Question

ROE AND ROIC

Baker Industries’ net income is $27,000, its interest expense is $4,000, and its tax rate is 35%. Its notes payable equals $25,000, long-term debt equals $80,000, 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

(i)	Return on equity =
	Net Income / Shareholder's equity x 100 =
	Net income -			27000
	Equity =			260000
	ROE =	27000/260000 x 100 =		10.385%
(ii)	ROIC = NOPAT/ Invested capital x 100 =
	NOPAT( Net operating profit after tax) =
	Net income =			27000
	Add: Tax @ 35%		(27000 x 35/(100-35))=	14538.46
	Add: Interest Expense			4000
	EBIT			45538.46
	Less: Tax @ 35%			15938.46
	NOPAT			29600
	Invested capital =
	Equity			260000
	Long term debt			80000
				340000
	ROIC =	29600/340000 x 100 =		8.706%
	Please provide feedback…. Thanks in advance…. :-)