Question

k to Assignment Attempts: 0 Keep the Highest: 0/2 7. Problem 4.07 Click here to read the eBook: Potential Misuses of Roe ROE AND ROIC Baker Industries' net income is $26,000, its interest expense is $6,000, and its tax rate is 35 %. Its notes payable equals $23,000, long-term debt equals $75,000, and common equity equals $255,000. The firm finances with only debt and common equity, so it has no preferred stock. What are the firm's ROE and ROJC? Round your answers to two decimal places. Do not round intermediate calculations ROE % ROIC % Grade It Now Save & Continue Continue without saving 13P e eand A NOV

Answer 1

a). ROE = Net Income / Equity = $26,000 / $255,000 = 0.1020, or 10.20%

b). EBIT = [Net income / (1 - t)] + Interest

= [$26,000 / (1 - 0.35)] + $6,000

= $40,000 + $6,000 = $46,000

NOPAT = EBIT * (1 - t) = $46,000 * (1 - 0.35) = $29,900

Invested Capital = Debt + Equity - Accounts Payable

= $75,000 + $255,000 - $23,000 = $307,000

ROIC = NOPAT / Invested Capital

= $29,900 / $307,000 = 0.0974, or 9.74%