Question

4-9. BEP, ROE, AND ROIC – Duval Manufacturing recently reported the following information:  

Net Income	$600,000
ROA	8%
Interest expense	$225,000
Accounts payable and accruals	$1,000,000

Duvanl’s tax rate is 35%. Duval finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, and 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).

Answer 1

a). NI=$600,000; Interest exp.=$225,000; T= 35%; 40%=1,000,000; 60%= 2,500,000

ROE= NI/CE

= ($600,000/2,500,000)

= 0.24 or 24%

ROA=NI/TA

8%=$600,000/x

TA= $7,500,000

B). ROIC=EBIT(1-T)/total invested capital

EBT= NI/(1-T) = 600K/ (1-0.35) = $923,076.92

Interest = $225,000  

EBIT= EBT + INT= $923.076.92 + 225,000 = $1,148,076.92

C). ROIC = [EBIT (1-T)/ TIC]

= [$1,148,076.92 (1-0.35)/2,500,000]

= 0.2985, or 29.85%

D). BEP = EBIT/TA

= $1,148,076.92/7,500,000 = 0.1532, or 15.32%