PROBLEM 4-10

FINANCIAL RATIOS-INVESTMENT ANALYSIS

DATA
Current Assets
Net Fixed Assets
Total Assets

$500,000
1,500,000
2,000,000

Liabilities
Owners' Equity
Total Liabilities and Owners' Equity

1,000,000
1,000,000
$2,000,000

Income Statement
Sales
Less: COGS
Gross Profit
Less: Oper Exp
Net Oper Income
Less: Interest Exp
EBT
Less: Taxes
Net Income

$4,500,000
3,500,000
1,000,000
500,000
500,000
100,000
400,000
200,000
$200,000

A)
Total asset turnover =
Operating profit margin =
Operating return on assets =

2.25
11.11%
25.0%

B)
Added plant & equip
Present debt ratio
New Oper profit margin

3,000,000
0.50
13.0%

New Operating return on assets =

19.5%

C)
Interest expense rises by:

NOI
Less: Interest
EBT

50,000
Post:
$585,000
150,000
435,000

Pre:
$500,000
100,000
400,000

Less: Taxes (50%)

Net Inc Available to Common

217,500
$217,500

200,000
$200,000

Post Renovation Analysis:

Return on Common Equity =

14.5%

Pre-renovation Analysis:
Return on Common Equity =

20.0%

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 ratoi 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 year, what will be the return earned on the common stockholders, investments?
Compare this rate of return with that earned befor the renovation.