Question

Baker Industries’ net income is $24,000, its interest expense is $5,000, and its tax rate is 45%. Its notes payable equals $25,000, long-term debt equals $70,000, and common equity equals $240,000. 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

Return on Equity (ROE)

Return on Equity (ROE) = [Net Income / Common Equity] x100

= [$24,000 / $240,000] x 100

= 10.00%

Return on Invested Capital (ROIC)

Return on Invested Capital (ROIC) = [Net Operating profit After Tax (NOPAT) / Total Invested Capital] x 100

Net Operating profit After Tax (NOPAT) = Net Income + Interest (1 – Tax Rate)

= $24,000 + $5,000(1 – 0.45)

= $24,000 + $2,750

= $26,750

Total Invested Capital = Common Equity + Note Payables + Long term debts

= $240,000 + $25,000 + $70,000

= $335,000

Therefore, Return on Invested Capital (ROIC) = [Net Operating profit After Tax (NOPAT) / Total Invested Capital] x 100

= [$26,750 / $335,000] x 100

= 7.99%