BEP, ROE, AND ROIC - Broward Manufacturing recently reported the following infor

Question

BEP, ROE, AND ROIC - Broward Manufacturing recently reported the following information: Net income $790,000 ROA 8% Interest expense $268,600 Accounts payable and accruals $950,000 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.

Explanation / Answer

ROA = 8%
ROA = Net Income/ Total Assets
790,000/Total assets =8%
Total assets = 790,000/8% = 9875000
EBIT = Net Income/(1 -Tax rate) + Interest = 790,000/(1-40%) + 268,600 = 1585266.67
BEP = EBIT/Total Assets =  1585266.67/9875000 = 0.1605 or 16.05%

Equity = 60% * Total assets = 60% *  9875000 = 5925000

ROE = Net income/ Equity =790,000/5925000 = 0.1333 or 13.33%

ROIC = Net operating profit after tax / Invested Capital = (Net income+ Interest * ( 1-Tax rate))/(Capital employed) = (790,000 + 268,000* ( 1-40%)/9875000 = 0.09628 or 9.63%

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