Question

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Balance Sheet (Millions of $)  

Assets      2018
Cash and securities      $3,000
Accounts receivable      15,000
Inventories      18,000
Total current assets      $36,000
Net plant and equipment      $24,000
Total assets      $60,000
Liabilities and Equity     
Accounts payable      $18,630
Accruals      8,370
Notes payable      6,000
Total current liabilities      $33,000
         
Long-term bonds      $9,000
Total liabilities      $42,000
Common stock      $5,040
Retained earnings      12,960
Total common equity      $18,000
Total liabilities and equity      $60,000
      
Income Statement (Millions of $)

2018
Net sales      $84,000
Operating costs except depreciation   78,120
Depreciation      1,680
Earnings before interest and taxes (EBIT)   $4,200
Less interest      900
Earnings before taxes (EBT)      $3,300
Taxes      1,320
Net income      $1,980
         
Other data:        
Shares outstanding (millions)      500.00
Common dividends (millions of $)      $693.00
Int rate on notes payable & L-T bonds   6%
Federal plus state income tax rate   40%
Year-end stock price      $47.52

Refer to Exhibit 4.1. What is the firm's return on invested capital?
    a. 8.63%  
   b. 8.32%  
   c. 7.64%  
   d. 6.03%  
   e. 6.41%

Answer 1

Answer: c. 7.64%

Return on invested capital = (NOPAT / Invested Capital) * 100

NOPAT = EBIT * (1-tax rate)
NOPAT = 4200 * (1-0.40)
NOPAT = $2,520

Invested Capital = Total Debt (Including Capital lease) + Total Equity & Equivalent Equity Investments + Non-Operating Cash
(Since notes payable will be rolled over, therefore, it will be included under short term debt)

Invested Capital = Short term debt + Long term debt + Equity + Non- Operating cash
Invested Capital = 6000 + 9000 + 18000 + 0
Invested Capital = $33,000

Return on Invested Capital = NOPAT/ Invested Capital * 100
Return on Invested Capital = 2520 / 33000 * 100
Return on Invested Capital = 7.64% (rounded off to two decimal places)