BEP, ROE, and ROIC Duval Manufacturing recently reported the following informati
ID: 2614315 • Letter: B
Question
BEP, ROE, and ROIC
Duval Manufacturing recently reported the following information
Duval's tax rate is 40%. Duval 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.
BEP: %
ROE: %
ROIC: %
Net income $630,000 ROA 11% Interest expense $195,300 Accounts payable and accruals $950,000Explanation / Answer
Solution: BEP = 21.74% ROE =21.98% ROIC = 15.64% Working Notes: Basic earning power (BEP) =Earnings before interest taxes / Total assets Basic earning power (BEP) =$1,245,300 / $5,727,272.72727 Basic earning power (BEP) =0.2174333 Basic earning power (BEP) =21.74 % Notes: Net Income $630,000 Add: Taxes @ 40% 420,000 [ Taxes = [Net Income/(1-tax rate)] x tax rate] [ Taxes = [630,000/(1-0.40)] x 0.40 =$420,000] Earnings before taxes $1,050,000 Add: Interest expenses $195,300 Earnings before interest & taxes $1,245,300 Return on assets (ROA) = Net income / Total assets 11% = $630,000/Total assets Total assets = $630,000/11% Total assets = $5,727,272.72727 Return on Equity (ROE) = Net income / Equity Return on Equity (ROE) = $630,000 /$2,866,363.636 Return on Equity (ROE) = 0.219790676 Return on Equity (ROE) = 21.9790676 % Return on Equity (ROE) = 21.98 % Long term debt + Equity + Accounts payable and accruals = Total assets Long term debt + Equity + $950,000 = $5,727,272.72727 Long term debt + Equity = $5,727,272.72727 - $950,000 Long term debt + Equity = $4,777,272.72727 out of this $4,777,272.72727 , 60% is finance by Equity Equity = $4,777,272.72727 x 60% Equity = $2,866,363.63636 Return on invested capital (ROIC) =Net Operating Profit After Tax (NOPAT)/Invested Capital =$747,180/$4,777,272.72727 =0.156403045 =15.64030% =15.64% Net Operating Profit After Tax (NOPAT) = Earnings before interest & taxes x (1- tax rate ) =$1,245,300 x (1- 0.40 ) =$1,245,300 x 0.60 =$747,180 Invested Capital = Long term debt + Equity = $4,777,272.72727 Please feel free to ask if anything about above solution in comment section of the question.
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