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(Solved): 1. BEP, ROE, AND ROIC Broward Manufacturing Recently Reported The Following Information: Net Income ...

1. BEP, ROE, AND ROIC

Broward Manufacturing recently reported the following information:

Net income $350,000
ROA 6%
Interest expense $140,000
Accounts payable and accruals $1,000,000

Broward's tax rate is 35%. Broward 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). Round your answers to two decimal places.

Find ROIC.

2. RETURN ON EQUITY

Commonwealth Construction (CC) needs $3 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CC will own no securities, so all of its income will be operating income. If it so chooses, CC can finance up to 30% of its assets with debt, which will have an 9% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. Assuming a 40% tax rate on all taxable income, what is the difference between CC's expected ROE if it finances these assets with 30% debt versus its expected ROE if it finances these assets entirely with common stock? Round your answer to two decimal places.


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