Question

Baker Industries’ net income is $23000, its interest expense is $4000, and its tax rate is 35%. Its notes payable equals $25000, long-term debt equals $75000, and common equity equals $250000. The firm finances with only debt and common equity, so it has no preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

What are the firm’s ROE and ROIC? Round your answers to two decimal places. Do not round intermediate calculations.

Answer 1

Return on equity = (Net income / Equity capital) * 100

Net income = 23000

Equity capital = 250000

Return on equity = (23000 / 250000) *100 = 9.2%

Return on invested capital = (NOPAT / Invested capital ) * 100

NOPAT = Net operating profit after tax = [ [ Net income / (1-tax rate) ] + interest expense ] * (1-tax rate)

= [ [ 23000 / (1-0.35) ] + 4000 ] * (1-0.35) = 39384.6 * (1-0.35) = 25600

Invested capital = Debt + Equity = 75000+25000 = 325000

Return on invested capital = (25600 / 325000) * 100 = 7.88%