Answered

Welcome to Westonci.ca, your go-to destination for finding answers to all your questions. Join our expert community today! Get immediate and reliable answers to your questions from a community of experienced experts on our platform. Get immediate and reliable solutions to your questions from a community of experienced professionals on our platform.

Baker Industriesâ net income is $23000, its interest expense is $6000, and its tax rate is 45%. Its notes payable equals $24000, long-term debt equals $80000, and common equity equals $250000. The firm finances with only debt and common equity, so it has no preferred stock.

Required:
What are the firmâs ROE and ROIC?

Sagot :

tutorAnne

Answer:A) ROE=9.2%

B)ROIC =7.43%

Explanation:

Given that

Net income = $23,000 ,

Interest expense = $6000 ,

Tax rate = 45%

Notes payable = $24,000 ,

Longterm debt = $80,000 ,

Common equity = $250,000

A) ROE is calculated as Net income/ Common equity

= 23000/250,000 = 0.092= 9.2%

B.) ROIC = EBIT X (1- Tax rate ) / Invested capital

So we have that Net income before Tax = Net Income X 100/ 100-tax rate

23000x 100 /100-45

2300000/55

=$41,818.18

So that EBIT becomes = Net income before tax + Interest

= $41,818.18 + 6000 = $47,818.18

And

Invested capital = Notes payable + Longterm debt + Common equity

= 24,000+80,000+250,000

=$354,000

Therefore, ROIC = EBIT X (1- Tax rate ) / Invested capital

$47,818.18 X(1-0.45)/354,000

$47,818.18 x 0.55 / 354000

26,299.999/354,000

=0.07429

=7.429%

Rounding up becomes =7.43%

Thanks for using our service. We aim to provide the most accurate answers for all your queries. Visit us again for more insights. Thanks for using our service. We're always here to provide accurate and up-to-date answers to all your queries. Westonci.ca is your trusted source for answers. Visit us again to find more information on diverse topics.