Question

Broward Manufacturing recently reported the following information: Net income $600,000 ROA 6% Interest expense $192,000 Accounts payable and accruals $950,000 Broward's tax rate is 40%. Broward finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, while 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). Round your answers to two decimal places.

BEP ___%

ROE ___ %

ROIC ___ %

Answer 1

Answer:

Basic Earning Power (BEP) = EBIT / Total Assets

Return on Assets = Net Income / Total Assets
0.06 = 600,000 / Total Assets
Total Assets = $10,000,000

Net Income = $600,000

Income before Taxes = Net Income / (1 – Tax Rate)
Income before Taxes = 600,000 / (1 – 0.40)
Income before Taxes = $1,000,000

EBIT = Income before Taxes + Interest Expense
EBIT = $1,000,000 + $192,000
EBIT = $1,192,000

Basic Earning Power (BEP) = 1,192,000 / 10,000,000
Basic Earning Power (BEP) = 0.1192 or 11.92%

Return on Equity = Net Income / Common Equity
Total Assets = Total Liabilities + Total Capital
$10,000,000 = $950,000 + Total Capital
Total Capital = $9,050,000

Total Common Equity = $9,050,000 * 60%
Total Common Equity = $5,430,000

Return on Equity = 600,000 / 5,430,000
Return on Equity = 0.1105 or 11.05%

Return on Invested Capital = EBIT * (1 – Tax Rate) / Total Invested Capital
Return on Invested Capital = 1,192,000 * (1 – 0.40) / 9,050,000
Return on Invested Capital = 715,200 / 9,050,000
Return on Invested Capital = 0.0790 or 7.90%