(Profitability and capital structure analysis) In the year just ended, Callaway

Question

(Profitability and capital structure analysis) In the year just ended, Callaway Lighting had sales of $5,130,000 and incurred cost of goods sold equal to $4,540,000.

The firm's operating expenses were $134,000 and its increase in retained earnings was $40,000 for the year. There are currently 97,000 common stock shares outstanding and the firm pays a $2.089 dividend per share. The firm has $1,060,000 in interest-bearing debt on which it pays 7.8 percent interest.

a. Assuming the firm's earnings are taxed at 35 percent, construct the firm's income statement.

b. Calculate the firm's operating profit margin and net profit margin.

c. Compute the times interest earned ratio. What does this ratio tell you about Callaway's ability to pay its interest expense?

d. What is the firm's return on equity?

Explanation / Answer

Ans A)

Ans B) Operaitng Profit margin = EBIT/sales = 456000/5130000 = 8.89%

Net profit margin = net profit/sales = 4.73%

Ans C) Times interest earned ratio = EBIT/ interest expense

= 456000/82680 = 5.52 times

Callaway can easily pay its interest expesnse because it is generating enough EBIT to service its debt.

Ans d) ROE = net income/shareholder's equity

= 242658/(97000 * share price)

= 2.501629/share price

if we get the share price then we can find the exact value.

Inocme statement sales $ 5,130,000.00 less cost of good sold $ 4,540,000.00 Gross Profit $    590,000.00 less Operating expense $    134,000.00 EBIT $    456,000.00 less Interest Expense $      82,680.00 (7.8% of 1060000) EBT $    373,320.00 less Tax Expense $    130,662.00 (35% o EBIT) EAT (net income) $    242,658.00

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