Baker Industries’ net income is $21,000, its interest expense is$4,000, and its tax rate is...

Baker Industries’ net income is $21,000, its interest expense is $4,000, and its tax rate is 25%. Its notes payable equals $23,000, long-term debt equals $80,000, and common equity equals $255,000. The firm finances with only debt and common equity, so it has no preferred stock. What are the firm’s ROE and ROIC? Do not round intermediate calculations. Round your answers to two decimal places.

Expert Solution

ROE = Net income / Common Equity

= 21,000 / 255,000

= 8.24%

ROIC = EBIT*(1 - tax) / Total capital

Total capital = Notes payable + long term debt + common equity

= 23,000 + 80,000 + 255,000

= 358,000

EBIT = EBT + interest

EBT = Net income / (1-tax)

= 21,000 / (1 - 25%)

= 28,000

so EBIT = 28,000 + 4000 = 32,000

ROIC = 32,000*(1-25%) / 358,000

= 6.70%

jeff jeffy answered 2 years ago

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