Question

Macro has $12mi in total assets. Its basic earning power is 10%, its times interest earned (TIE) ratio is 5. The tax rate is 40%. What is its ROA?

Answer 1

Basic Earning Power (BEP) =Earnings Before Interest and Taxes (EBIT)/Total Assets

Given, total assets = $ 12000000

Therefore, 10%= EBIT/ 12000000

EBIT = 12000000 * 10% = $ 1200000

NOW,

Times interest earned (TIE)= EBIT/Interest Expense

Given, TIE = 5

Therefore, 5= 1200000/Interest expense

Interest expense= $ 240000

NOW,

Tax rate= 40%

Earnings after interest = EBIT- Interest expense =1200000 - 240000 = $ 960000

Tax = 40% of Earnings after interest = 40% of 960000 =$ 384000

Net earnings = EBIT- Interest - Tax = 1200000-240000-384000 =$ 576000

NOW,

Return on Asset(ROA)= (Net earnings/Average total assets )*100

ROA= (576000/12000000)*100 =4.8%