Duffert Industries has total assets of $1,040,000 and total current liabilities (consisting only of accounts payable and accruals)of $105,000.Duffert finances using only long-term debt and common equity.The interest rate on its debt is 8% and its tax rate is 25%.The firm's basic earning power ratio is 13% and its debt-to capital rate is 40%.What are Duffert's ROE and ROIC? Do not round your intermediate calculations.
A) 6.48%;9.11%
B) 8.37%;9.44%
C) 9.57%;10.52%
D) 9.97%;10.84%
E) 10.67%;12.04%

Question

Quizplus · Accepted Answer

ROE = (Net Income / Equity)
ROIC = (NOPLAT / Total Invested Capital)

First we need to find the equity and total invested capital:

Equity = Total Assets - Total Liabilities
Equity = $1,040,000 - $105,000 = $935,000

Total Invested Capital = Total Debt + Equity
Total Debt = Total Capital * Debt-to-Capital Ratio
Total Capital = Equity / (1 - Debt-to-Capital Ratio)

Total Capital = $935,000 / (1 - 0.4) = $1,558,333.33
Total Debt = $1,558,333.33 * 0.4 = $623,333.33
Total Invested Capital = $623,333.33 + $935,000 = $1,558,333.33

Next, we use the given information to find NOPLAT:

NOPLAT = EBIT * (1 - Tax Rate)

EBIT = (Total Assets - Total Liabilities) * Basic Earning Power Ratio
EBIT = ($1,040,000 - $105,000) * 0.13 = $121,550

NOPLAT = $121,550 * (1 - 0.25) = $91,162.50

Now we can calculate ROE and ROIC:

ROE = $91,162.50 / $935,000 = 9.75%
ROIC = $91,162.50 / $1,558,333.33 = 5.85%

The closest answer choice is (D) 9.97%;10.84%.

Duffert Industries Has Total Assets of $1,040,000 and Total Current