Question

Baker Industries’ net income is $26000, its interest expense is $5000, and its tax rate is 35%. Its notes payable equals $23000, 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. 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.

What are the firm’s ROE and ROIC? Round your answers to two decimal places. Do not round intermediate calculations.


ROE %

ROIC %

Answer 1

ROE = 10.4%

ROIC =7.37%

Step-by-step explanation:

The formula for calculating return on equity (ROE) = net income divided / average shareholders' equity = $26,000 / $250,000 = 0.104 or 10.4%

The formula for calculating return on invested capital (ROIC) = (net income - dividends) / (debt + equity) = $26,000 - $0 / [($23,000 + $80,000) + $250,000] = $26,000 / $353,000 = 0.0737 or 7.37%