In 2016, the Allen Corporation had sales of $ 69$69 million, total assets of $ 4
ID: 391737 • Letter: I
Question
In 2016, the Allen Corporation had sales of
$ 69$69
million, total assets of
$ 43$43
million, and total liabilities of
$ 15$15
million. The interest rate on the company's debt is
5.75.7
percent, and its tax rate is
3535
percent. The operating profit margin is
1313
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
$nothing
million. (Round to two decimal places.)
Explanation / Answer
Answer to question # a :
Since operating profit margin is 13 percent and sales is $69 million ,
Net operating income = 13 percent of $69 million = $8.97 million
Interest rate on company’s liabilities = 5.7 percent and company’s liabilities is $15 million ,
Therefore total interest payable = 5.7 percent of $15 million = $ 0.855 Million
Therefore, Profit before tax
= Net operating income – Total interest payable
= $8.97 - $0.855
= $8.115 million
Since tax rate is 35 percent, Profit after tax ( i.e. net income ) will be 65 percent of $8.115 Million = $5.275 million
Net operating income = $8.97 million
Net income = $5.275 million
Answer to question b :
Firm’s operating return on assets
= Net operating income / Total assets x 100
= 8.97 million /43 million x 100
= 20.86 %
Total equity = Total assets – Total liability = $43 - $15 = $28 million
Return on equity
= Net profit ( i.e. net income) / Total equity x 100
= 5.275/28 x 100
= 18.84 % ( rounded to 2 decimal places )
Firm’s operating return on assets = 20.86%
Return on equity = 18.84%
Net operating income = $8.97 million
Net income = $5.275 million
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