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Broward Manufacturing recently reported the followinginformation:Net income$414,000ROA8%Interest expense$124,200Accounts...

Broward Manufacturing recently reported the following information:

Net income$414,000
ROA8%
Interest expense$124,200
Accounts payable and accruals$950,000

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

BEP = 13.067%

ROE = 16.33%

ROIC =12%

1.

BASIC EARNINGS POWER (BEP) =EBIT / TOTAL ASSETS

ROA =NET INCOME / TOTAL ASSETS

8% = 414,000 / TOTAL ASSETS

TOTAL ASSETS =5,175,000

WORK BACK FROM NET INCOME

EBIT =676200

LESS INTEREST = 124,200

INCOME BEFORE TAXES 552,000

LESS INCOME TAX =138,000

(414,000 / (1-25%) X25%)

NET INCOME =414,000

BEP = 676,200 / 5,175,000

=13.067%

2.

RETURN ON EQUITY = NET INCOME / COMMON EQUITY

COMMON EQUITY = CAPITAL INVESTED X 60%

= ( 5,175,000 - 950,000) X 60%

=2,535,000

ROE = NET INCOME / COMMON EQUITY

=414,000 / 2,535,000

=16.33%

3. ROIC = EBIT (1-T) / TOTAL INVESTED CAPITAL

=676,200(1-25%) / 4,225,000

= 507,150 / 4,225,000

=12%

jeff jeffy answered 2 years ago
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