SHORTLY AFTER DEPARTURE PILOT HEARD A LOUD BANG FROM THE ENGINE AREA AND BEGAN TO SMELL SMOKE. HE RETURNED TO THE AIRPORT AND MADE AN UNEVENTFUL LANDING. AFTER LANDING HE EXITED THE AIRCRAFT AND GROUND CREWS EXTINGUISHED A FIRE WHICH HAD ERUPTED IN THE ENGINE COMPARTMENT. THE FIRE HAD BURNED THROUGH THE BAGGAGE COMPARTMENT. EXAMINATION OF THE AIRCRAFT BY FAA INSPECTORS INDICATED THE EXHAUST PIPE HAD SEPARATED FROM THE MUFFLER ALLOWING ENGINE EXHAUST TO EXIT ESCAPE INTO THE ENGINE COMPARTMENT.