Question

In​ 2016, the Allen Corporation had sales of $63 million, total assets of $48 ​million, and total liabilities of $21 million. The interest rate on the​ company's debt is 6.4

​percent, and its tax rate is 35 percent. The operating profit margin is13 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.)

Answer 1

a. The net operating income is computed as shown below:

= Sales x operating profit margin

= $ 63 million x 13%

= $ 8.19 million or $ 8,190,000

Net income is computed as shown below:

= (Operating income - Liabilities x interest rate) x (1 - tax rate)

= ($ 8.19 million - $ 21 million x 6.4%) x (1 - 0.35)

= $ 4.4499 million or $ 4,449,900

b. The operating return on assets is computed as shown below:

= Operating profit / Total Assets

= $ 8.19 million / $ 48 million

= 17.0625%

Return on equity is computed as shown below:

= Net income / Equity

Equity is computed as follows:

= Total Assets - Total Liabilities

= $ 48 million - $ 21 million

= $ 27 million

So, the Return on Equity will be computed as follows:

= $ 4.4499 million / $ 27 million

= 16.4811% Approximately

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