(Financial statement analysls) The annual sales for Saloo, Inc. were $4.52 milli
ID: 2790539 • Letter: #
Question
(Financial statement analysls) The annual sales for Saloo, Inc. were $4.52 million last year. The firm's end-of-year balance sheet was as follows: 11. Salco's income statement for the year was as follows 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 $1.07 million. The firm will maintain its present debt ratio of 50 percent when inancing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.2 percent. What will be the new operating return on assets ratio (i.e, net operating income+total assets) for Salco aftor the plant's renovation? c. Given that the plant renovation in part (b) occurs and Saloo's interest expense rises by $45,000 per year, what will be the retun eamed 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 offect on the profitability of the firm? a. Calculate Saloo's total asset turnover, operating profit margin, and operating return on assets The company's total asset turmover is The company's operating profit margin is The company's operating return on assets is times. (Round to two decimal places.) %. (Round to one decimal place.) 96" (Round to one decmal place.) b. Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of $1.07 million. The firm will maintain its present debt ratio of 50 percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.2 percent What will be the new operating return on assets ratio (ie., net operating income total assets) for Salco after the plant's renovation? The company's new operating return on assets is %. (Round to one decimal place.) c. Given that the plant renovation in part (b) occurs and Salco's interest expense rises by $45,000 per year, what will be the retum eamed on the common stockholders' investment? %. (Round to one decimal place.) The new return on ownens' equity is Compare this rate of return with that eamed before the renovation Before the investment the return on owners' equity was Based on this comparison, did the renovation have a favorable effect on the profitability of the firm? The renovation had (1) 1: Data Table %. (Round to one decimal place.) effect on the profitability of the firm. (Select from the drop-down menu.) Current assets Net fixed assets Total Assets $504,000 Liabilities 481,000 Owners' equity $992,500 992 500 $1,985,000 $1.985,000 Total 2: Data TableExplanation / Answer
a. Total assets turnover = sales / Total assets
= 4520000 / 1985000
= 2.28
Operating profit margin = Net operating income / sales
= 525000 / 4520000
= 11.62%
Operating return on assets = Net operating income / Total assets
= 525000 / 1985000
= 26.45%
b. New Operating return on assets = Net operating income / sales * sales / Total assets
= Operating profit margin * sales / Total assets
= 13.2% * 4520000 / [1985000 + 1070000]
= 13.2% * 4520000 / 3055000
= 19.53%
c. New return on owner's equity = Earning available to owner's equity / common equity
= $287716 / 1527500
= 18.84%
Before the renovation return on owner's equity = $270400 / 992500
= 27.24%
Note :- Net operating income [13.2% * 4520000] = 596640
less: interest expense [109000 + 45000] =154000
Earning before tax = 442640
less: tax @35% =154924
Earning available to owner's equity = $287716
Debt ratio = Total liabilities/ total assets
0.5 = Total liabilities / [1985000 + 1070000 ]
1527500 = Total liabilities
Total assets = total liabilities + Total common equity
3055000 = 1527500 + Total common equity
Total common equity = 1527500
Based on this comparison , The renovation had an Unfavorable effect on the profitabiiity of the firm , return of equity seems to be decreased from 27.24% to 18.84%
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