Question
(Financial statementanalysis) The annual sales forSalco, Inc. were $4.43 million last year. Thefirm's end-of-year balance sheet was asfollowsCurrent assets $491,000 Liabilities $993,500 Net fixed assets
(Financial statementanalysis)The annual sales forSalco, Inc. were $4.43 million last year. Thefirm's end-of-year balance sheet was asfollowsCurrent assets $491,000 Liabilities $993,500
Net fixed assets 1,496,000 Owners' equity 993,500
Total Assets $1,987,000 Total $1,987,000
Salco's income statement for the year was asfollows
Sales $4,430,000
Less: Cost of goods sold (3,492,000)
Gross profit $938,000
Less: Operating expenses (504,000)
Net operating income $434,000
Less: Interest expense (98,000)
Earnings before taxes $336,000
Less: Taxes (35%) (117,600)
Net income $218,400
A. CalculateSalco's operating return on assets.(Round to one decimalplace.)
b.Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of $1.06 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 to13.1 percent. What will be the new operating return on assets ratio(i.e., net operating income divided bytotal assets) for Salco after theplant's renovation?
c.Given that the plant renovation in part (b) occurs andSalco's interest expense rises by $51,000 peryear, what will be the return earned on the commonstockholders' investment? Compare this rate of return with that earned before the renovation. Based on thiscomparison, did the renovation have a favorable effect on the profitability of thefirm?
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