Question

Question 5. (15 points total) (Profitability and capital structure analysis) In the year that just ended Callaway Lighting had sales of S5,470,000 and incurred cost of goods sold equal to $4,460,000 The firm's operating expenses were $128,000 and its increase in retained earnings was $42,000 for the year. There are currently 99,000 common stock shares outstanding and the firm pays a $4.770 dividend per share The firm has $1, 180,000 in interest-bearing debt on which it pays 7.7 percent interest a (5 points) Assuming the firm's earnings are taxed at 35%, construct the firm's income statement Income Statement Revenues Cost of Goods Sold Gross Profit Operating Expenses Net Operating Income Interest Expense Earnings before Taxes Income Taxes Net Income decimal place.) The operating profit margin is The net income margin is b. (5 points) Calculate the firm's operating profit margin and net profit margin. (Round to one c (5 points) Compute the times interest earned ratio The times interest earned ratio is What does this tell you about Callaway's ability to pay its interest expense? (Fill in the blank with the times interest earned ratio from above and select the best choice.) 1) Callaway's operating income can fall as much as the company would still be able to service its debt times the interest expense and 2) Callaway's interest expense is 3) Callaway's gross profit can fall as much as times and still be able to service its times higher than its competitors. debt 4) Callaway's operating income can fall as much astimes and still be able to repay Answer What is the firm's return on equity? (Select the best choice.) The firm's return on equity is the same as the net profit margin, 9 496. The firm's return on equity is the sum of the operating profit margin and the net profit margin. 25.5% There is not enough information to answer this question. The firm's return on equity is the same as the operating profit margin, 16.1%. 1) 2) 3) 4) Answer

Answer 1

Calculate the income statement as follows:

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Formulas: