Question

 

 (Related to Checkpoint 4.3) (Analyzing Profitability) In 2016, the Allen Corporation had sales of $62 milion, total assets of $42 milion, and total liablities of $21 milion. The interest rate on the company's debt is 6.1 percent, and its tax rate is 35 percent. The operating profit margin is 11 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

Question 1:

 

Operating Profit Percentage = 11%

 

Net Operating Income = 11% of Sales = 11% x $ 62m = $ 6.82 million

Interest Expense = 6.1% of $ 21 m = $ 1.281 million

 

Net Income = (Net Operating Income - Interest Expense) - Tax Expense

Net Income = ( 6.82 - 1.281)million - 35%

Net Income = $ 5.539 million - 35%

Net Income = $ 3.6 Million

 

Question 2:

 

Operating Return on Assets = Operating Income / Assets

Operating Return on Assets = 6.82 / 42 = 16.29%

 

Total Assets = Total Liabilities + Total Equity

$ 42 million = $ 21 million + Total Equity

Total Equity = $ 21 million

 

Return on Equity = Net Income / Equity x 100

Return on Equity = $ 3.6 m / $ 21 m x 100 = 17.14 %

1. Net Operating Income = $6.82 million
    Net Income: $3.6 million

 

2. Operating Return on Assets: 16.29%
   Return on Equity: 17.14%