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Broward Manufacturing recently reported the following information: Net income $231,000 ROA 10% Interest expense $87,780 Accounts...

Broward Manufacturing recently reported the following information:

Net income	$231,000
ROA	10%
Interest expense	$87,780
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.

Solutions

Expert Solution

Given Information:

Net Income=231000, ROA 10%, Interest=87780, AP=1000000

1. Basic Earning Power:

Step-1: Total Assets and EBIT are directly not given in the Question. So we need to calculate both with the avaialble information.

Step 2: Net Income is Profit after taxes which is given in the question 231000 and Also taxes given 25% So by reverse calculation we can calculate Profit before taxes as : 231000/0.75

Profit Before taxes: 308000

Step 3 : To Calculate Earning Before int and taxes Ad back the interest 87780 in Profit after Taxes 308000

EBIT= 395780

Step 4: Calculation of Total Assets. ROA given 10% and formula for ROA is

10% = 231000/ Total Assets.

With this calculation we get Total assets as 2310000.

No Calculate BEP= 395780/2310000 = 17.13%

2. Return on Equity :

Step 1 - Net Income is available in the Question but we need to calculate the Equity Capital using the information available in the question.

Step 2 - We got the Total Assets above and Account payables are given in the question. So Calculate the Capital Employed or Called Net Assets with this.

Step 3 - Capital Employed or Net assets =

so solve 2310000 - 1000000 = 1310000

Step 4 - We have Capital Employed 1310000 and it is given that 60% is Equity and 40% is Debt So

Equity = 786000

Debt = 524000

Now caculate return On Equity = Net Income/ Equity Capital = 231000/786000 = 29.39%

3. Return on Total capital Employed:

Both figures are calculates in above solutions so.

= 395780/1310000 = 30.21%

jeff jeffy answered 1 year ago

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