Problem 4e9 BEP, ROE, and ROIC Duval Manufacturing recently reported the followi
ID: 2383511 • Letter: P
Question
Problem 4e9 BEP, ROE, and ROIC Duval Manufacturing recently reported the following information Net income $530,000 ROA 7% Interest expense $190,800 Accounts payable $1,000,000 and accruals Duval?s tax rate is 40%. Duval finances with only debt and common equity, 50 it has no preferred stock. 40% 01 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.Explanation / Answer
Answer: Computation of the Basic Earning power
Basic Earning Power (BEP) = EBIT/Total Assets
First need to find the Total Asset
ROA = Net Income/Total Assets
Total Assets = Net Income/ROA
= 530,000/0.07
= $7571428.57
Earning before tax = Net income/(1 - tax rate) = 530000/(1 - 0.40) = 883333.33
EBIT=EBT+Interest
=$883333.33+190800
=$1074133.33
BEP = EBIT/TA = 1074133.33/$7571428.57 = 0.1908 = 14.19%
Answer: ROE= Net income/Shareholders Equity
=$530000/((7571428.57-1000000)*60%)
=13.44%
Answer: ROIC = ( Net income - Dividends ) / ( Total assets-Accounts payable )
=($530000-0)/(7571428.57-1000000)
=8.06%