Question

BEP, ROE, AND ROIC Broward Manufacturing recently reported the following information:

Net income	$615,000
ROA	10%
Interest expense	$202,950
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, and 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).

Answer 1

Solution:-

Return on assets ( ROA) = 10%

ROA = Net Income / Total assets

10%= $615000/ Total Assets

Total assets = 615000/10%= $61,50,000

Invested Capital = Total assets - Total liabilities

Invested capital = 61,50,000 - 9,50,000= $52,00,000

Invested capital = Debt + Equity

Debt = $52,00,000*40% = $20,80,000

Equity = 52,00,000*60%= $31,20,000

Basic Earning Power ( BEP) = Net income / Number of shares

BEP = 6,15,000/ 312000= 1.9711

Return on equity = NOPAT / Equity

Net income = . 6,15,000

Add : Tax @30% = 2,63,571

Earning before tax = 8,78,571

Add : interest = 2,02,950

Income before interest and tax 10,81,521

Less : Tax @ 30% = 3,24,456

Net operating profit after tax = 7,57,065

Return on equity = 7,57,065/31,20,000 = 24.26%

Return on invested capital ( ROIC) = Net income /Invested capital

Return on invested capital ( ROIC ) = 615000/52,00,000= 11.83%