question archive Russell Securities has $100 million in total assets and its corporate tax rate is 40 percent
Russell Securities has $100 million in total assets and its corporate tax rate is 40 percent
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Russell Securities has $100 million in total assets and its corporate tax rate is 40 percent. The company recently reported that its basic earning power (BEP) ratio was 15 percent and that its return on assets (ROA) was 9 percent. What was the company's interest expense?
a. $ 0
b. $ 2,000,000
c. $ 6,000,000
d. $15,000,000
e. $18,000,000
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ANSWER: A
BEP = EBIT/TA
0.15 = EBIT/$100,000,000 EBIT = $15,000,000.
ROA = NI/TA
0.09 = NI/$100,000,000 NI = $9,000,000.
EBT = NI/(1 - T) EBT = $9,000,000/0.6 EBT = $15,000,000.
Therefore interest expense = $0.
