80.2K

Verified Solution

Link Copied!

(Financial statement analysis)The annual sales for Salco, Inc. were

$ 4.75$4.75

million last year. The firm's end-of-year balance sheet was as follows:

LOADING...

. Salco's income statement for the year was as follows:

LOADING...

.

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

b.Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of

$ 1.01$1.01

million. The firm will maintain its present debt ratio of

5050

percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to

13.213.2

percent. What will be the new operating return on assets ratio (i.e., net operating

incomedivided bytotal

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

$ 54 comma 000$54,000

per year, what will be the return earned on the common stockholders' investment? Compare this rate of return with that earned before the renovation. Based on this comparison, did the renovation have a favorable effect on the profitability of the firm?

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

The company's total asset turnover is

nothing

times.(Round to two decimal places.)

Current assets

$ 509 comma 000$509,000

Liabilities

$ 995 comma 000$995,000

Net fixed assets

1 comma 481 comma 0001,481,000

Owners' equity

995 comma 000995,000

Total Assets

$ 1 comma 990 comma 000$1,990,000

Total

$ 1 comma 990 comma 000$1,990,000

Sales	$ 4 comma 750 comma 000$4,750,000
Less: Cost of goods sold	( 3 comma 500 comma 000 )(3,500,000)
Gross profit	$ 1 comma 250 comma 000$1,250,000
Less: Operating expenses	( 493 comma 000 )(493,000)
Net operating income	$ 757 comma 000$757,000
Less: Interest expense	( 100 comma 000 )(100,000)
Earnings before taxes	$ 657 comma 000$657,000
Less: Taxes (35 %35%)	( 229 comma 950 )(229,950)
Net income	$ 427 comma 050$427,050

Balance sheet

Current assets	$ 509 comma 000$509,000		Liabilities	$ 995 comma 000$995,000
Net fixed assets	1 comma 481 comma 0001,481,000		Owners' equity	995 comma 000995,000
Total Assets	$ 1 comma 990 comma 000$1,990,000		Total	$ 1 comma 990 comma 000$1,990,000

Income statement for the year

Sales	$ 4 comma 750 comma 000$4,750,000
Less: Cost of goods sold	( 3 comma 500 comma 000 )(3,500,000)
Gross profit	$ 1 comma 250 comma 000$1,250,000
Less: Operating expenses	( 493 comma 000 )(493,000)
Net operating income	$ 757 comma 000$757,000
Less: Interest expense	( 100 comma 000 )(100,000)
Earnings before taxes	$ 657 comma 000$657,000
Less: Taxes (35 %35%)	( 229 comma 950 )(229,950)
Net income	$ 427 comma 050$427,050

Answer & Explanation Solved by verified expert

See Answer