Question

​(Financial statement​ analysis)  The annual sales for​ Salco, Inc. were $4.43 million last year. The​ firm's end-of-year balance sheet was as​ follows Current assets $491,000 Liabilities $993,500

Net fixed assets 1,496,000 Owners' equity 993,500

Total Assets $1,987,000 Total $1,987,000

Salco's income statement for the year was as​ follows

Sales $4,430,000

Less: Cost of goods sold (3,492,000)

Gross profit $938,000

Less: Operating expenses (504,000)

Net operating income $434,000

Less: Interest expense (98,000)

Earnings before taxes $336,000

Less: Taxes (35%) (117,600)

Net income $218,400

b.  Salco plans to renovate one of its plants and the renovation will require an added investment in plant and equipment of $1.06 million. The firm will maintain its present debt ratio of 50 percent when financing the new investment and expects sales to remain constant. The operating profit margin will rise to13.1 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 $51,000 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?

Answer 1

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ACCOUNTS latest - Microsoft Excel (Product Activation Failed) View Add-Ins - 2x Dr General File Home Insert Page Layout Formulas Data Review % Cut Calibri -11AA = = = Ea Copy Paste Format Painter B I U B- A Clipboard Font HK195 fx Wrap Text Merge & Center - Σ AutoSum : A Fill 2 Sort & m Find & $ -% . Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format 2 Clear Filter Editing Select Alignment Number Cells HJ HK HL HM HN HO HP HQ Formula Bar His HT HU 178 179 180 SALCO 181 TOTAL ASSETS TURNOVER SALES/TOTAL ASSETS 4430000/1496000 = 2.96 182 183 184 185 OPERATING PROFIT MARGIN EBIT/SALES 434000/4430000 = 9.80% 186 OPERATING RETURN ON ASSETS EBIT/TOTAL ASSETS 434000/1496000 = 29.01% 187 188 189 190 191 SALES OPERATING PROFIT 4430000 580330 (13.1% X 4430000] TOTAL ASSETS = 1987000 + 1060000 (RENOVATION) = 3047000 192 NEW OPERATING RETURN ON ASSETS EBIT/ TOTAL ASSETS 580330/3047000 = 19.05% 193 194 195 196 197 FIFO budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont ► Rea CASH BUDGET ferences: EV24 DIFF ANALYSIS BO ovel 120% -_- O m * 4 O ENG

X 2 E. Insert = Page Layout ACCOUNTS latest - Microsoft Excel (Product Activation Failed) View Add-Ins File Home Formulas Data Review - 2x % Cut . Conditional Format Formatting as Table Styles Cell Styles Insert Delete Format Σ AutoSum : A Fill Sort & 2 Clear Filter Editing Find & Select Cells HFormula Bars HT HU 197 Calibri -11AA = = = Dr Wrap Text General E Copy Paste Format Painter B I U B- A Merge & Center - $ -% Clipboard Font Alignment Number HK214 HJ HK HL HM HN HO HP HQ 195 NET OPERATING INCOME 580330 (13.1% X 4430000] 196 INTEREST EXPENSES 149000 [98000 + 51000] EBT 431330 198 TAX 150966 NET INCOME 280364.50 200 201 TOTAL ASSETS AFTER RENOVATION = 3047000 (AS CALCULATED ABOVE) EQUITY = 50% OF 3047000 1523500 204 BEFORE RENOVATION 206 RETURN ON STOCK HOLDERS' INVESTMENT 218400/993500 = 207 (NET INCOME/EQUITY) 199 202 203 205 21.98% 208 280364.50/1523500 = 18.40% 209 210 RETURN ON STOCK HOLDERS' INVESTMENT (NET INCOME/EQUITY) 211 212 RETURN ON STOCKHOLDERS' INVESTMENT HAS DECREASED SO RENOVATION HAS NOT FAVOURABLE EFFECT ON THE PROFITABILITY 213 214 215 FIFO budget 45 days cycle ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGET dupont CASH BUDGET ferences: CU58 DIFF ANALYSIS BO ovel 120% Rea - O m * 4 ENG