Question

(Analyzing Profitability) In​ 2016, the Allen Corporation had sales of

$ 69

​million, total assets of

$ 42

​million, and total liabilities of

$ 24

million. The interest rate on the​ company's debt is

6.2

​percent, and its tax rate is

35

percent. The operating profit margin is

13

percent.

a. Compute the​ firm's 2016 net operating income and net income.

b. Calculate the​ firm's operating return on assets and return on equity.​ (Hint: You can assume that interest must be paid on all of the​ firm's liabilities.)

a. Compute the​ firm's 2016 net operating income and net income.

The​ firm's 2016 net operating income is

​$nothing

million. ​ (Round to two decimal​ places.)

Answer 1

(a)-Firm's 2016 net operating income and net income

Net Operating Income = Total sales x Operating profit margin

= $69 Million x 13%

= $8.97 Million

Net Income = [Operating Income – Interest Expenses) x (1 – Tax Rate)

= [$8.97 Million – ($24 Million x 6.20%)] x (1 – 0.35)

= [$8.97 Million – $1.49 Million] x 0.65

= $7.48 Million x 0.65

= $4.86 Million

(b)-Firm's operating return on assets and return on equity.

Operating return on assets = [Operating Income / Total Assets] x 100

= [$8.97 Million / $42 Million] x 100

= 21.36%

Return on Equity = [Net Income / Total Equity] x 100

= [Net Income / (Total Assets – Total Liabilities)] x 100

= [$4.86 Million / ($42 Million - $24 Million)] x 100

= [$4.86 Million / $18 Million] x 100

= 27.02%