Aaron Aviation recently reported the following information: Net income = $500,000
ROA = 10%
Interest expense = $200,000
The company's average tax rate is 40%. What is the company's basic earning power (BEP)?
A) 14.12%
B) 16.67%
C) 17.33%
D) 20.67%
E) 22.50%

Question

Quizplus · Accepted Answer

BEP = EBIT/Total Assets
Since net income and interest expense are given, we need to add back interest expense to find EBIT.
EBIT = Net Income + Interest Expense
EBIT = $500,000 + $200,000
EBIT = $700,000
Now, we can calculate BEP using the formula:
BEP = EBIT/Total Assets
BEP = $700,000/(Total Assets)
ROA = Net Income /Total Assets
10% = $500,000/Total Assets
Total Assets = $5,000,000
So, BEP = $700,000/$5,000,000 = 0.2067 or 20.67%
Therefore, the best choice is D.

Aaron Aviation Recently Reported the Following Information: Net Income =