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The annual sales for Salco Inc. were $4.5 million last year. The firms end-of-year balance sheet was as follows:

Current assets $ 500,000 Liabilities $1,000,000

Net fixed assets 1,500,000 Ownersâ??equity 1,000,000
__________ _________
$2,000,000 $2,000,000

The firmâ??s income statement for the year was as follows:

Sales $ 4,500,000

Less cost of goods sold (3,500,000)
__________

Gross profit $1,000,000

Less operating expenses (500,000)
__________

Operating income $ 500,000

Less interest expense (100,000)
___________

Earnings before taxes $ 400,000

Less taxes (50%) (200,000)
___________

Net income $ 200,000

a. find out Salcos total asset turnover, operating profit margin, and operating return on assets.
b. Salco plans to renovate one of its plants, which will require an added investment in plant and equipment of $1 million. The firm will maintain its present debt ratio of .5 when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13 percent. What will be the new operating return on assets for Salco after the plantâ??s renovation?
c. Given that the plant renovation in part b occurs and Salcoâ??s interest expense rises by $50,000 per year, what will be the return earned on the common stockholdersâ?? investment? Compare this rate of return with that earned before the renovation.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M928171

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