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##### Week one assignment 1 4-10. (Financial ratios?in...

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Week one assignment 1 4-10. (Financial ratios?investment analysis) The annual sales for Salco Inc. were \$4.5 million last year. The firm?s end-of-year balance sheet was as follows: Current assets \$ 500,000 Liabilities \$1,000,000 Net fixed assets 1,500,000 Owners? equity 1,000,000 \$2,000,000 \$2,000,000 The firm?s income statement for the year was as follows: Sales \$ 4,500,000 Less cost of goods sold (3,500,000) Gross profit \$ 1,000,000 Less operating expenses (500,000) Operating income \$ 500,000 Less interest expense (100,000) Earnings before taxes \$ 400,000 Less taxes (50%) (200,000) Net income \$ 200,000 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 million. The firm will maintain its present debt ratio of .5 when financing the new investment and expects sales to remain constant. The operating profit margin will rise to 13 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 \$50,000 per,c. Given that the plant renovation in part b occurs and Salco?s interest expense rises by \$50,000 per year what will the return earned on the common stockholders investments? Compare this rate of return whit that earned before the renovations. Solution: a. Total asset turnover = Sales/ Total Assets = 4,500,000/2,000,000 = 2.25 times Operating Profit Margin = Operating Income/ Sales = 500,000/4,500,000 = 0.1111 or 11.11% Operating Return on Assets = Operating Income/ Total assets = 500,000/2,000,000 = 0.25 or 25% b. New operating return on assets Operating return on assets = Operating Income/Sales * Sales/Total assets = 0.13* 4,500,000/3,000,000 = 0.13*1.5 = 19.5%

Paper#1534 | Written in 18-Jul-2015

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