Duval Manufacturing recently reported the following information:
Net income $640,000
Interest expense $192,000
Accounts payable and accruals $1,000,000
Duval's tax rate is 35%.
Duval 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).
Ratio analysis refers to the analysis of the financial statements of the stock through ratios. It is done to compare the performance of the company with the past performance and also with the other companies in the similar industry.
Answer and Explanation:
Let us first note down the formula of each ratio and then we will proceed to find out the variables:
BEP = EBIT / Total Assets
ROE = Net Income / Equity x 100
ROIC = Net Income / Invested capital x 100
= Net Income + Taxes + Interest expense
= 640000 + (640000 x 35 / 65) + $192,000.00
= Net Income / ROA
= 640000 / 0.08
= Total assets - Current liabilities
= $8,000,000.00 - $1,000,000.00
= 60% of Invested capital
= 7,000,000 x 60%
BEP = 1176615 / 8000000 = 0.147
ROE = 640000 / 4200000 x 100 = 15.24%
ROIC = 640000 / 7000000 x 100 = 9.14%
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from Business 110: Business MathChapter 8 / Lesson 5