Accounting – The annual sales for Salco Inc

The annual sales for Salco Inc. were $4.5 million last year. The firmӳ endof-year balance sheet was as follows: Current assets $ 500 000 Liabilities $1 000 000 Net fixed assets 1 500 000 OwnersҠequity 1 000 000 $2 000 000 $2 000 000 The firmӳ 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 Salcoӳ 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 plantӳ renovation? c. Given that the plant renovation in part b occurs and Salcoӳ interest expense rises by $50 000 per year what will be the return earned on the common stockholdersҠinvestment? Compare this rate of return with that earned before the renovation.