Question

?(Evaluating current and pro forma profitability?)

The annual sales for Salco Inc. were $4.45

million last year. All sales are on credit. The? firm's end-of-year balance sheet and income statement were in the popup? window:

.

Calculate? Salco's total asset? turnover, operating profit? margin, and operating return on assets.

b. Salco plans to renovate one of its? plants, which will require an added investment in plant and equipment of $1.07 million. The firm will maintain its present debt ratio of 0.529 when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.3 percent. What will be the new operating return on assets for Salco after the? plant's renovation?

c. Given that the plant renovation in part b occurs and? Salco's interest expense rises by $50,000 per? year, what will be the return earned on the common? stockholders' investment? Compare this rate of return with that earned before the renovation.

Salco Inc. Balance Sheet
Current assets	$512,000		Liabilities	$1,070,000
Net fixed assets	1,510,000		?Owners' equity	952,000
	$2,022,000			$2,022,000

Salco Inc. Income Statement
Sales	$ 4,450,000??
Less cost of goods sold	(3,510,000)
Gross profit	$ 940,000??
Less operating expenses	(542,000)
Operating income	398,000??
Less interest expense	(106,000)
Earnings before taxes	292,000??
Less taxes (50%?)	(146,000)
Net income	146,000??

Answer 1