Question

Baker Industries’ net income is $23,000, its interest expense is $6,000, and its tax rate is 35%. Its notes payable equals $23,000, long-term debt equals $80,000, and common equity equals $255,000. 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.

ROE	%
ROIC	%

Thomson Trucking has $15 billion in assets, and its tax rate is 30%. Its basic earning power (BEP) ratio is 11%, and its return on assets (ROA) is 7%. What is its times-interest-earned (TIE) ratio? Round your answer to two decimal places.

Answer 1

Answer to Question 1.

Return on Equity (ROE) = Net Income / Common Equity * 100
Return on Equity (ROE) = $23,000 / $255,000 * 100
Return on Equity (ROE) = 9.02%

Return on Invested Capital (ROIC) = EBIT (1 – Tax Rate) / Total Invested Capital * 100
Total Invested Capital = Notes Payable + Long Term Debt + Common Equity
Total Invested Capital = $23,000 + $80,000 + $255,000
Total Invested Capital = $358,000

Net Income = EBT * (1 – Tax Rate)
$23,000 = EBT * (1 – 0.35)
EBT = $35,384.62

EBT = EBIT – Interest Expense
$35,384.62 = EBIT - $6,000
EBIT = $41,384.62

Return on Invested Capital (ROIC) = $41,384.62 * (1 – 0.35) / $358,000 * 100
Return on Invested Capital (ROIC) = $26,900.03 / $358,000 * 100
Return on Invested Capital (ROIC) = 7.51%