Question
In: Finance
Broward's tax rate is 25%. Broward finances with only debt and common equity, so it has no preferred stock
Broward Manufacturing recently reported the following information:
| Net income | $435,000 |
| ROA | 10% |
| Interest expense | $134,850 |
| 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: %
Solutions
Expert Solution
Basic Earning Power (BEP) = Earnings before interest and taxes / Total assets
Earnings before interest and taxes= Net income + Taxes + Interest
= $435,000 + $435,000*25/ 60 + $134,850
= $435,000 + $181,250 + $134,850
= $787,500
Total assets = Net income / ROA
= 435,000 / 10%
= $4,350,000
Basic Earning Power (BEP) = $787,500 / $4,350,000
= 0.1810*100
= 18.10%.
2.ROE= Net income / Equity
Equity= 60%*Total assets
= 60%*$4,350,000
= $2,610,000
ROE= $435,000 / $2,610,000
= 0.1667*100
= 16.67%.
3.ROIC = NOPAT / Invested Capital
= EBIT*(1 - tax) / (Total assets - Accounts payables and accruals)
= $787,500*(1 - 0.25) / ( $4,350,000 - $1,050,000)
= $590,625 / $3,300,000
= 0.1790*100
= 17.90%.
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