Question
The annual sales for Salco Inc. were $4.47 million last year. All sales are on credit. The firm's end-of-year balance sheet and income statement are
The annual sales for Salco Inc. were $4.47 million last year. All sales are on credit. The firm's end-of-year balance sheet and income statement are below.
a. Calculate Salco's total asset turnover, operating profit margin, and operating return on assets.
b. Salco plans to renovate one of its plants, which will require an added investment in plant and equipment of $1.08 million. The firm will maintain its present debt ratio of 0.512 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 for Salco after the plant's renovation?
c. Given that the plant renovation in part b occurs and Salco's interest expense rises by $47,000 per year, what will be the return earned on the common stockholders' investment? Compare this rate of return with that earned before the renovation.
lco Inc. Balance Sheet Current assets Net fixed assets S 511,000 Liabilities $1,520,000 Owners' equity $991,000 $2,031,000 S1,040,000 $2,031,000 Salce Inc. Income Statement Sales Less cost of goods sold Gross profit Less operating expenses S 4,470,000 3,520,000) S950,000 550,000) $400,000 (103,000) $297,000 Operating income Less interest expense Earnings before taxes Less taxes (50 %50%) Net income (148,500) $148,500Step by Step Solution
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