In the year just ended, Callaway Lighting had sales of $5,000,000 and incurred a cost of goods sold equal to $4,500,000. The firm’s operating expenses were $130,000 and its increase in retained earnings was $40,000 for the year. There are currently 100,000 common-stock shares outstanding and the firm pays a $1.485 dividend per share. The firm has $1,000,000 in interest-bearing debt on which it pays 8 percent interest.
a. Assuming the firm’s earnings are taxed at 35 percent, construct the firm’s income statement.
b. Calculate the firm’s operating profit margin and net profit margin.
c. Compute the times interest earned ratio. What does this ratio tell you about Callaway’s ability to pay its interest expense?
d. What is the firm’s return on equity?

  • CreatedOctober 31, 2014
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