Question

(Profitability and capital structure​ analysis)  In the year just​ ended, Callaway Lighting had sales of $5,170,000 and incurred cost of goods sold equal to $4,510,000. The​ firm's operating expenses were $133,000 and its increase in retained earnings was $40,000 for the year. There are currently 99,000 common stock shares outstanding and the firm pays a $2.482 dividend per share. The firm has $1,040,000 in​ interest-bearing debt on which it pays

8.4 percent interest.

a.  Assuming the​ firm's earnings are taxed at 35

​percent, construct the​ firm's income statement.

b.  Calculate the​ firm's operating profit margin and net profit margin.

c.  Compute the times interest earned ratio. What does this ratio tell you about​ Callaway's ability to pay its interest​ expense?

d.  What is the​ firm's return on​ equity?

a.  Assuming the​ firm's earnings are taxed at 35%​, construct the​ firm's income statement.

Complete the income statement​ below:  ​(Round to the nearest​ dollar.)

Income Statement
Revenues	$	?
Cost of Goods Sold		?
Gross Profit	$	?
Operating Expenses		?
Net Operating Income	$	?
Interest Expense		?
Earnings before Taxes	$	?
Income Taxes		?
Net Income	$	?

Answer 1

a.) Calculation of Net Income :

Income Statement
	Amount
Sales	5170000
Less :Cost of Goods Sold	4510000
Gross Profit	660000
Operating Expenses	133000
Net Operating Income	527000
Interest Expenses (1040000*8.4%)	87360
Earning Before Tax (EBT)	439640
Income Tax (35%)	153874
Net Income	285766

(b.) Operating Profit Margin = Net Operating Income / Sales

= 527000 / 5170000

= 10.19%

Net Profit Margin = Net Income / Sales

= 285766 / 5170000

= 5.53%

(c.) Times Interest Earned Ratio = Net Operating Income / Interest Expenses

= 527000 / 87360

= 6.03

Callaway ability is good as its operating income is 6.03 times the interest expense

(d.) Calculation of Return on Equity

As paid up capital information is not given therefore we cannot calculate return on Equity.