Question

​(Financial statement​ analysis)  The annual sales for​ Salco, Inc. were$4.64million 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

$1.01 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 13.5 percent. What will be the new operating return on assets ratio​ (i.e., net operating income÷total ​assets) for Salco after the​ plant's renovation?

c.  Given that the plant renovation in part​(b​)occurs and​ Salco's interest expense rises by$48,000 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   $500,000   Liabilities   $1,012,500
Net fixed assets   1,525,000   Owners' equity   1,012,500
Total Assets   $2,025,000   Total   $2,025,000

Sales    $4,640,000
Less: Cost of goods sold    (3,501,000)
Gross profit    $1,139,000
Less: Operating expenses    (507,000)
Net operating income    $632,000
Less: Interest expense    (94,000)
Earnings before taxes    $538,000
Less: Taxes (35%)    (188,300)
Net income    $349,700

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

The​ company's total asset turnover is

2.292.29

times.  ​(Round to two decimal​ places.)

The​ company's operating profit margin is

13.613.6​%.

​(Round to one decimal​ place.)

The​ company's operating return on assets is

31.231.2​%.

​(Round to one decimal​ place.)

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

$1.01

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

13.5

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

income÷total

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

The​ company's new operating return on assets is

20.720.7​%.

​(Round to one decimal​ place.)

c . Given that the plant renovation in part

​(b​)

occurs and​ Salco's interest expense rises by

$48,000

per​ year, what will be the return earned on the common​ stockholders' investment?

The new return on​ owners' equity is

nothing​%.

​(Round to one decimal​ place.)

c.  Given that the plant renovation in part ​(b​)occurs and​ Salco's interest expense rises by $48,000 per​ year, what will be the return earned on the common​ stockholders' investment? The new return on​ owners' equity is nothing​%.​(Round to one decimal​ place.)

Answer 1

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