Question

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:   %

Answer 1

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%.