$7.$ Problem $4\mathrm{.}07($ROE and ROIC$)$

eBookeBook Problem Walk$-$ThroughProblem Walk$-$Through

Baker Industries$$ net income is $$21,000,$ its interest expense is $$6,000,$ and its tax rate is $25\%.$ Its notes payable equals $$25,000,$ long$-$term debt equals $$75,000,$ and common equity equals $$250,000.$ The firm finances with only debt and common equity, so it has no preferred stock. What are the firm$$s ROE and ROIC? Do not round intermediate calculations. Round your answers to two decimal places.

ROE:

$8\mathrm{.}40$

$\%$

ROIC:

$8\mathrm{.}00$

$\%$

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Solution

Given: Net income $=$ $$21,000$; Common equity $=$ $$250,000$

To calculate ROIC we need to find EBIT and total invested capital.

Step $1$: To calculate EBIT, we use the income statement and calculate up the income statement beginning with net income as follows:

EBIT $$34,000$ EBT $+$ Int. $=$ $$28,000+6,000$

Interest $6,000($Given$)$

EBT $$28,000$ NI$/(1$ T$)=$ $$21,000/0\mathrm{.}75$

Taxes $(25\%)7,000$ EBT $\backslash$times T $=$ $$28,000\backslash$times $0\mathrm{.}25$

Net income $$21,000($Given$)$

Step $2$: Calculate total invested capital as follows:

Notes payable $ $25,000$

Long$-$term debt $75,000$

Common equity $250,000$

Total invested capital $$350,000$

Step $3$: Calculate ROIC as follows:

Solution

Correct Response

eBook Problem Walk$-$Through

Baker Industries$$ net income is $$21,000,$ its interest expense is $$6,000,$ and its tax rate is $25\%.$ Its notes payable equals $$25,000,$ long$-$term debt equals $$75,000,$ and common equity equals $$250,000.$ The firm finances with only debt and common equity, so it has no preferred stock. What are the firm$$s ROE and ROIC? Do not round intermediate calculations. Round your answers to two decimal places.

ROE:

$8\mathrm{.}40$

$\%$

ROIC:

$7\mathrm{.}29$

$\%$