The Karson Transport Company currently has income of $500,000 and pays interest
ID: 2754282 • Letter: T
Question
The Karson Transport Company currently has income of $500,000 and pays interest expense of $200,000. The company to borrow $1 million on which the firm will pay 10 percent interest. The borrowed money will be used to finance an investment that is expected to increase the firm net operating income $400,000 a year. (Profitability analysis) The Allen had sales in 2013 of $65 million, total assets of $42 million, and total of $20 million. The interest rate on the company's debt is 6 percent, and its tax 35 percent. The operating profit margin is 12 percent. Compute the firm's 2013 net operating income and net income. Calculate the firm's operating return on assets and return on equity. (Efficiency analysis) Baryla Inc. manufactures high-quality decorator lamps plant located in eastern Tennessee. Last year the firm had sales of $100 million gross profit margin of 40 percent.Explanation / Answer
4-7)
a) Time Interest Earned Ratio before loan = (Net operating Income + Interest Expenses)/Interest Expenses
Time Interest Earned Ratio before loan =(500000+200000)/200000
Time Interest Earned Ratio before loan = 3.5 times
b)
Time Interest Earned Ratio after loan = (Net operating Income + Interest Expenses)/Interest Expenses
Net operating Income = (500000+400000) = 900000
Interest Expenses = 200000+ 1000000*10% = 300000
Time Interest Earned Ratio after loan =(900000+300000)/300000
Time Interest Earned Ratio after loan = 4 times
The effect on Time Interest Earned Ratio after loan would be increased from 3.5 to 4 times
4-8
a)
Sale = 65 Million
Operating Profit Margin = 12%
Net Operating Income = 12%*65
Net Operating Income = $ 7.80 Million
Interest Expenses = 20*6% = $ 1.20 Milion
Net Income before tax = 7.80 -1.20 = $ 6.60 million
Tax Expenses = 6.6*35% = 2.31 Million
Net Income = 6.60 - 2.31 = $ 4.29 Million
b)
Operating Return on Asset = Net Operating Income /Asset
Operating Return on Asset = 7.80/42
Operating Return on Asset = 18.57%
Return on Equity = Net income / Equity
Return on Equity = 4.29/( 42-20)
Return on Equity = 19.50%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.