Question

Baker Industries’ net income is $27,000, its interest expense is $5,000, and its tax rate is 35%. Its notes payable equals $27,000, long-term debt equals $75,000, and common equity equals $250,000. The firm finances with only debt and common equity, so it has no preferred stock. What are the firm’s ROE and ROIC? Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

Net income = $27,000
Interest expense = $5,000
Tax rate = 35%

Net income = (EBIT - Interest expense) * (1 - tax rate)
$27,000 = (EBIT - $5,000) * (1 - 0.35)
$41,538.46 = EBIT - $5,000
EBIT = $46,538.46

Invested capital = Notes payable + Long-term debt + Common equity
Invested capital = $27,000 + $75,000 + $250,000
Invested capital = $352,000

Return on equity = Net income / Common equity
Return on equity = $27,000 / $250,000
Return on equity = 10.80%

Return on invested capital = EBIT / Invested capital
Return on invested capital = $46,538.46 / $352,000
Return on invested capital = 13.22%

answered by: anonymous