Return on Assets (ROA) and Return on Common Equity (ROCE) Computations
A. No Tax Example
| CASE | ||||||||||
| A | B | C | D | E | F | G | ||||
| Assets | $200 | $200 | $200 | $200 | $200 | $200 | $200 | |||
| Liabilities | $0 | $50 | $100 | $150 | $50 | $100 | $150 | |||
| Shareholders' Equity | 200 | 150 | 100 | 50 | 150 | 100 | 50 | |||
| Total Liab. and SE | $200 | $200 | $200 | $200 | $200 | $200 | $200 | |||
| Net Income before Interest | $30 | $30 | $30 | $30 | $30 | $30 | $30 | |||
| Interest | 12% | 0 | 6 | 12 | 18 | 18% | 9 | 18 | 27 | |
| Net Income | $30 | $24 | $18 | $12 | $21 | $12 | $3 | |||
| Return on Assets Computation | ||||||||||
| Net Income + Interest | $30+0 | |||||||||
| Assets | $200 | |||||||||
| ROA | 15% | |||||||||
| Return on Common Equity Computation | ||||||||||
| Net Income - Pref. Dividends | $30 | |||||||||
| Shareholders' Equity | $200 | |||||||||
| ROCE | 15% | |||||||||
B. Example with Taxes |
tax rate = 30% | |||||||||
| Net Income before Interest | $30 | $30 | $30 | $30 | $30 | $30 | $30 | |||
| Interest | 12% | 0 | 6 | 12 | 18 | 18% | 9 | 18 | 27 | |
| Net Income before Taxes | $30.0 | $24.0 | $18.0 | $12.0 | $21.0 | $12.0 | $3.0 | |||
| Taxes | 30% | 9.0 | 7.2 | 5.4 | 3.6 | 6.3 | 3.6 | 0.9 | ||
| Net Income | $21.0 | $16.8 | $12.6 | $8.4 | $14.7 | $8.4 | $2.1 | |||
| Return on Assets Computation | ||||||||||
| Net Inc. + Interest x (1-T) | $21.0 | |||||||||
| Assets | $200 | |||||||||
| ROA | 10.5% | |||||||||
| Return on Common Equity Computation | ||||||||||
| Net Income - Pref. Dividends | $21.0 | |||||||||
| Shareholders' Equity | $200 | |||||||||
| ROCE | 10.5% | |||||||||
Last Updated on 12/9/97