P4- 31 (problem)

Financial statement analysis

The annual sales for Salco, Inc. were $4.51 million last year. The firms end of year balance sheet was as follows (will post) Salco's income statement for the year was as follows (will post)

A. Calculate Salco's total asset turnover, operating profit margin, and operating return on assets.

B. Salco plans to renovate one of it's plants and the renovation will require an added investment in plant and equipment of $1.01 million. The firm will maintain it's present debt ratio of 50 percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise 13.8 percent. What will be the new operating return on assets ratio (ie; net operating income/ total assets) for Salco after the plants renovations?

C. Given that the plant renovation in part (b) occurs and Salco's interest expense rises by $54,000 per year, what will be the retun earned on the common stockholders investment? Compare this rate of retun with that earned before the renovation. Based on this compairson, did the renovation have a favorable effect on the profitability of the firm?

Anwer: (Round to two decimal places)

Income Statement

Sales $4,510,000 Less: Cost of goods sold (3,490,000) Gross profit $1,020,000 Less: Operating expenses (493,000) Net operating income $527,000 Less: Interest expense (99,000) Earnings before taxes $428,000 Less: Taxes (35%) (149,800) Net income $278,200

End of Year Balance Sheet

Current assets	$503,000	Liabilities	$999,500
Net fixed assets	1496000	Owners' equity	999500
Total Assets	$1,999,000	Total	$1,999,000