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25 August, 07:32

Herring Corporation has operating income of $270,000 and a 40% tax rate. The firm has short-term debt of $119,000, long-term debt of $316,000, and common equity of $435,000. What is its return on invested capital

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Answers (2)
  1. 25 August, 08:13
    0
    18.62%

    Explanation:

    To calculate the return on invested capital, you can use the following formula:

    ROIC = NOPAT / Invested Capital, where:

    NOPAT (net operating profit after tax) = Operating Profit * (1-Tax Rate)

    Invested Capital = short-term debt + long-term debt + equity

    Operating Profit = $270,000

    Tax rate = 40%

    Short-term debt = $119,000

    long-term debt = $316,000

    Common equity = $435,000

    ROIC = (Operating Profit * (1-Tax Rate)) / short-term debt + long-term debt + equity

    ROIC = (270,000 * (1-0.4)) / (119,000+316,000+435,000)

    ROIC = (270,000*0.60) / 870,000

    ROIC = 162,000/870,000

    ROIC = 0.1862*100 = 18.62%

    The return on invested capital is 18.62%.
  2. 25 August, 11:14
    0
    ROIC 18.62%

    Explanation:

    This ratio measures how investors are earning on invested capital

    To calculate the return on invested capital we use the formula

    ROIC = Net Income/debt + equity

    Net income

    operating income * 1 - tax

    270000 - (1-0.4) = $162 000

    Debt = 119000+316000=435000

    ROIC = 162000 / (435000+435000

    =162000/870000

    =0.1862/18.62%

    As the return on invested capital is less than 2% this means that the company is destroying value of the company
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