Answer:
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%
