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Financial ratios investment analysis for Salco Inc.

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



Net fixed assets



Ownersâ?? equity




The firm's income statement for the year was as follows:


$ 4,500,000

Less cost of goods sold


Gross profit

$ 1,000,000

Less operating expenses


Operating income

$   500,000

Less interest expense


Earnings before taxes

$   400,000

Less taxes (50%)


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 year, what will be the return earned on the common stockholders' investment? Compare this rate of return with that earned before the renovation.
(Keown. Foundations of Finance: The Logic and Practice of Financial Management, 6th Edition. Pearson Learning Solutions p. 124).

Solution Summary

Financial ratios investment analysis for Salco Inc is examined.