Problem
a. Zerog Corp. had EBIT of $450 million in 2001. It had interest expense of $30 million and a tax rate of 40%. Balance sheet data are given below in millions of dollars.
2000 2001
Cash 50 60
A/R 150 180
Inventories 300 360
Total CA 500 600
Net FA 1000 1200
Total assets 1500 1800
A/P and accruals 100 120
Debt 300 350
Common stock 600 600
Retained Earnings 500 730
Total Liab.& Equity 1500 1800
What is the FCF for the year 2001?
b) Roland & Company has a new management team that has developed an operating plan to improve upon last year's ROE. The new plan would place the debt/TA ratio at 55 percent which will result in interest charges of $7,000 per year.
EBIT is projected to be $25,000 on sales of $270,000, and it expects to have a total assets turnover ratio of 3.0. The average tax rate will be 40 percent. What does Roland expect return on equity to be following the changes?