Question

(Evaluating profitability) The Malia Corporation had sales in 2019 of $60 million, total assets of $46 million, and total liabilities of 15 million. The interest rate on the company’s debt is 6 percent and its tax rate is 21 percent. The operating profit margin was 11.8 percent. What were the company’s operating income and net income? What was the operating return on assets and return on equity? Assume that interest must be paid on all of the debt.

The operating profits were $ ________. (Round to the nearest dollar.)

The net income was $ ________. (Round to the nearest dollar.)

The operating return on assets was ______ %. (Round to one decimal place)

The return on equity was______ %. (Round to one decimal place)

Answer 1

a).

- Net Operating Income = Sales*Operating margin

Net Operating Income = $60 million*11.8%

Net Operating Income = $7.08

Net Operating Income for 2019 = $7,080,000

- Interest expenses = Total Liabilities*INterest on Debt

= $15 million*6%

Interest expenses = $0.9 million

Net Income = (Net Operating Income - Interest expenses)*(1- Tax rate)

Net Income = ($7.08 million - $0.9 million)*(1-0.21)

Net income = $4.8822 million

Net Income for 2019 = $4,882,200

b).

- Operating return on assets = Net Operating Income/Total Assets

Operating return on assets = $7.08 million/$46 million

Operating return on assets for 2019 = 15.39%

- Total Equity = Total Assets - Total Liabilities

Total Equity = $46 million - $15 million

Total Equity = $31 million

Return On Equity = Net income/Total Equity

Return On Equity = $4.8822 million/$31 million

Return On Equity for 2019 = 15.75%

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