BEP, ROE, AND ROIC Broward Manufacturing recently reported the following informa
ID: 2814706 • Letter: B
Question
BEP, ROE, AND ROIC
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.
*** For BEP my answer is 16.05% (answer key states its correct)
***For ROE my answer is 13.33% & for ROIC my answer is 9.63% (answer key states its WRONG)
Net income $790,000 ROA 8% Interest expense $268,600 Accounts payable and accruals $950,000Explanation / Answer
1. Computation of BEP
BEP = EBIT / Total Assets
EBIT = Net Income / (1 - Tax) + Interest Expenses = $790000 / 60% + $268600
EBIT = $1585266.67
Total Assets = Net Income / ROA = $790000 / 8%
Total Assets = $9875000
BEP = $1585266.67 / $9875000 = 16.05%
2. Computation of ROE
ROE = Net Income / Shareholders' Equity
Net Income = $790000
Share holders' Equity = (Total Assets - Short Term Liabilities) * (1 - Debt)
Share holders' Equity = ($9875000 - $950000) * (1 - 0.40)
Share holders' Equity = $5355000
ROE = Net Income / Shareholders' Equity
ROE = $790000 / $5355000
ROE = 14.75%
3. Computation of ROIC
ROIC = EBIT * (1 - Tax) / Invested Capital
ROIC = $951160 / 8925000
ROIC = 10.66%
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