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

Question

Erica Pearson

Business

9 January, 07:20

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

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Answers (2)

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Rory Fields · Answer 1

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

Janet Blair · Answer 2

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%.