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Unformatted text preview: ROA 8% Interest expense $225,000 Duval’s tax rate is 35%. What is its basic earning power (BEP)? Solution: Computation of the Basic Earning power Formula for BEP Basic Earning Power (BEP) = EBIT/Total Assets First need to find the Total Asset ROA = Net Income/Total Assets Total Assets = Net Income/ROA = 600,000/0.08 = $7,500,000 Net Income = EBIT - Interest - Tax = (1-T)(EBIT – Interest EBIT = Net Income/(1-T) + Interest = 600,000/0.65 +225,000 =$1,148,000 BEP = 1148000/7500000 = 0.153 = 15.3% Hence the Basic Earning power is 15.3% 4-10Assume the following relationships for the Brauer Corp.: Sales total assets 1.5× Return on assets (ROA) 3% Return on equity (ROE) 5% Calculate Brauer’s profit margin and debt ratio. Profit margin = ROA*total assets/sales = 3%/1.5 = 2% Equity/ assets = ROA/ROE = 3%/5% = 60% Debt ratio = 1-60% = 40%...
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- Spring '08
- Financial Ratio, Generally Accepted Accounting Principles, basic earning power, Net Income/Shareholder