Calculate return on equity for Allen Corporation given the following: The Allen

Question

Calculate return on equity for Allen Corporation given the following:

The Allen Corporation had sales in 2013 of $69 million, total assets of $50 million and total liabilities of $25 million. The interest rate on the company's debt is 6.8 percent and its tax rate is 30 percent. The operating profit margin was 11.8 percent. What was the company's operating income and net income? What was the operating return on assets and return on equity? Assume that interest must be paid on all of the debt. The operating income was $ 8142000. The net income was $ 4509400. The operating return on assets was 16.3 %. The return on equity was

Explanation / Answer

Operating Income=0.118*69000000=8142000

Interest on the liability(debt)=0.068*25000000=1700000

Income before tax=8142000-1700000=6442000

Net Income=Income before tax*(1-Tax Rate)=6442000*(1-0.30)=4509400

Return on Assets=8142000/50000000=0.1628 or 16.3% (appx)

Equity(Networth)=Assets-Liability=50m-25m=25m

Return on Equity=4509400/25000000=0.1803=18.03%

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