Question

In​ 2016, the Allen Corporation had sales of $61 ​million, total assets of $44​ million, and total liabilities of $17 million. The interest rate on the​ company's debt is 5.7 ​percent, and its tax rate is 35 percent. The operating profit margin is 12 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.​ (Hint: You can assume that interest must be paid on all of the​ firm's liabilities.)

Answer 1

a). Sales = $61 million

Operating profit margin = 12%

Firm's Net operating Income = Sales*Operating profit margin

= $61 million*12%

= $7.32 millions

Interest Expenses for year 2016 = Total Liabilities(or Debt)*Interest rate on Debt

=$17 million*5.7%

= $0.969 million

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

= ($7.32 millions - $0.969 millions)*(1-0.35)

= $4,128,150

b). Operating Return on Assets = Net Operating income/Total ASsets

= $7.32 millions/$44 millions

= 16.64%

Return on Equity(ROE) = Net Income/Total Equity

where, Total Equity = Total Assets - Total Liabilities

= $44 millions - $17 millions

= $27 millions

ROE = $4,128,150/$27,000,000

= 15.29%

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