Question

(Related to Checkpoint 4.3) (Analyzing Profitability) In 2016, the Allen Corporation had sales of $70 million, total assets of $43 million, and total liabilities of $19 million. The interest rate on the company's debt is 5.5 percent, and its tax rate is 35 percent. The operating profit margin is 12 percent. a. Compute the firm's 2016 net operating income and net income b. Calculate the firm's operating return on assets and return on equity. (Hint: You can assume that interest must be paid on all of the firm's liabilities.) a. Compute the firm's 2016 net operating income and net income The firm's 2016 net operating income is $ million. (Round to two decimal places.)

Answer 1

Qa) Operating profit margin = 12%

Operating profit / sales = 12%

Operating profit = 12% × sales

= 12% × 70,000 000

= $8,400,000

Operating profit = $8,400,000

Net income

Operating profit = 8,400,000

(-) interest = (1,045,000)

EBT = 7,355,000

(-) Taxes = (2,574,250)

Net income = $4,780,750

notes:-

Interest = 19,000,000 × 5.5% = 1,045,000

Qb) Operating return on assets = operating income / total assets

= 8,400,000 / 43,000,000

= 19.53%

Return on equity = net income / equity

= net income / asset - liability

= 4,780,750 / 43,000,000 - 19,000,000

= 4,780,750 / 24,000,000

= 19.92%