Broward Manufacturing recently reported the following information: Broward\'s ta
ID: 2814975 • Letter: B
Question
Broward Manufacturing recently reported the following information:
Broward's tax rate is 40%. Broward finances with only debt and common equity, so it has no preferred stock. 40% of its total invested capital is debt, while 60% of its total invested capital is common equity. Calculate its basic earning power (BEP), its return on equity (ROE), and its return on invested capital (ROIC). Round your answers to two decimal places.
Net income $725,000 ROA 9% Interest expense $282,750 Accounts payable and accruals $950,000Explanation / Answer
ROA (Return on Assets) = Net Income / Total assets
or, 0.09 = $725,000 / Total assets
or, Total assets = $8,055,555.55555
Total assets = Total liabilities
or, $8,055,555.55555 = Accounts payable and accruals + Total invested capital
or, Total invested capital = $8,055,555.55555 - $950,000 = $7,105,555.55555
Total debt = 40% x $7,105,555.55555 = $2,842,222.22222
Total equity = 60% x $7,105,555.55555 = $4,263,333.33333
Basic Earning Power
EBT = Net Income / (1 - tax rate) = $725,000 / (1 - 0.40) = $1,208,333.33333
EBIT = EBT + Interest expense = $1,208,333.33333 + $282,750 = $1,491,083.33333
Basic Earning Power = EBIT / Total assets = $1,491,083.33333 / $8,055,555.55555 = 0.1851 or 18.51%
Return on Equity
ROE = Net income / Total equity = $725,000 / $4,263,333.33333 = 0.1701 or 17.01%
Return on invested capital
Net Operating profit after taxes (NOPAT) = EBIT x (1 - Tax rate) = $1,491,083.33333 - (1 - 40%) = $894,650
ROIC = NOPAT / Total invested capital = $894,650 / $7,105,555.55555 = 0.1259 or 12.59%
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