Question Help (Related to Checkpoint 4.3) (Analyzing Profitability) In 2016, the

ID: 2619016 • Letter: Q

Question

Question Help (Related to Checkpoint 4.3) (Analyzing Profitability) In 2016, the Allen Corporation had sales of $67 million, total assets of $49 million, and total liabilities of $23 million. The interest rate on the company's debt is 6.3 percent, and its tax rate is 35 percent. The operating profit margin is 11 percent. a. Compute the firm's 2016 net operating income and net income b. Calculate the firm's operating return on assets and return on equity. (Hint: You can assume that interest must be paid on all of the firm's liabilities.) a. Compute the firm's 2016 net operating income and net income. The firm's 2016 net operating income is $million. (Round to two decimal places.) The firm's 2016 net income is $million. (Round to two decimal places.) b. Calculate the firm's operating return on assets and return on equity. The operating return on assets is %. (Round to two decimal places.) The return on equity is | %. (Round to two decimal places.)

Explanation / Answer

Sales

67 Million

Operating Profit [$67 million x 11%]

7.37 Million

Less : Interest on Debt

1.45 Million

Income Before Tax

5.92 Million

Less : Tax at 35%

2.07 Million

Net Income

3.85 Million

Requirement (a) – Net Operating Income and Net Income

Firm’s 2016 Net Operating Income = $7.37 Million

Firm’s Net Income = $3.85 Million

Requirement (b) – Firm’s Operating Return on Assets and Return on Equity

Firm’s Operating Return on Assets = [$7.37 million / $67 million] x 100 = 15.04%

Firm’s Return on Equity = [$3.85 million / ($49 – 26 Million)] x 100 = 14.80%