Question

eBook Problem Walk-Through Broward Manufacturing recently reported the following information: Net income $693,000 ROA 8% Interest expense $270,270 Accounts payable and accruals $1,050,000 Broward's tax rate is 25%. Broward finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, and 60% of its total invested capital is common equity. Calculate its basic earning power (BEP), its return on equity (ROE), and its return on invested capital (ROIC). Do not round intermediate calculations. Round your answers to two decimal places.

BEP: % ROE: % ROIC: %

Answer 1

ROA = net income / total assets

total assets = net income / ROA

total assets = $693,000 / 8% = $8,662,500

ROE = net income / equity

Equity = total assets * 60%

ROE = $693,000 / ($8,662,500 * 60%)

ROE = 13.33%

BEP = EBIT / total assets

EBIT = (net income / (1 - tax rate)) + interest expense

EBIT = ($693,000 / (1 - 25%)) + $270,270

EBIT = $1,194,270

BEP = $1,194,270 / $8,662,500 = 13.79%

ROIC = EBIT * (1 - Tax rate) / invested capital

invested capital = total assets - short-term payables = $8,662,500 - $1,050,000 = $7,612,500

ROIC = $1,194,270 * (1 - 25%) / $7,612,500

ROIC = 11.775