Question

Excel Online Structured Activity: ROE and ROIC Baker Industries' net income is $25000, its interest expense is $4000, and its tax rate is 45%. Its notes payable equals $26000, long-term debt equals $70000, and common equity equals $250000. The firm finances with only debt and common equity, so it has no preferred stock. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below Open spreadsheet ermediate What are the firm's ROE and ROIC? Round your answers to two decimal places ROL ROIC Check My Work Reset Problem

Answer 1

Return on Equity (ROE)

Return on Equity (ROE) = [Net Income / Common Equity] x100

= [$25,000 / $250,000] x 100

= 10.00%

“Return on Equity (ROE) will be 10.00%”

Return on Invested Capital (ROIC)

Return on Invested Capital (ROIC) = [Net Operating profit After Tax (NOPAT) / Total Invested Capital] x 100

Net Operating profit After Tax (NOPAT) = Net Income + Interest (1 – Tax Rate)

= $25,000 + $4,000(1 – 0.45)

= $25,000 + [$4,000 x 0.55]

= $25,000 + $2,200

= $27,200

Total Invested Capital = Common Equity + Note Payables + Long term debts

= $250,000 + $26,000 + $70,000

= $346,000

Therefore, Return on Invested Capital (ROIC) = [Net Operating profit After Tax (NOPAT) / Total Invested Capital] x 100

= [$27,200 / $346,000] x 100

= 7.86%

“Return on Invested Capital (ROIC) will be 7.86%”