Question

A company had sales of $65 million, total assets of $42 million and total liabilities of $20 million. The company’s interest rate on its debt is 6%. Its tax rate is 30%. The operating profit margin was 12%. Assume that interest is paid on all of the liabilities. What was the company’s operating return on assets and the return on equity? Show step by step how to solve one excel and show formulas

Answer 1

Sales = $65,000,000
Operating Profit Margin = 12%

Operating Profit = Sales * Operating Profit Margin
Operating Profit = $65,000,000 * 12%
Operating Profit = $7,800,000

Interest Expense = 6% * Debt
Interest Expense = 6% * $20,000,000
Interest Expense = $1,200,000

Net Income = [Operating Profit - Interest Expense]*(1 - tax)
Net Income = [$7,800,000 - $1,200,000]*(1 - 0.30)
Net Income = $4,620,000

Total Assets = $42,000,000
Debt = $20,000,000

Equity = Assets - Debt
Equity = $42,000,000 - $20,000,000
Equity = $22,000,000

Operating Return on Assets = Operating Profit / Total Assets
Operating Return on Assets = $7,800,000 / $42,000,000
Operating Return on Assets = 18.57%

Return on Equity = Net Income / Equity
Return on Equity = $4,620,000 / $22,000,000
Return on Equity = 21.00%