Question

9.  Problem 4.09

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BEP, ROE, AND ROIC

Broward Manufacturing recently reported the following information:

Net income	$430,000
ROA	10%
Interest expense	$154,800
Accounts payable and accruals	$1,000,000

Broward's tax rate is 35%. 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). Round your answers to two decimal places.

BEP	%
ROE	%
ROIC	%

Answer 1

Ans:

ROA = Net income / Total assets

10% = 430,000 / Total assets

Total assets = 4,300,000

EBT = Net income / ( 1 - 0.35)

= 430,000 / (0.65)

= 661538

EBIT = EBT + Interest expenses

= 661538 + 154,800

= 816,338.5

(1) BEP = EBIT / Total assets

= 816,338 / 4,300,000

= 18.98 %

(2) Total capital = Total assets - liabilities

= 4,300,000 - 1,000,000

= 3,300,000

Common Equity = 60% * Total capital

= 60 %* 3,300,000

= 1,980,000

ROE = Net Income / Common Equity

= 430,000 / 1,980,000

= 21.71 %

ROIC = EBIT(1- tax) / Total Invested capital

= 816,338.5 ( 1 -0.35) /   3,300,000

= 16.08 %