2-3 Molteni Motors Inc. recently reported $6 million of net income. Its EBIT was $13 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement, and then fill in the known values. Then divide $6 million net income by 1−T=0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense. Use this procedure to work some of the other problems.)
Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
2-3
Molteni Motors Inc. recently reported $6 million of net income. Its EBIT was $13 million, and its tax rate was 40%. What was its interest expense? (Hint: Write out the headings for an income statement, and then fill in the known values. Then divide $6 million net income by 1−T=0.6 to find the pre-tax income. The difference between EBIT and taxable income must be the interest expense. Use this procedure to work some of the other problems.)
$6,000,000 net income/(1- 40%)
$6,000,000 net income/(0.6)
=10,000 million
$13,000,000-$10,000,000=$3,000,000 Interest Expense
2-12
Using Rhodes Corporation’s financial statements (shown below), answer the following questions.
- What is the
net operating profit after taxes (NOPAT) for 2013?
NOPAT= EBIT (1- Tax Rate)
$1260(1-.4)
$1260(0.6)
NOPAT=756
- What are the amounts of net operating working capital for both years?
NOWC= operating current assets-operating current liabilities
NOWC12=(550,000,000 + 2,750, 000,000 + 1,650,000,000)-
(1,000,000,000+550,000,000)=
$3.3 billion
NOWC13= (500,000,000+2,500,000,000 +1, 500,000,000) - (1,000,000,000 +
500,000,000)
=$3,000,000,000
- What are the amounts of total net operating capital for both years?
NOWC+Net Fixed assets= operating capital
Op.capital 13= $3,300,000,000+$3,850,000,000= $7.15 billion
Op.capital 12= $3,000,000,000 + $3,500,000,000=
$6.billion
- What is the
free cash flow for 2013?
NOPAT-NET INVESTMENT IN OPERATING CAPITAL=FCF
Operating capital of 2013 - operating capital of 2012
$7,150-$6,500= $650 million
$756 million - $650 million= $106 million
- What is the
ROIC for 2013?
NOPAT/ Invested capital= ROIC
ROIC=756/6,216
ROIC=12%
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- What are the amounts of total net operating capital for both years?
NOWC+Net Fixed assets= operating capital
Op.capital 13= $3,300,000,000+$3,850,000,000= $7.15 billion
Op.capital 12= $3,000,000,000 + $3,500,000,000=
$6.billion
- What is the
free cash flow for 2013?
NOPAT-NET INVESTMENT IN OPERATING CAPITAL=FCF
Operating capital of 2013 - operating capital of 2012
$7,150-$6,500= $650 million
$756 million - $650 million= $106 million
- What is the ROIC for 2013?
NOPAT/ Invested capital= ROIC
ROIC=756/6,216
ROIC=12%
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