Question

Broward Manufacturing recently reported the following information:

Net income	$336,000
ROA	8%
Interest expense	$131,040
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.

Answer 1

- Net Income = $336,000

EBIT = Income before Tax + Interest Expenses

where, Income before Tax = Net Income/(1-Tax rate)

EBIT = $336,000/(1-0.25) + $131,040

EBIT = $579,040

- Return on Assets(ROA) = Net income/Total Assets

0.08 = $336,000/Total Assets

Total Assets = $4200,000

- Total Invested Capital = Total Assets – Accounts payable and Accurals

= $4200,000 - $1000,000

Total Invested Capital = $3200,000

Common Equity = 60% of Total Invested Capital

= 60%*$3200,000

Common Equity = $1920,000

Now, Calculating the followings:-

a). Basic earnings Power(BEP) = EBIT/Total Assets

= $579,040/$4200,000

BEP = 13.79%

b). Return on Equity(ROE) = Net income/Common Equity

= $336,000/$1920.000

ROE = 17.50%

c). Return on Invested Capital(ROIC) = EBIT*(1-Tax Rate)/Total Invested Capital

= $579,040*(1-0.25)/$3200,000

ROIC = 13.57%

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