Question

Baker Industries’ net income is $26,000, its interest expense is $6,000, and its tax rate is 45%. Its notes payable equals $23,000, long-term debt equals $70,000, 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? Round your answers to two decimal places. Do not round intermediate calculations.

Answer 1

ROI=10%

ROIC=0.83

Step-by-step explanation:

Net Income = $26,000

Interest expense = $6,000

Tax rate = 45%

Payable = $23,000

Long-term debt = $70,000

Common equity = $260,000

1. ROE = Net Income / Common equity

= 26,000 / 260,000

=0.1

=10%

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

EBIT = Net Income before tax + Interest

Net Income before tax = (Net income * 100) / (100-Tax rate)

Net Income before tax = 26000 * 100 / 100-45

=2600000 / 55

Net Income before tax = 47272.72

EBIT = 47272.72 + 6,000

=53272.72

Invested Capital = Note payable + Long term debt.+ Common Equity

=23000 +70000 +260000

=$353,000

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

ROIC= 53272.72 * (1-0.45) / 353,000

=53272.72*0.55 / 353,000

=292299.996/353,000

=0.8280

=0.83

ROIC= 0.83