Question
Could someone please give me a breakdown of how to solve the problems that are in bold lettering for this problem? I have included all
Could someone please give me a breakdown of how to solve the problems that are in bold lettering for this problem? I have included all of the information for what I have already solved but am confused on how to solve for those problems.
The annual sales for Salco Inc. were $4.49 million last year. All sales are on credit. The firm's end-of-year balance sheet and income statement were in the popup window:
.
a. Calculate Salco's total asset turnover, operating profit margin, and operating return on assets.
b. Salco plans to renovate one of its plants, which will require an added investment in plant and equipment of
$1.09 million. The firm will maintain its present debt ratio of 0.522 when financing the new investment and expects sales to remain constant. The operating profit margin will rise to
13.7 percent. What will be the new operating return on assets for Salco after the plant's renovation?
c. Given that the plant renovation in part b occurs and Salco's interest expense rises by $49,000 per year, what will be the return earned on the common stockholders' investment? Compare this rate of return with that earned before the renovation.
a. Calculate Salco's total asset turnover, operating profit margin, and operating return on assets.
The total asset turnover is 2.23X.
The operating profit margin is 9.75%.
The operating return on assets is 21.75%.
b. Salco plans to renovate one of its plants, which will require an added investment in plant and equipment of
$1.09 million. The firm will maintain its present debt ratio of 0.522 when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.7 percent. What will be the new operating return on assets for Salco after the plant's renovation?
The new operating return on assets after the plant renovation is 24.0% (19.8% is the correct answer).
c. Given that the plant renovation in part b occurs and Salco's interest expense rises by $49,000 per year, what will be the return earned on the common stockholders' investment? Compare this rate of return with that earned before the renovation.
The pre-renovation rate of return on common equity is 38.2% (27.6% is the correct answer).
Post-Renovation Analysis: Net income available to common stockholders following the renovation was calculated as follows:
The new operating profits are $367245 ($615,130 is the correct answer).
The earnings before taxes are $465130.
The net income available to common stockholders is $367453.
The post-renovation rate of return on common equity is 30.5% (24.8% is the correct answer).
"A comparison of the two rates of return would argue that the renovation not be undertaken. However, since investments in fixed assets generally produce cash flows over many years, it is not appropriate to base decisions about their acquisition on a single year's ratios."
Is the above statement true or false?
True
Current assets Net fixed assets Salco Inc. Balance Sheet $ 513,000 Liabilities 1,500,000 Owners' equity $2,013,000 $1,050,000 963,000 $2,013,000 (Click on the following icon in order to copy its contents into a spreadsheet.) Salco Inc. Income Statement Sales $ 4,490.000 Less cost of goods sold (3,510,000) Gross profit $ 980,000 Less operating expenses (542,000) Operating profits $ 438,000 Less interest expense (101,000) Earnings before taxes $ 337,000 Less taxes (21%) (70,770) Net income $ 266,230Step by Step Solution
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