What Is the ROE for a Firm with Times Interest

Multiple Choice

What is the ROE for a firm with times interest earned ratio of 2, a tax liability of $1 million and interest expense of $1.5 million if equity equals $1.5 million?

A) 44.44%
B) 33.33%
C) 22.22%
D) 11.11% Times interest earned = EBIT/interest = 2
Therefore, EBIT = 3 million because interest = $1.5 million
Net income = EBIT - interest - taxes
= $3 million - $1.5 million - $1 million = $.5 million
ROE = net income/equity