Evaluating Profitability:

Last year, Davies Inc. had sales of $400,000 with a cost of goods sold of $112,000. The firms operating expenses were $130,000, and its increase in retained earnings was $58,000. There are currently 22,000 common stock shares outstanding and the firm pays a $1.60 dividend per share.

a. Assuming the firms earnings are taxed at 34 percent, construct the firms income statement.

b. Compute the firms operating profit margin.

c. What was the times interest earned?

DATA

Sales $400,000

Cost of goods sold 112,000

Operating expenses 130,000

Increase in retained earnings 58,000

Common stock outstanding 22,000 shares

Dividend per share $1.60

Tax rate 34%

SOLUTION

a. Assuming the firms earnings are taxed at 34 percent, construct the firms income statement.

Income Statement:

Net sales

Cost of goods sold

Gross profit

Operating expenses

Operating income

Interest expense

Income before taxes

Tax

Net income

b. Compute the firms operating profit margin.

Operating profit margin

c. What was the times interest earned?

Times interest earned