Question

Baker Industries’ net income is $23000, its interest expense is $5000, and its tax rate is 45%. Its notes payable equals $25000, long-term debt equals $80000, and common equity equals $260000. The firm finances with only debt and common equity, so it has no preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

ROE and ROIC
Net income	$23,000
Interest expense	$5,000
Tax rate	45.00%
Notes payable	$25,000
Long-term debt	$80,000
Common equity	$260,000
			Formulas
ROE			#N/A
Partial Income Statement:
EBIT			#N/A
Interest	$5,000.00
EBT			#N/A
Taxes			#N/A
Net income	$23,000.00
Capital Summary:
Notes payable	$25,000.00
Long-term debt	$80,000.00
Common equity	$260,000.00
Total invested capital			#N/A
ROIC			#N/A

Open spreadsheet

What are the firm’s ROE and ROIC? Round your answers to two decimal places. Do not round intermediate calculations.

ROE	%
ROIC	%

Answer 1

Return on equity (ROE) = Net income / Equity = $23000 / $260000 = 8.85%

Earnings before tax = Net income / (1 - tax%) = $23000 / (1 - 45%) = $41818

Earnings before interest and tax (EBIT) = EBIT + Interest = $41818 + $5000 = $46818

Total invested capital = Notes payables + Long term debt + Common equity = $25000 + $80000 + $260000 = $365000

Return on invested capital (ROIC) = EBIT * (1 - tax%) / Total invested capital = $46818 * ( 1 - 45% ) / 365000 = 7.05%