In: Finance
4.9
Broward Manufacturing recently reported the following information:
Net income | $597,000 |
ROA | 10% |
Interest expense | $220,890 |
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: %
Basic Earning Power (BEP) Ratio
Earnings Before Tax(EBT) = Net Income / (1 – Tax Rate)
= $5972,000 / (1 – 0.25)
= $597,000 / 0.75
= $796,000
Earnings Before Interest & Tax (EBIT) = EBT + Interest Expenses
= $796,000 + $220,890
= $1,016,890
Return on Asset (ROA) = Net Income / Total Assets
0.10 = $597,000 / Total Assets
Total Assets = $597,000 / 0.10
Total Assets = $5,970,000
Therefore, the Basic Earning Power (BEP) = [Earnings Before Interest & Tax (EBIT) / Total Assets] x 100
= [$1,016,890 / $5,970,000] x 100
= 17.03%
“Basic Earning Power (BEP) = 17.03%”
Return on Equity (ROE)
Total Invested Capital = Total Assets – Current Liabilities
= $5,970,000 - $1,050,000
= $4,920,000
Equity = 60% of the Total Invested Capital
= $4,920,000 x 60%
= $2,952,000
Therefore, the Return on Equity (ROE) = (Net Income / Total Equity) x
= [$597,000 / $2,952,000] x 100
= 20.22%
“Return on Equity (ROE) = 20.22%”
Return on Invested Capital (ROIC)
Return on Invested Capital (ROIC) = [{EBIT(1 – Tax Rate)} / Total Invested Capital] x 100
= [{$1,016,890(1 – 0.25) / $4,920,000] x 100
= [($1,016,890 x 0.75) / $4,920,000] x 100
= [$762,667.50 / $4,920,000] x 100
= 15.50%
“Return on Invested Capital (ROIC) = 15.50%”