Question

​(Related to Checkpoint​ 4.3) ​(Analyzing Profitability) In​ 2016, the Allen Corporation had sales of

$ 66​million, total assets of $ 50 ​million, and total liabilities of 21million. The interest rate on the​ company's debt is 5.6​percent, and its tax rate is 35percent. 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.​ (Hint: You can assume that interest must be paid on all of the​ firm's liabilities.)

Answer 1

Answer of Part a:

Operating Profit Margin = Net Operating Income / Sales
0.14 = Net Operating Income / $66,000,000
Net Operating Income = 0.14 * $66,000,000
Net Operating Income = $9,240,000

Income Before tax = Net Operating Income – Interest Expense
Income Before Tax = $9,240,000 - $21,000,000 * 0.056
Income Before Tax = $9,240,000 - $1,176,000
Income Before Tax = $8,064,000

Net Income = Income Before tax – tax
Net Income = $8,064,000 – ($8,064,000 * 35%)
Net Income = $8,064,000 - $2,822,400
Net Income = $5,241,600

Answer of Part b:

Operating Return on Assets = Operating Income / Total Assets
Operating Return on Assets = $9,240,000 / $50,000,000
Operating Return on Assets = 0.1848 or 18.48%

Common Equity = Total Assets – Total Liabilities
Common Equity = $50,000,000 - $21,000,000
Common Equity = $29,000,000

Return on Equity = Net Income / Common Equity
Return on Equity = $5,241,600 / $29,000,000
Return on Equity = 0.1807 or 18.07%