Question

BEP, ROE, AND ROIC Broward Manufacturing recently reported the following information: Net income $325,000 ROA 10% Interest expense $126,750 Accounts payable and accruals $950,000 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). Round your answers to two decimal places. BEP 18.12 % ROE 21.55 % ROIC

Answer 1

a). ROA = Net income / Total assets

Total assets = Net Income / ROA

= $325,000 / 0.10 = $3,250,000

Net income = (EBIT - I) * (1 - t)

$325,000 = (EBIT - $126,750) * (1 - 0.30)

EBIT = [$325,000 / 0.70) + $126,750 = $464,285.71 + $126,750 = $591,035.71

BEP = EBIT / Total assets

= $591,035.71 / $3,250,000 = 0.1819, or 18.19%

b). Total equity = 60% of total assets = $3,250,000 x 0.60 = $1,950,000

ROE = Net income / Total equity

= $325,000 / $1,950,000 = 0.1667, or 16.67%

c). Total debt = 40% of total assets = $3,250,000 x 0.40 = $1,300,000

Current liabilities = $950,000

Long term debt = $1,300,000 - $950,000 = $350,000

Net operating profit after tax (NOPAT) = EBIT * (1 - t) = $591,035.71 * (1 - 0.30) = $413,725

ROIC = NOPAT / (Long term debt + Equity)

= $413,725 / ($350,000 + $1,950,000) = $413,725 / $2,300,000 = 0.1799, or 17.99%