Question

 The annual sales for​ Salco, Inc. were

$4.46

million last year. The​ firm's end-of-year balance sheet was as​ follows:  

. ​ Salco's income statement for the year was as​ follows:  

.

a. Calculate​ Salco's total asset​ turnover, operating profit​ margin, and operating return on assets.

b.  Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of

$1.04

million. The firm will maintain its present debt ratio of 50

percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to

13.4

percent. What will be the new operating return on assets ratio​ (i.e., net operating

income divided by÷total

​assets) for Salco after the​ plant's renovation?

c.  Given that the plant renovation in part

​(b​)

occurs and​ Salco's interest expense r $49,000

per​ year, what will be the return earned on the common​ stockholders' investment? Compare this rate of return with that earned before the renovation. Based on this​ comparison, did the renovation have a favorable effect on the profitability of the​ firm?

Current assets $507,000

Liabilities

$1,005,500

Net fixed assets

1,504,000

​Owners' equity

1,005,500

Total Assets

$2,011,000

Sales

$4,460,000

​Less: Cost of goods sold

(3,495,000)

Gross profit $965,000

​Less: Operating expenses

(497,000)

Net operating income

$468,000

​Less: Interest expense

(104,000)

Earnings before taxes

$364,000

​Less: Taxes

​(35%​)

(127,400)

Net income

$236,600

Answer 1