Question

(Profitability and capital structure analysis) In the year just ended, Callaway Lighting had sales of $5,210,000 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 $44,000 for the year. There are currently 95,000 common stock shares outstanding and the firm pays a $2.542 dividend per share. The firm has $1,180,000 in interest-bearing debt on which it pays 8.2 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? a. Assuming the firm's earnings are taxed at 35%, construct the firm's income statement. Complete the income statement below: (Round to the nearest dollar.) Income Statement Revenues $ Cost of Goods Sold Gross Profit Operating Expenses Net Operating Income Interest Expense Earnings before Taxes Income Taxes Net Income

Answer 1

Revenue=5210000
Cost of Goods Sold=4540000
Gross Profit=670000
Operating Expenses=134000
Net Operating Income=536000
Interest Expense=1180000*8.2%=96760
EBT=439240
Income Tax=153734
Net Income=285506

Operating Profit Margin=536000/5210000=10.29%
Net Profit Margin=285506/5210000=5.48%

Times Interest Earned=536000/96760=5.539479124
Ability is good