Question

Broward Manufacturing recently reported the following information:

Net income	$234,000
ROA	8%
Interest expense	$91,260
Accounts payable and accruals	$1,050,000

Broward's tax rate is 25%. 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). Do not round intermediate calculations. Round your answers to two decimal places.

BEP:   %

ROE:   %

ROIC:   %

Answer 1

Net Income = $ 234000

ROA = 8%

Interest expenses = $ 91260

Account payable & Accruals = $ 1050000

Given Tax rate = 25%

Profit Before Tax = Net income / ( 1-Tax rate)

= $ 234000/ ( 1-0.25)

= $ 234000/0.75

= $ 312000

We know that EBIT = Net income +Interest +Taxes

= PBT + Interest

= $ 312000+$ 91260

= $403260

We know that Total Assets = Net income / ROA

= $ 234000/0.08

= $ 2925000

Hence Total Assets is $ 2925000

Computation of BEP

Basic Earning power = EBIT / Total Assets

= $ 403260/$ 2925000

= 0.1379

Hence Basic Earning power is 13.79%

Computation of ROE

Total Assets = $ 2925000

Total Assets = Common equity + Debt Capital + Account payable

$ 2925000= Common equity + Debt capital+$ 1050000

$ 2925000-$ 1050000= Common equity + Debt capital

$ 1875000= Common Equiy + Debt Capital

Common Equity= $ 1875000*0.60= $ 1125000

Debt Capital = $ 1875000*0.40= $ 750000

Returnn on Equity = Net income / Common Equity

= $ 234000/$ 1125000

=0.2080

Hence return on Equity is 20.80%

Computation of Return on Invested Capital ( ROIC)

We know that ROIC = EBIT ( 1-Tax rate ) / [ Debt + Common equity]

= $ 403260( 1-0.25) / [ $ 750000+$ 1125000]

= $ 302445/$ 1875000

= 0.1613

Hence return on invested Capital is 16.13%.

Particulars	%
BEP	13.79
ROE	20.8
ROIC	16.13