Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

(Financial statement analysis) The annual sales for Salco, Inc. were $4.45 million last year. The firm's end-of-year balance sheet was as follows: B Salco's income

image text in transcribed

(Financial statement analysis) The annual sales for Salco, Inc. were $4.45 million last year. The firm's end-of-year balance sheet was as follows: B Salco's income statement for the year was as follows: B a. Calculate Salco's total asset turnover, operating profit margin, and operating return on assets. b. Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of $1.07 million. The firm will maintain its present debt ratio of 50 percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.9 percent. What will be the new operating return on assets ratio (i.e., net operating income = total 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 $53,000 per year, what will be the return earned on the common stockholders' investment? Compare this rate of return with that earned before the renovation. Based on this comparison, did the renovation have a favorable effect on the profitability of the firm? a. Calculate Salco's total asset turnover, operating profit margin, and operating return on assets. The company's total asset turnover is 2.25 times. (Round to two decimal places.) The company's operating profit margin is 9.75 %. (Round to one decimal place.) The company's operating return on assets is 21.97 %. (Round to one decimal place.) b. Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of $1.07 million. The firm will maintain its present debt ratio of 50 percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.9 percent. What will be the new operating return on assets ratio (i.e., net operating income + total assets) for Salco after the plant's renovation? The company's new operating return on assets is %. (Round to one decimal place.) Data Table Data Table Current assets Net fixed assets $495,000 1,481,000 Liabilities Owners' equity $988,000 988,000 $1,976,000 Sales Less: Cost of goods sold Gross profit Less: Operating expenses Net operating income Less: Interest expense Earnings before taxes Less: Taxes (35%) $4,450,000 e (3,506,000) $944,000 (510,000) $434,000 (108,000) $326,000 (114,100) $211,900 Total Assets $1,976,000 Total Print Done Net income

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Corporate Finance Principles And Practice

Authors: Denzil Watson, Antony Head

5th Edition

0273725343, 978-0273725343

More Books

Students also viewed these Finance questions