Question

Baker Industries’ net income is $25,000, its interest expense is $5,000, and its tax rate is 45%. Its notes payable equals $23,000, long-term debt equals $70,000, and common equity equals $250,000. The firm finances with only debt and common equity, so it has no preferred stock. What are the firm’s ROE and ROIC? Do not round intermediate calculations. Round your answers to two decimal places.

Answer 1

Answer:

Return on Equity (ROE) = Net Income / Total Equity * 100
Return on Equity (ROE) = $25,000 / $250,000 * 100
Return on Equity (ROE) = 10.00%

Earnings before taxes = Net Income / (1 – Tax Rate)
Earnings before taxes = $25,000 / (1 – 0.45)
Earnings before taxes = $45,454.55

Earnings before Interest and Taxes = Earnings before taxes + Interest Expense
Earnings before Interest and Taxes = $45,454.55 + $5,000
Earnings before Interest and Taxes = $50,454.55

Total Invested Capital = Notes Payable + Long term Debt + Common Equity
Total Invested Capital = $23,000 + $70,000 + $250,000
Total Invested Capital = $343,000

ROIC = Earnings before Interest and Taxes (1- Tax Rate)/ Total Invested Capital * 100
ROIC = $50,454.55 * (1 – 0.45) / $343,000
ROIC = $27,750.00 / $343,000
ROIC = 8.09%