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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? Do not round your intermediate calculations.

Respuesta :

Answer:

Duffert´s ratios are:

ROE = 23.33%

ROIC=  14%

Explanation:

1. First, to calculate ROE:

ROE = Net income / Net equity

Net income can be deducted from the Basic earning power ratio:

Basic Earning Power  = Net income  / Total Assets

14% = Net income / 940,0000

14% * 940,000 = Net income

131,600= Net income

Net equity can be deducted from debt to capital rate, 40%

Debt + Equity = Total assets

40% (940,000) = Debt

60% (940,000)= Equity

564,000= Equity

ROE = Net income / Net equity

ROE= 131,600 / 564,000

ROE= 23.33%

2. ROIC = Net profit / Equity

Net Profit = Net income * (1- tax)

Net profit = 131,600 (1 -  40%)

net profit = $78,960

ROIC = Net profit / Equity

ROIC = 78,960 / 564,000

ROIC = 14%

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