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?