Question

(Analyzing Profitability) In​ 2016, the Allen Corporation had sales of

$ 60$60

​million, total assets of

$ 41$41

​million, and total liabilities of

$ 25$25

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

5.75.7

​percent, and its tax rate is

3535

percent. The operating profit margin is

1212

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)-Firm's 2016 net operating income and net income.

Net Operating Income

Net Operating Income = Sales x Operating Profit Margin

= $6,00,00,000 x 12%

= $72,00,000

Net Income

Net Income = (Net Operating Income – Interest Expenses) x (1 – Tax Rate)

= [$72,00,000 – ($2,50,00,000 x 5.70%)] x (1 – 0.35)

= ($72,00,000 – 14,25,000) x 0.65

= $57,75,000 x 0.65

= $37,53,750

(b)-Firm's operating return on assets and return on equity.

Operating Return on Assets

Operating Return on Assets = (Net Operating Income / Total Assets) x 100

= ($72,00,000 / $4,10,00,000) x 100

= 17.56%

Return on Equity

Return on Equity = (Net Income / Total Common Equity) x 100

= [$37,53,750 / ($4,10,00,000 - $2,50,00,000)] x 100

= [$37,53,750 / $1,60,00,000] x 100

= 23.46%