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Broward Manufacturing recently reported the following information: Net income $297,000 ROA 8% Interest expense $92,070 Accounts...

Broward Manufacturing recently reported the following information:

Net income	$297,000
ROA	8%
Interest expense	$92,070
Accounts payable and accruals	$1,000,000

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

= $297,000 + $297,000*25/ 60 + $92,070

= $297,000 + $123,750 + $92,070

= $512,820

Total assets = Net income / ROA

= $297,000/ 8%

= $3,712,500

Basic Earning Power (BEP) = $512,820 / $3,712,500

= 0.1381*100

= 13.81%.

2.ROE= Net income / Equity

Equity= 60%*Total assets

= 60%*$3,712,500

= $2,227,500

ROE= $297,000 / $2,227,500

= 0.1333*100

= 13.33%.

3.ROIC = NOPAT / Invested Capital

= EBIT*(1 - tax) / (Total assets - Accounts payables and accruals)

= $512,820*(1 - 0.25) / ( $3,712,500 - $1,000,000)

= $384,615 / $2,712,500

= 0.1418*100

= 14.18%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 1 year ago

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