(Financial statement analysis) The annual sales for Salco, Inc. were $4.57 million last year. The firm's end-of-year balance sheet was as follows: Salco's income statement for the year was as follows: 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 $1.01 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 $52,000 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 2.26 times. (Round to two decimal places.) The company's operating profit margin is 12.54%. (Round to one decimal place.) The company's operating return on assets is 28.31 %. (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 $1.01 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 20.94 %. (Round to one decimal place.) c. Given that the plant renovation in part (b) occurs and Salco's interest expense rises by $52,000 per year, what will be the return earned on the common stockholders' investment? The new return on owners' equity is %. (Round to one decimal place.) Current assets Net fixed assets Total Assets $500,000 1,524,000 $2,024,000 Liabilities Owners' equity Total $1,012,000 1,012,000 $2,024,000 Sales Less: Cost of goods sold Gross profit Less: Operating expenses Net operating income Less: Interest expense Earnings before taxes Less: Taxes (35%) Net income $4,570,000 (3,506,000) $1,064,000 (491,000) $573,000 (93,000) $480,000 (168,000) $312,000
