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Duffert Industries has total assets of $1,000,000 and total current liabilities (consisting only of accounts payable...

Duffert Industries has total assets of $1,000,000 and total current liabilities (consisting only of accounts payable and accruals) of $145,000. 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. 10.34%; 9.88% b. 12.57%; 10.22% c. 14.48%; 10.89% d. 15.91%; 11.23% e. 17.19%; 12.46% detailed steps needed! Thank you!

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Answer #1

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 + 145000 = 1000000
debt + equity = 1000000-145000 = 855000
Debt to capital ratio = debt / (debt + equity)
0.40 = Debt / 855000
So, Total Debt = 342000, Equity = 855000-342000 = 513000

So, ROE = EAT/ Average equity or closing equity

   = EBIT - interest - Taxes / equity

   = (160000 - 0.07*342000) * 0.60 / 513000 = 81636/542000 = 0.1591 or 15.91%

ROIC = EBIT*(1-Tax rate) / ( Debt + Equity )

   = 160000*0.6 / (855000) = 0.1123 or 11.23%

So, option d is correct.

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