Question

 The annual sales for​ Salco, Inc. were

$ 4.69 million last year.

The​ firm's end-of-year balance sheet was as​ follows: 

 Current assets   $504,000   Liabilities   $1,002,000
Net fixed assets   1,500,000   Owners' equity   1,002,000
Total Assets   $2,004,000   Total   $2,004,000

. ​ Salco's income statement for the year was as​ follows:  

Sales    $4,690,000
Less: Cost of goods sold    (3,509,000)
Gross profit    $1,181,000
Less: Operating expenses    (501,000)
Net operating income    $680,000
Less: Interest expense    (92,000)
Earnings before taxes    $588,000
Less: Taxes (35%)    (205,800)
Net income    $382,200

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

b.  Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of

$ 1.07$1.07

million. The firm will maintain its present debt ratio of

5050

percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to

13.813.8

percent. What will be the new operating return on assets ratio​ (i.e., net operating

incomedivided by÷total

​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

$ 53 000 $53,000

per​ year, what will be the return earned on the common​ stockholders' investment? Compare this rate of return with that earned before the renovation. Based on this​ comparison, did the renovation have a favorable effect on the profitability of the​ firm?

Answer 1

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