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Duval Manufacturing recently reported the following information: Net income $640,000 ROA 8% ...

Question:

Duval Manufacturing recently reported the following information:

Net income $640,000

ROA 8%

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:

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

Now,

EBIT
= Net Income + Taxes + Interest expense
= 640000 + (640000 x 35 / 65) + $192,000.00
= $1,176,615.00

Total Assets
= Net Income / ROA
= 640000 / 0.08
= $8,000,000.00

Invested Capital
= Total assets - Current liabilities
= $8,000,000.00 - $1,000,000.00
= $7,000,000.00

Equity
= 60% of Invested capital
= 7,000,000 x 60%
= $4,200,000.00

So,

BEP = 1176615 / 8000000 = 0.147

ROE = 640000 / 4200000 x 100 = 15.24%

ROIC = 640000 / 7000000 x 100 = 9.14%


Learn more about this topic:

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Financial Ratio Calculation and Analysis

from Business 110: Business Math

Chapter 8 / Lesson 5
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