Question

aker Industries’ net income is $27000, its interest expense is $5000, and its tax rate is 45%. Its notes payable equals $24000, long-term debt equals $80000, 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. Open spreadsheet What are the firm’s ROE and ROIC? Round your answers to two decimal places. Do not round intermediate calculations.

Answer 1

ROE = 10.3%

ROE = 10.3%

Step-by-step explanation:

ROE can be calculated by dividing net income by common equity and ROIC can be calculated by dividing EBIT after tax by the total invested capital.

1) Computation of ROE

ROE = Net Income / Common Equity

ROE = $27,000 / $260,000

ROE = 0.103 or ROE = 10.3%

2) Computation of ROIC

ROIC = [EBIT * (1-tax rate)] / Total Invested capital

ROIC = [$50,000 * (1 - 0.40)] / $365,000

ROIC = 0.0821 or ROIC = 8.21%

EBT = Net income *100 / (100% - T)

EBT = $27,000 x 100% / 60%

EBT = $45,000

EBIT = EBT + interest = $45,000 + $5,000

EBIT = $50,000

Invested capital = Notes payable + Long term Debt + Common stock

Invested capital = $24,000 + $80,000 + $260,000

Invested capital = $365,000