Question

Analyzing Profitability) In​ 2016, the Allen Corporation had sales of $60 ​million, total assets of $49 ​million, and total liabilities of $25 million. The interest rate on the​ company's debt is 5.7 ​percent, and its tax rate is 35 percent. The operating profit margin is 11 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) Sales = $ 60 Million

Operating profit margin = 11%

Operating Profit = Operating profit margin * Sales

= 11% * 60

= 6.6 Million

Interest Expense = Total Liability * Interest rate

= 25 * 5.7%

= $ 1.425 Million

Net income = ( Net Operating Income - Interest Expense ) * ( 1 - Tax Rate )

= ( 6.6 - 1.425 ) * ( 1 - 35% )

= 5.175 * 0.65

= $ 3.36375 Million

Net Income for 2016 is $ 3,363,750

B) Operating return on assets is calculated as :

= Net Operating Income / Total Assets

= 6.6 / 49

= 0.1347 or 13.47%

Return on Equity = Net Income / Total Equity

Total Assets = Total Liability + Total Equity

49 = 25 + Total Equity

Total Equity = 49 - 25

= $ 24 Million

Return on Equity = 3,363,750 / 24,000,000

= 0.1402 or 14.02%

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