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(Related to Checkpoint 4.3) (Analyzing Profitability) In 2016. the Allen Corporation had sales of $62 million, total assets of $48 million, and total

(Related to Checkpoint 4.3) (Analyzing Profitability) In 2016. the Allen Corporation had sales of $62 million, total assets of $48 million, and total liabilities of S22 million. The interest rate on the company's debt is 6.1 percent. and its tax rate is 35 percent. The operating profit margin is 14 percent.

a. Compute the firm's 2016 net operating income and net income.

b. Calculate the firm's operating return on assets and return on equity.

Expert Solution

a)

Operating Profit margin = Operating Profit / Sales

Operating Profit Margin = 14%

Sales = $ 62000000

Operating Profit = 62000000 * 14%

Operating Profit = $8680000

Operating Profit	8680000
(-) Interest	(1342000)
EBT	7338000
(-)Taxes	(2568300)
Net income	$ 4769700

Interest = 22000000 * 6.1% = 1342000

b)

Operating return on Asset = Operating Income / Assets

Operating return on Asset = 8680000 / 48000000

Operating return on Asset = 0.1808 or 18.08%

Total Assets = Total liabilities + Total Equity

48000000 = 22000000 + Total Equity

Total Equity = 48000000 - 22000000

Total Equity = $26000000

Return on Equity = Net income / Equity * 100

Return on Equity = 4769700 / 26000000 * 100

Return on Equity = 18.35%

a. Interest = 22000000 * 6.1% = 1342000

b. Return on Equity = 18.35%

Junaid answered 2 years ago

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