Calculate the Return on Equity and the Return on Invested Capital for each year. What can you say about these two numbers relative to the interest rate on the proposed loan? If Cartwright takes on the loan and continues to grow, what will happen to these numbers?

Help with Question $3$

For the ROE and ROIC calculations, do not worry about mid$-$year conventions, and just calculate year using the end$-$of$-$year balance sheet. Calculate Return on Equity using bottom line Net Income.

Invested capital in this case is the shareholders equity $($in the exhibit, Net Worth$)$ and the interest bearing debt $($the Notes payable and the total long$-$term debt.$)$ Note that this is a little tricky because the Return on Invested Capital technically requires calculating the earnings after the taxes, but before the interest and the tax shield from the interest. In other words, the EBIT minus the implied taxes calculated on EBIT alone. Because there is a progressive tax rate, calculating the taxes requires a bit of Excel Ju$-$Jitsu.

I have implemented this for you in the attached worksheet. If you aren$$t very familiar

Tax Rate Examplenctions, you can use it to calculate the estimated taxes manually.