Baker Industries’ net income is $27000, its interest expense is $5000, and its tax rate is...

Baker Industries’ net income is $27000, its interest expense is $5000, and its tax rate is 40%. Its notes payable equals $24000, long-term debt equals $70000, and common equity equals $260000. 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.

Expert Solution

ROE = Return on Equity = Net Income / Total value of shareholder's equity

Total shareholder's equity = Common equity + preferred stocks = $ 260,000 + 0 = $ 260,000

Hence, ROE = $ 27000 / $ 260,000 = 0.1038 ~ 10.38 %

ROIC = Return on Invested Capital = NOPAT (Net operating profit after tax) / Total Invested Capital

NOPAT = 27000 * (1 - 40/100) = 27000 * 0.60 = $ 16,200

Total Invested Capital = Total Long term debt + Total amount of equity = $ 70,000 + $ 260,000 = $ 330,000

Hence, ROIC = $ 16,200 / $ 330,000 = 0.049 ~ 5 %

Hope this clears the doubt.

jeff jeffy answered 2 years ago

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