Question

​(Related to Checkpoint​ 4.3) ​(Analyzing Profitability) In​ 2016, the Allen Corporation had sales of $ 67 ​million, total assets of $ 43 ​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 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.)

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.)

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

The​ firm's 2016 net operating income is ​$_____million. ​ (Round to two decimal​ places.)

Answer 1

a. Net operating income = Sales * Operating profit margin = $67 million * 13% = $8.71 million

	Million $
Net operating income	8.71
(-) Interest [ $18 million * 5.6% ]	1.01
Income before taxes	7.70
(-) Tax @35%	2.70
Net income	5.01

b. Operating return on assets = Net operating income / Total assets = $8.71 million / $43 million = 20.26%

Equity = Total assets - Total liabilities = $43 million - $18 million = $25 million

Return on equity = Net income / Equity = $5.01 million / $25 million = 20.04%