Duffert Industries has total assets of $1,000,000 and total current liabilities (consisting only of accounts payable and accruals)of $125,000.Duffert finances using only long-term debt and common equity.The interest rate on its debt is 8% and its tax rate is 40%.The firm's basic earning power ratio is 15% and its debt-to capital rate is 40%.What are Duffert's ROE and ROIC?
A)12.00%; 10.29%
B)12.57%; 10.29%
C)13.94%; 9.86%
D)13.94%; 10.29%
E)13.94%; 11.50%

Question

Quizplus · Accepted Answer

First, let's calculate Duffert's equity ratio (ER):
ER = 1 - Debt-to-Capital Ratio
ER = 1 - 0.4
ER = 0.6

Next, let's calculate Duffert's Return on Equity (ROE):
ROE = (Net Income / Equity)
ROE = (EBIT / Total Assets) x (1 - Tax Rate) x (Total Assets / Equity)
ROE = (0.15 x $1,000,000) x (1 - 0.4) x (1 / 0.6)
ROE = 0.09 x 1.67
ROE = 0.1503 or 15.03%

Lastly, let's calculate Duffert's Return on Invested Capital (ROIC):
ROIC = (EBIT / Invested Capital)
Invested Capital = Total Assets - Current Liabilities
Invested Capital = $1,000,000 - $125,000
Invested Capital = $875,000
ROIC = (0.15 x $1,000,000) / $875,000
ROIC = 0.1714 or 17.14%

Therefore, Duffert's ROE is 13.94% (closest to choice D) and its ROIC is 10.29%.

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