Question

(Evaluating current and pro forma profitability) The annual sales for Salco Inc. were $4.55 million last year. All sales are on credit. The firm's end-of-year balance sheet and income statement were in the popup window: a. Calculate Salco's 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 $1.01 million. The firm will maintain its present debt ratio of 0.519 when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13.1 percent. What will be the new operating return on 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 $45,000 per year, what will be the return earned on the common stockholders investment? Compare this rate of return with that earned before the renovation a. Calculate Salco's total asset turnover, operating profit margin, and operating return on assets. X. (Round to two decimal places.) The total asset turnover is

Answer 1

→ Given: - Saus last year = $4.55 million a. Totul desits tumover ratio. This is used to measure a fursas capacity to guesate Humans in comparison with its Asetse Fomila - Net Saus (4) Total Assets. (Bolu puud t aillenthe - $4.55 million t 2.043 million (4) - 2.23 Ci) Opuating Popit mengin :-] This ratio measures how much operating profit das an entity marces on 18 of sales, Formula - opuating taminas (3) Revmuel + quating chevume means income after Dariable costs but before interest Lox) tau. se opusting profit margiu - $513gao () 45,501000 = 0111274 - (W) 1.2756% cm opuating deum of Assess:] This is an import runt profitabilit ratios but same as Retww on Assets Encept the fact that it takes EBIT instead of income Available to share holders. Formula :- EBIT (²) Total Assers / $513,000 (4) 2,043,0008 20.2511(a) 25.11% LEBIT = opuating profils - $518,00

Dale 2. Givet:- $101 million → New investment Fak senovatione Planning to maintain debt ratio of 0.519 Cold ratio). 4 New investment will be acquired as follows: → Incuest based debt - $524, 190 ($1.0lm x0519). > owne's equity – $4753610 presunt operating profit maszín = 11.37546 Esputed maigiu post investment 5 13.14. Also mustioned that bertes to maintain coustent level - $4.55m .. New operating profit 13.1 = 4 x $596,050. Neid opua ting ketuin on Assets = ? The new renovation will add 1.0168 million to cuisting assus new total Assus = $2,043,000 (t) $1,010,000 - - $3,053,000 I New opuating Actum on Assets & EBIT (²) Total Assets L = $596,050 (3) $39053,000 - 0.195234 / 19.523%.

Salco Inc. income Statement Particulars Before renovation saus $ 4,556902 operating profits $ 513,000 less: - intuest ($107.000) $4,06,000 luss: Ten (214) $85,260 $320,740 After renovation $43550,000 $596,050 ($152,000 $444,050 93,256 $350, Bee Rate of serum on Equity : - Beperibe busevations- $320, 74013) $982,000 - 32.634. Aptw luovanou :- $350360 (3) $2,4562810 - 24.05% → The Ictus en Equity has after hendatione secued very substantially The season could be Substantial increase in not enough interest. invease in EBIT and Note: - In the above question inome chant has been taken from EBIT Since no clarity is give regauding | the increase in VARIABLE EXPENSES.