Baker Industries’ net income is $25000, its interest expense is $6000, and its tax rate is...

Baker Industries’ net income is $25000, its interest expense is $6000, and its tax rate is 45%. Its notes payable equals $26000, long-term debt equals $70000, and common equity equals $250000. The firm finances with only debt and common equity, so it has no preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.

Open spreadsheet
What are the firm’s ROE and ROIC? Round your answers to two decimal places. Do not round intermediate calculations.

ROE
%
ROIC
%

Solutions

Expert Solution

Return on Equity (ROE) is Net income divided by Shahreholders equity.

Net income =			25000
Shareholders equity =			250000

*ROE = Net income / Shareholders equity 100**
	25000/250000
	10.00%

Return on invested capital is Net operating profit after taxes divided by book value of debt and equity

Net income			25000
Tax rate 45%. So net profit = 1-0.45 = 0.55
So, Profit before taxes = 25000/0.55 * 1=			45454.55
Interest expenses			6000

So, EBIT = 45454.55 + 6000 =			51454.55

Net Operating profit after tax = EBIT * (1 - tax rate)
	51454.55 * (1 - 0.45)
	28300

Invested capital = Notes payable + Long term debt + Common equity
	26000 + 70000 + 250000
	346000

Return on Invested capital = Net operating profit after taxes / Book value of debt and equity
		28300 / 346000
		8.18%

So, ROE =	10.00%
ROIC =	8.18%

jeff jeffy answered 1 year ago

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