Llegget industries had total assets of $1,050,000 and total current liabilites (consisting only of accounts payable and accruals) of $150,000.

please show all work and calculations.

Llegget industries had total assets of $1,050,000 and total current liabilites (consisting only of accounts payable and accruals) of $150,000. duffert finances using only long term debt and common equity. the interest rate on its debt is 9% and its tax rate is 40%. the firms basic earning power is 15% and its debt - to cpaital rate is 40%. what are dufferts ROE and ROIC? do not round your intermediate calculations.

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Expert Solution

EBIT = Total assets * Basic earning power ratio
= $1,050,000 * 15%
= $157,500

Total invested capital = Total assets - accounts payable and accruals
= $1,050,000 - $150,000
= $900,000

Debt = $900,000 * 40% = $360,000

Equity = $900,000 * 60% = $540,000

Net income = (EBIT - Interest) * (1 - tax rate)
= ($157,500 - ($360,000 * 9%)) * (1 - 0.40)
= $75,060

ROE = Net income / Equity
= $75,060 / $540,000
= 13.90%

ROE = 13.90%

ROIC = (EBIT * (1 - tax rate)) / Total operating capital
= ($157,500 * (1 - 0.40)) / $900,000
= 10.50%

ROIC = 10.50%

jeff jeffy answered 2 years ago

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