Question

# Steve Enterprise's total assets are \$1,000,000 and its total current liabilities (consisting only of accounts payable...

Steve Enterprise's total assets are \$1,000,000 and its total current liabilities (consisting only of accounts payable and accruals) are \$200,000. Duffert finances using only long-term debt and common equity. The interest rate on its debt is 7% and its tax rate is 40%. The firm's basic earning power ratio is 16% and its debt-to capital rate is 40%. What are Duffert's ROE and ROIC?  Do not round your intermediate calculations.

 a. 12.57%; 10.22% b. 15.91%; 11.23% c. 14.48%; 10.89% d. 10.34%; 9.80% e. 17.20%; 12.00%

Basic earning power = EBIT / Total Assets

0.16 = EBIT / 1000000

So, EBIT = \$ 160,000

Total Debt + Total Equity + Total Current Liabilities = Total Assets

Total Debt + equity + 200000 = 1000000

debt + equity = 1000000 - 200000 = 800000

Debt to capital ratio = debt / (debt + equity)

0.40 = Debt / 800000

So, Total Debt = 320000, Equity = 800000-320000 = 480000

So, ROE = EAT/ Averag equity or closing equity

= EBIT - interest - Taxes / equity

= (160000 - 7/100*320000) * 0.60 / 480000 = 82560/480000 = 0.172 = 17.20%

ROIC = ( Net income - Dividends ) / ( Debt + Equity )

= (82560 - 0) / (800000) = 0.1032 = 10.32%

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