Question

Broward Manufacturing recently reported the following information: Net income $785,000 ROA 10% Interest expense $251,200 Accounts payable and accruals $1,000,000 Broward's tax rate is 30%. Broward finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, while 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 place

Answer 1

Total Assets = Debt + Equity + Accounts payable & Accruals

Since ROA = Net Income / Total Assets = 10%

Total Assets = Net Income/10% = $785000/0.1 = $7850000

So, Debt+ Equity + Accounts payable & Accruals = $7850000

=> (Debt+ Equity) or Invested Capital = $6,850,000

So, Debt = 0.4*$6850000 = $2740000

& Equity = 0.6*$6850000 = $4110000

As Net Income = $785000

EBT = Net Income /(1-tax rate) = $785000/0.7 =$1121428.57

EBIT = EBT + Interest = $1121428.57+$251200 = $13,726,28.57

So,

Basic Earnings power (BEP) = EBIT/Total Assets = $1372628.57/$7850000 = 0.174857 or 17.49%

ROE = Net Income/ Equity = $785000/$4110000 =0.1909976 or 19.10%

ROIC = Net Income / Invested Capital = $785000/$6850000 = 0.1145985 or 11.46%