Question

Baker Industriesâ net income is $23000, its interest expense is $6000, and its tax rate is 45%. Its notes payable equals $24000, long-term debt equals $80000, and common equity equals $250000. The firm finances with only debt and common equity, so it has no preferred stock.

Required:
What are the firmâs ROE and ROIC?

Answer 1

Answer:A) ROE=9.2%

B)ROIC =7.43%

Step-by-step explanation:

Given that

Net income = $23,000 ,

Interest expense = $6000 ,

Tax rate = 45%

Notes payable = $24,000 ,

Longterm debt = $80,000 ,

Common equity = $250,000

A) ROE is calculated as Net income/ Common equity

= 23000/250,000 = 0.092= 9.2%

B.) ROIC = EBIT X (1- Tax rate ) / Invested capital

So we have that Net income before Tax = Net Income X 100/ 100-tax rate

23000x 100 /100-45

2300000/55

=$41,818.18

So that EBIT becomes = Net income before tax + Interest

= $41,818.18 + 6000 = $47,818.18

And

Invested capital = Notes payable + Longterm debt + Common equity

= 24,000+80,000+250,000

=$354,000

Therefore, ROIC = EBIT X (1- Tax rate ) / Invested capital

$47,818.18 X(1-0.45)/354,000

$47,818.18 x 0.55 / 354000

26,299.999/354,000

=0.07429

=7.429%

Rounding up becomes =7.43%