Duffert Industries has total assets of $940,000 and total current liabilities (consisting only of accounts payable and accruals) of $130,000. Duffert finances using only long-term debt and common equity. The interest rate on its debt is 8% and its tax rate is 40%. The firm's basic earning power ratio is 14% and its debt-to capital rate is 40%. What are Duffert's ROE and ROIC?

ROE = 13.04%

ROIC = 7.83%

Explanation:

Data provided in the question:

Total assets = $940,000

Total current liabilities = $130,000

Interest rate on its debt = 8%

Tax rate = 40%

The firm's basic earning power ratio = 14%

Debt-to capital rate = 40% = 0.40

Now,

Basis earning power = EBIT : Total Assets

or

EBIT = Basis earning power * Total assets

= 14% * $940,000

= $131,600

Total Assets = Total Debt + Total Equity + Total Current Liabilities

$940,000 = Total Debt + Total equity + $130,000

Debt + Equity = $940,000 - $130,000

= $810,000

Debt to capital ratio = Debt : [ Debt + Equity ]

0.40 = Debt : $810,000

or

Total Debt = $324,000

Thus,

Debt + Equity = $810,000

or

$324,000 + Equity = $810,000

or

Equity = $810,000 - $324,000

= $486,000

Interest = 8% of Debt

= 0.08 * $324,000

= $25,920

Taxes = 40% of [ EBIT - Interest ]

= 0.40 * ($131,600 - $25,920)

= $42,272

Therefore,

ROE = [ EBIT - interest - Taxes ] : Equity

= [$131,600 - $25,920 - $42,272 ] : $486,000

= 0.1304

= 13.04%

ROIC = [ EBIT - interest - Taxes ] : Total capital

= [$131,600 - $25,920 - $42,272 ] : [Debt + Equity]

= [$131,600 - $25,920 - $42,272 ] : $810,000

= 0.0783 = 7.83%