Question

Broward Manufacturing recently reported the following information:

Net income	$570,000
ROA	9%
Interest expense	$199,500
Accounts payable and accruals	$1,050,000

Broward's tax rate is 35%. Broward finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, while 60% of its total invested capital is common equity. Calculate its basic earning power (BEP), its return on equity (ROE), and its return on invested capital (ROIC). Round your answers to two decimal places.

Answer 1

ROA=9%

net income/assets=9%

assets=570000/9%

=6333333.33

invested capital=assets-Accounts payable and accruals

=6333333.33-1050000

=5283333.33

Earnings Before Interest and Taxes=( net income/(1 - tax rate))+interest expense

=(570000/(1-35%))+199500

=1076423.08

basic earning power (BEP)=Earnings Before Interest and Taxes/assets=1076423.08/6333333.33=17.00%

its return on equity (ROE)=Net income/equity

=570000/(5283333.33*60%)

=17.98%

return on invested capital (ROIC)

=(EBIT*(1-tax rate))/invested capital

=(1076423.08*(1-35%))/5283333.33

=13.24%

the above is answer..