Question

Baker Industries’ net income is $26000, its interest expense is $5000, and its tax rate is 45%. Its notes payable equals $27000, long-term debt equals $70000, and common equity equals $260000. The firm finances with only debt and common equity, so it has no preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

ROE =
ROIC =

Answer 1

ROE (Return on Equity) = Net Income / Total Equity

Total Equity = Common Equity + Long-Term Debt + Notes Payable = $260000 + $70000 + $27000 = $333000

ROE = $26000 / $333000 = 0.0779 or 7.79%

ROIC (Return on Invested Capital) = (Net Income + Interest Expense) / (Total Debt + Total Equity)

Total Debt = Long-Term Debt + Notes Payable = $70000 + $27000 = $97000

ROIC = ($26000 + $5000) / ($97000 + $333000) = 0.0598 or 5.98%

Note: The ROE represents the return that the equity owners receive on their investment in the company, while the ROIC represents the return that the company is generating on all its capital investments, including both debt and equity.

Hope this helps,

- Jeron :- )