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 longterm 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 debtto 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 = 800000320000 = 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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