Finance 401 Week 1 Assign

Topics: Generally Accepted Accounting Principles, Financial ratios, Investment Pages: 3 (535 words) Published: May 7, 2013
RATIO ANALYSIS
Review the financial information pertaining to Salco Inc. in Study Problem 4-10 on pages 113 and 114 of you text.  Answer the following questions in an Excel document.  Solve using Excel formulas (preferred) or clearly write out the steps you took to calculate your answers.   Round any dollar amounts to the nearest dollar ($1,500,074) and any percentages to two decimals (9.56%).
QUESTION 1
Calculate Salco’s total asset turnover, operating profit margin, and operating return on assets.

ANSWER 1
Total Asset TurnoverOperating Profit MarginOperating Return on Assets

Formula: Total Asset Turnover = Sales/ Total AssetsFormula: Operating Profit Margins= Operating Profits/ SalesFormula: Operating Return on Assets= Operating Profit Margin x Total Asset Turnover 4500000/ 2000000500,000 / 4,500,000 =.1111x2.25

2.2511%25%

Note: I added net fixed assets and current assets for total assets.Note: Operating profits= EBITDA

QUESTION 2
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?

ANSWER 2
Operating Return on Assets

Formula: Operating Return on Assets= Operating Profit Margin x Total Asset Turnover Operating Return on Assets = .13 x X
Operating Return on Assets =.13 x 1.5
19.50%

Note: Total Asset Turnover
Formula: Total Asset Turnover = Sales/ Total Assets
4,500,000/ 2,000,000 + 1,000,000=1.5

QUESTION 3
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’ investment? Compare this rate of return with that earned...
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