Duffert Industries has total assets of $1,080,000 and total current liabilities (consisting only of accounts payable and accruals) of $100,000. Duffert finances using only long-term debt and common equity. The interest rate on its debt is 7% and its tax rate is 40%. The firm's basic earning power ratio is 15% and its debt-to capital rate is 40%. What are Duffert's ROE and ROIC? Do not round your intermediate calculations.

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Business

Lee Perez

13 December, 18:12

Duffert Industries has total assets of $1,080,000 and total current liabilities (consisting only of accounts payable and accruals) of $100,000. Duffert finances using only long-term debt and common equity. The interest rate on its debt is 7% and its tax rate is 40%. The firm's basic earning power ratio is 15% and its debt-to capital rate is 40%. What are Duffert's ROE and ROIC? Do not round your intermediate calculations.

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Maddison Walsh · Answer 1

ROIC is 9.26%

ROE is 12.63%

Explanation:

According to the given data we have the following:

Total assets = $1,080,000

Total liabilities = Current liabilities + Debt + Common equity = $1,080,000

D / (D + E) = 0.40

D / ($1,080,000 - 100,000) = 0.40

D = $392,000

Common equity = Total liabilities - Current liabilities - Debt = $1,080,000 - 100,000 - 392,000 = $588,000

BEP = 0.15 = EBIT/TA

= EBIT/$1,080,000

Therefore, EBIT = $162,000

In order to calculate the ROIC we would have to make the following calculation:

ROIC = [EBIT (1 - T) ] / (D + E) = [$151,200 (0.6) ] / ($392,000 + $588,000) = 9.26%

ROIC is 9.26%

To calculate the ROE we would have to calculate first net income from income statement as follows:

EBIT=$151,200

Less: Interest ($392,000 x 7%) 27,440

EBT = 123,760

Less: Tax 40% 49,504

Net Income = 74,256

Therefore, ROE = NI/E = $74,256/$588,000 = 12.63%

ROE is 12.63%