Question

Baker Industries’ net income is $26,000, its interest expense is $4,000, and its tax rate is 45%. Its notes payable equals $27,000, long-term debt equals $80,000, and common equity equals $245,000. The firm finances with only debt and common equity, so it has no preferred stock. What are the firm’s ROE and ROIC? Round your answers to two decimal places. Do not round intermediate calculations.

Answer 1

Ans :

(1) Return on Equity = Net Income / Common Equity

Net Income = $ 26,000

Common Equity = $ 245,000

Return on Equity = $ 26,000 / $ 245,000

= 10.61 %

(2) Return on Invested Capital = EBIT / Total Invested Capital

= 51,273 / 352,000

= 14.56 %

Note 1:

EBIT = Net Income + Taxes + Interest

= 26,000 + 26,000 / (1- tax rate ) * 45 % + 4,000

= 26,000 + 26,000 / ( 1 - 45 %) * tax rate + 4,000

= 26000 + 21,273 + 4000

= 51,273

Total Invested Capital = Notes payable + Long term debt + Common Equity

= 27,000 + 80,000 + 245,000

= 352,000