Question

Baker Industries’ net income is $21,000, its interest expense is $5,000, and its tax rate is 25%. Its notes payable equals $24,000, long-term debt equals $80,000, and common equity equals $260,000. 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.

ROE:   %

ROIC:   %

Answer 1

Given,

Net income = $21000

Interest expense = $5000

Tax rate = 25% or 0.25

Notes payable = $24000

Long term debt = $80000

Common equity = $260000

Solution :-

ROE = net income/common equity

= $21000/$260000 = 0.0808 or 8.08%

Operating income after tax = Net income + [interest expense x (1 - tax rate)]

= $21000 + [$5000 x (1 - 0.25)]

= $21000 + [$5000 x 0.75]

= $21000 + $3750 = $24750

ROIC = Operating income after tax/(notes payable + long term debt + common equity)

= $24750/($24000 + $80000 + $260000)

= $24750/$364000 = 0.0680 or 6.80%