Question

Baker Industries’ net income is $26000, its interest expense is $4000, and its tax rate is 35%. Its notes payable equals $24000, long-term debt equals $75000, and common equity equals $255000. The firm finances with only debt and common equity, so it has no preferred stock.

What are the firm’s ROE and ROIC? Round your answers to two decimal places. Do not round intermediate calculations.

ROE and ROIC
Net income	$26,000
Interest expense	$4,000
Tax rate	35.00%
Notes payable	$24,000
Long-term debt	$75,000
Common equity	$255,000
ROE
Partial Income Statement:
EBIT
Interest	$4,000.00
EBT
Taxes
Net income	$26,000.00
Capital Summary:
Notes payable	$24,000.00
Long-term debt	$75,000.00
Common equity	$255,000.00
Total invested capital
ROIC

Answer 1

Solution:
	ROE=10.20%
	ROIC =8.08%
Working Notes:
	Return on Equity (ROE)
	=Net Income /Common equity
	=$26,000/$255,000
	=0.10196078
	=10.20%
	Return on invested capital (ROIC)
	= NOPAT/Total invested capital
	NOPAT = EBIT x (1-Tax rate)
	Net income	26,000
	Add: Taxes	14,000
	(Net income/(1-tax rate)) x tax rate
	[(26000/(1-0.35)) x 0.35]
	Earnings before taxes (EBT)	40,000
	Add: Interest Expense	$4,000
	Earnings before interest and taxes (EBIT)	$44,000
	NOPAT = EBIT x (1-tax rate)
	NOPAT = 44,000 x (1-0.35)
	NOPAT = 44,000 x 0.65
	NOPAT = 28,600
	Total invested capital = Equity + Long term debt +Notes payable
	Total invested capital =255,000 + 75,000 + 24,000
	Total invested capital =354,000
	Return on invested capital (ROIC)
	= NOPAT/Total invested capital
	=28,600/354,000
	=0.08079096
	=8.079096%
	=8.08%
Please feel free to ask if anything about above solution in comment section of the question.