Question

In 2016, the Allen Corporation had sales of $60 million, total assets of $50 million, and total liabilities of $16 million. The interest rate on the company's debt is 5.7%, and it's tax rate is 35%. The operating profit margin is 13%.

Please answer: 

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)

Operating profit margin = Operating income / revenue

0.13 = Operating income / 60

Operating income = 7.8 million

Interest = 16 million * 0.057 = 0.912 million

Net income = (Operating income - interest)(1 - tax)

Net income = (7.8 - 0.912)(1 - 0.35)

Net income = 6.888 * 0.65

Net income = $4.48 million

b)

Operating return on assets = (Operating income / total assets) * 100

Operating return on assets = (7.8 / 50) * 100

Operating return on assets = 15.60%

Total equity = Total assets - debt

Total equity = 50 - 16

Total equity = 34

Return on equity = (Net income / equity) * 100

Return on equity = (4.48 / 34) * 100

Return on equity = 13.18%