Question

of Roe ROE AND ROIC Baker Industries' net income is $26,000, its interest expense is $5,000, and its tax rate is 35%. Its notes payable equals $25,000, long-term debt equals $75,000, and common equity equals $260,000. 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 ROIC

Answer 1

Net Income = $ 26000, Interest Expense = $ 5000, Tax Rate = 35%, Notes Payable = $ 25000, Long-Term Debt = $ 75000 and Equity = $ 260000

Profit Before Tax (PBT) = 26000 / (1-Tax Rate) = 26000 / (1-0.35) = $ 40000

Add: Interest Expense = $ 5000

EBIT = $ 45000

NOPAT = EBIT x (1-Tax Rate) = 45000 x (1-0.35) = $ 29250

Invested Capital = $ 25000 + $ 75000 + $ 260000 = $ 360000

Return on Invested Capital = ROIC = 29250 / 360000 = 8.125 %

Return on Equity (ROE) = 26000 / 2600000 = 10 %