Broward Manufacturing recently reported the following information: Net income $365,000 ROA 7% Interest expense $127,750 Accounts payable and accruals $1,050,000 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). Do not round intermediate calculations. Round your answers to two decimal places.

BEP = 14.11%

ROE = 14.6%

ROIC = 10.60%

Explanation:

Calculate its basic earning power (BEP)

The formula for BEP is

BEP = EBIT / Total Assets

To find Total Assets, we can use the ROA formula:

ROA = Net Income / Total Assets

7% = $365,000 / Total Assets

Total Assets = $365,000 / 7%

= $5,214,285.714

Now, we must find the EBIT, which means Earnigns Before Interest and Taxes.

We have a net income of $365,000. The tax rate is 40%. We solve the following formula to find the tax expense:

Tax Expense = $365,000 / ((1 - 40%) / 40%)

= $243,333.333

Now, we add the net income, the tax expense that we found above, and the interest expense:

EBIT = $365,000 + $243,333.333 + $127,750

= $736,083.333

Finally we can find the BEP:

BEP = $736,083.333 / $5,214,285.714

= 0.1411

= 14.11%

2) To find the return on equity, we must first find the common equity

Total Invested Capital = Total Assets - Accounts Payable and Accruals

= $5,214,285.714 - $1,050,000

= $4,164,285.714

Common Equity = Total Invested Capital x 60%

= $4,164,285.714 x 60%

= $2,498,571.428

Now we can solve for ROE

ROE = Net Income / Common Equity

= $365,000 / $2,498,571.428

= 0.1460

= 14.6%

3) To find the return on invested capital, we use this formula:

ROIC = EBIT (1 - T) / Total Invested Capital

= $736,083.333 (1 - 40%) / $4,164,285.714

= 0.1060

= 10.60%

Answer: (1) BEP = 0.12 (2) ROE = 0.09 (3) ROIC = 0.08

Explanation:

Since we are given 7% as ROA

Therefore to calculate total Asset

= Net income / ROA

= 365,000 / 0.07

= $5,214,285.71

To calculate tax expense

= Tax rate * Net income

= 40% * 365,000

= 0.4 * 365,000

= $146,000

EBIT = Net income + Tax expense + interest expense

= 365,000 + 146,000 + 127,750

=$638,750

BEP = EBIT / Total Assets

= 638,750/5,214,285.17

=0.12

To calculate ROE

ROE = Net income / Shareholders Equity

To calculate shareholders Equity

=Total capital invested = Total Asset - Account payable

= 5,214,285.17 - 1,050,000

= $4,164,285.71

Common Equity = 4,164,285.71 * 60%

= $2,498,571.42

Debt = 4,164,285.71 * 40%

= 1,665,714.06

Shareholders Equity = Common Equity + Debt

= 2,498,571.42 + 1,665,714.06

=$4,164,285.48

ROE = Net income / Shareholders Equity

= 365,000/4,164,285.48

= 0.09

To calculate Return on invested capital

ROIC = Net income / Total invested capital

= 365,000 / 4,164,285.71

=0.08