Question Set 78-Solution

Solution

(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

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One Response to “Question Set 78-Solution”

  1. Twila Says:

    I really intend to save this article, “Question Set 78-Solution Business & Finance Expert Live” on my very own page.
    Would you mind if Ido it? Thank you ,Georgina

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