Question

​(Related to Checkpoint​ 4.3) ​(Analyzing Profitability) In​ 2016, the Allen Corporation had sales of

$63

​million, total assets of

$40

​million, and total liabilities of

$18

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

5.6

​percent, and its tax rate is

35

percent. The operating profit margin is

14

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.)The​ firm's 2016 net income is

​$nothing

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

b. Calculate the​ firm's operating return on assets and return on equity.

The operating return on assets is

nothing​%.

​ (Round to two decimal​ places.)The return on equity is

nothing​%.

​(Round to two decimal​ places.)

Answer 1

a).

- Net Operating Income = Sales*Operating margin

Net Operating Income = $63 million*14%

Net Operating Income for 2016 = $8.82 million

- Interest expenses = Total Liabilities*INterest on Debt

= $18 million*5.6%

Interest expenses = $1.008 million

Net Income = (Net Operating Income - Interest expenses)*(1- Tax rate)

Net Income = ($8.82 million - $1.008 million)*(1-0.35)

Net income = $5.0778 million

Net Income for 2016 = $5.08 million

b).

- Operating return on assets = Net Operating Income/Total Assets

Operating return on assets = $8.82 million/$40 million

Operating return on assets for 2016 = 22.05%

- Total Equity = Total Assets - Total Liabilities

Total Equity = $40 million - $18 million

Total Equity = $22 million

Return On Equity = Net income/Total Equity

Return On Equity = $5.0778 million/$22 million

Return On Equity for 2016 = 23.08%