Question

Baker Industries’ net income is $23000, its interest expense is $5000, and its tax rate is 35%. Its notes payable equals $24000, long-term debt equals $75000, 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.

Answer 1

Solution and Explanation:

Net income = $23000 , Interest expense = $5000 , Tax rate = 35%

Notes payable = $24000 , Longterm debt = $75000 , Common equity = $260000

ROE = Net income divided by Common equity = 23000 divided by 260000 = 0.088 = 8.8%

Net income before Tax =
`Net income $* 100 /(100-\text { tax rate })$`

=
`23000 * 100(100-35)`

= 35384.615

EBIT = Net income before tax + Interest

= 35384.615 + 5000 = 40384.615

Invested capital = Notes payable + Longterm debt + Common equity

`=24000+75000+260000` = 359000

ROIC = EBIT * (1- Tax rate )/ Invested capital

`=40384.615 *(1-35 \%) / 359000`

= 0.0731% = 7.31 % (rounded off)