Question

Baker Industries’ net income is $24,000, its interest expense is $5,000, and its tax rate is 25%. Its notes payable equals $24,000, long-term debt equals $80,000, and common equity equals $260,000. The firm finances with only debt and common equity, so it has no preferred stock. What are the firm’s ROE and ROIC? Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

ROE = 9.23%

ROIC = 7.62%

Step-by-step explanation:

Data:

Net Income NI = $24,000

Interest Expense IE = $5,000

Tax Rate T = 25% = 0.25

Notes Payable NP = $24,000

Long-term debt LTD = $80,000

Common Equity CE = $260,000

Return On Equity ROE = ?

Retrun On Invested Capital ROIC = ?

Earnings Before Taxes EBT = ?

Invested Capital IC = ?

Earnings Before Taxes and Interest EBIT = ?

Calculations:

`ROE = (NI)/(CE)= (24,000)/(260,000)=0.0923 = 9.23`%

`EBT = (NI)/(1-T) = (24,000)/(1-0.25) = (24,000)/(0.75) = 32,000`

`EBIT = EBT+IE=32,000 + 5,000=37,000`

`IC =NP+LTD+CE=24,000+80,000+260,000=364,000`

`ROIC = (EBIT*(1-T))/(IC) = (37,000*(1-0.25))/(364,000)= (37,000*(0.75))/(364,000)= (27,750)/(364,000)= 0.0762=7.62`%

Hope this helps!