Question

A company has an EPS of $2.40, a book value per share of $26.40, and a market/book ratio of 1.3×. What is its P/E ratio? Do not round intermediate calculations. Round your answer to two decimal places.

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A firm has a profit margin of 5.5% and an equity multiplier of 1.6. Its sales are $260 million, and it has total assets of $78 million. What is its ROE? Do not round intermediate calculations. Round your answer to two decimal places.

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Baker Industries’ net income is $21,000, its interest expense is $4,000, and its tax rate is 25%. Its notes payable equals $24,000, long-term debt equals $80,000, and common equity equals $250,000. The firm finances with only debt and common equity, so it has no preferred stock. What are the firm’s ROE and ROIC? Do not round intermediate calculations. Round your answers to two decimal places.

ROE: ____%

ROIC: ____%

Answer 1

1) EPS = $2.40

Book value per share = $26.40

Market / book ratio = 1.3x

Market / book ratio = Market price per share / Book value per share

1.3 = Market price per share / $26.40

Market price per share = $34.32

P / E ratio = Market price per share / Eanings per share

P / E ratio = $34.32 / 2.40

P / E ratio = $14.30

2) Profit margin = 5.5%

Equity multiplier = 1.60

Sales = $260,000,000

Total Assets = $78,000,000

ROE = Profit margin * Total assets turnover * Equity multiplier

ROE = 5.5% * ($260,000,000 / $78,000,000) * 1.60

ROE = 29.33%

3) ROE = Net income / Total Equity

ROE = $21,000 / $250,000

ROE = 0.084 or 8.40%.

ROIC = Net operating profit after tax / [Debt + Equity]

Net operating profit after tax = [(net income * 100/(1-T) + Interest expense] * (1 - T)

Net operating profit after tax = [($21,000*100/75) + $4,000] * (1 - 0.25) = $32,000 * 0.75

Net operating profit after tax = $24,000

ROIC = $24,000 / [24,000 + 80,000 + 250,000] = 6.78%

So, ROE = 8.40%

ROIC = 6.78%