Question

Herring Corporation has operating income of $270,000 and a 40% tax rate. The firm has short-term debt of $119,000, long-term debt of $316,000, and common equity of $435,000. What is its return on invested capital

Answer 1

Answer:

18.62%

Explanation:

To calculate the return on invested capital, you can use the following formula:

ROIC= NOPAT / Invested Capital, where:

NOPAT (net operating profit after tax)= Operating Profit*(1-Tax Rate)

Invested Capital= short-term debt + long-term debt + equity

Operating Profit= $270,000

Tax rate= 40%

Short-term debt= $119,000

long-term debt= $316,000

Common equity= $435,000

ROIC= (Operating Profit*(1-Tax Rate))/short-term debt + long-term debt + equity

ROIC= (270,000*(1-0.4))/(119,000+316,000+435,000)

ROIC= (270,000*0.60)/870,000

ROIC= 162,000/870,000

ROIC= 0.1862*100= 18.62%

The return on invested capital is 18.62%.

Answer 2

Answer:

ROIC 18.62%

Explanation:

This ratio measures how investors are earning on invested capital

To calculate the return on invested capital we use the formula

ROIC = Net Income/debt +equity

Net income

operating income *1 - tax

270000- (1-0.4) =$162 000

Debt = 119000+316000=435000

ROIC = 162000/(435000+435000

          =162000/870000

           =0.1862/18.62%

As the return on invested capital is less than 2% this means that the company is destroying value of the company