a. Calculate Salco\'s total asset turnover, operating profit margin, and operati

Question

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 $ 1.04$1.04 million. The firm will maintain its present debt ratio of 5050 percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.913.9 percent. What will be the new operating return on assets ratio (i.e., net operating income divided by ÷total assets) for Salco after the plant's renovation? c.Given that the plant renovation in part (b) occurs and Salco's interest expense rises by $ 53 comma 000$53,000 per year, what will be the return earned 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 effect on the profitability of the firm? a.Calculate Salco's total asset turnover, operating profit margin, and operating return on assets. The company's total asset turnover is nothing times.(Round to two decimal places.)Current assets $ 499 comma 000$499,000 Liabilities $ 1 comma 009 comma 000$1,009,000 Net fixed assets 1 comma 519 comma 0001,519,000 Owners' equity 1 comma 009 comma 0001,009,000 Total Assets $ 2 comma 018 comma 000$2,018,000 Total $ 2 comma 018 comma 000$2,018,000 Sales $ 4 comma 620 comma 000$4,620,000 Less: Cost of goods sold ( 3 comma 508 comma 000 )(3,508,000) Gross profit $ 1 comma 112 comma 000$1,112,000 Less: Operating expenses ( 501 comma 000 )(501,000) Net operating income $ 611 comma 000$611,000 Less: Interest expense ( 106 comma 000 )(106,000) Earnings before taxes $ 505 comma 000$505,000 Less: Taxes (35 %35%) ( 176 comma 750 )(176,750) Net income $ 328 comma 250$328,250

Explanation / Answer

Given:

Balance sheet

Current assets $499,000 Liabilities $1,009,000

Net fixed assets $1,519,000 Owners' equity $1,009,000

Total Assets $2,018,000 Total $2,018,000

Income Statement

Sales $4,620,000

Less: Cost of goods sold (3,508,000)

Gross profit $1,112,000

Less: Operating expenses (501,000)

Net operating income $611,000

Less: Interest expense (106,000)

Earnings before taxes $505,000

Less: Taxes (35%) (176,750)

Net income $328,250

a. Total Asset Turnover= Sales/Total Assets= $4,620,000/$2,018,000 =2.289= 2.29 Times

Operating profit margin= Operating Income/Sales=$611,000 /$4,620,000=13.22%

Operating return on assets=Operating Income/Total Asset=$611,000 /$2,018,000=30.27%

b. New operating return on assets ratio after plant's renovation

Added investment= $1.04 million= $1,040,000

Total asset now= $2,018,000+ $1,040,000=$3,058,000

Operating profit margin=13%

Operating return on assets= (Operating income/Sales)*(Sales/Total Assets)

0.13*($4,620,000/$3,058,000)= 0.13*1.51= 0.196=19.6%

c. Return earned on the common stockholders' investment:

Interest expense rises by $53,000 per year

Net Income calculation after renovation:

Operating Income= 0.13*$4,620,000=$600,600

Less: Interest expense =$106,000+$53,000=$1,59,000

Earning before Taxes: $4,41,600

Less Taxes (35%)= $154,560

Net Income =$2,87,040

Return on common equity= Net income/Common equity= 287,040/3,058,000-$1,009,000=287,040/20,49,000= 0.14= 14%

Return with that earned before the renovation= $328,250/1,009,000= 0.32= 32%

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