busi-320_corporate_finance-2013_fall-b_moten_exam-1_questions x
B
USI-320
C
orporate Finance-2013 Fall-B (Moten)
3. Problem 2-6 Income statement [LO1]
Given the following information, prepare an income statement for the Dental Drilling Company.
(Input all amounts as positive values. Omit the “
$
” sign in your response.)
Selling and administrative expense
73,000
Depreciation
expense
78,000
Sales
521,000
Interest
expense
48,000
Cost of goods sold
200,000
Taxes
47,000
6.Problem 2-15 Development of balance sheet [LO3]
A
rrange the following items in proper balance sheet presentation (Be sure to list the assets in order of their liquidity. Input all amounts as positive values. Omit the “$” sign in your response):
Accumulated depreciation |
30 9,000 |
||||
Retained earnings |
187,000 |
||||
Cash |
1 4,000 |
||||
Bonds payable |
136,000 |
||||
Accounts receivable |
54,000 |
||||
Plant and equipment—original cost |
7 75,000 |
||||
Accounts payable |
35,000 |
||||
Allowance for bad debts |
9,000 | ||||
Common stock , $1 par, 100,000 shares outstanding |
100,000 |
||||
Inventory |
70,000 |
||||
Preferred stock, $59 par, 1,000 shares outstanding |
59,000 |
||||
Marketable securities |
24,000 |
||||
Investments |
20,000 |
||||
Notes payable |
34,000 |
||||
Capital paid in excess of par (common stock) |
88,000 |
9. Problem 2-18
Price
-earnings ratio [LO2]
Botox Facial Care had earnings after taxes of $364,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $93.80. In 2010, earnings after taxes increased to $424,000 with the same 200,000 shares outstanding. The stock price was $133.00. |
(a) |
Compute earnings per share and the P/E ratio for 2009. The P/E ratio equals the stock price divided by earnings per share. (Enter only numeric values.Round your intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.) |
Earnings per share
$
P/E ratio
(b) |
Compute earnings per share and the P/E ratio for 2010. (Enter only numeric values.Round your intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.) |
(c)
Why the P/E ratio changed? (Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)
10.Problem 2-21 Depreciation and cash flow [LO5]
The Jupiter Corporation has a gross profit of $789,000 and $249,000 in depreciation expense. The Saturn Corporation also has $789,000 in gross profit, with $46,600 in depreciation expense. Selling and administrative expense is $216,000 for each company. |
Given that the tax rate is 40 percent, compute the cash flow for both companies. (Omit the “$” sign in your response.) |
Jupiter | Saturn | |||||||||||||||||||||
Cash flow |
$ |
$
|
What is the difference in cash flow between the two firms? (Omit the “$” sign in your response.) |
Difference in cash flow |
12. Problem 2-24 Book value and market value [LO2, 3]
The Rockford Corporation has assets of $444,000, current liabilities of $51,000, and long-term liabilities of $71,000. There is $35,500 in preferred stock outstanding; 20,000 shares of common stock have been issued. |
Compute book value (net worth) per share. (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
Book value per share |
If there is $25,700 in earnings available to common stockholders and Rockford’s stock has a P/E of 19 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
Current price |
(c) |
What is the ratio of market value per share to book value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
Ratio |
13.Problem 2-25 Book value and market value [LO2, 3]
Amigo Software, Inc., has total assets of $824,000, current liabilities of $164,000, and long-term liabilities of $133,000. There is $83,000 in preferred stock outstanding. Thirty thousand shares of common stock have been issued. |
Compute book value (net worth) per share. (Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
Book value per share
$
If there is $53,000 in earnings available to common stockholders and the firm’s stock has a P/E of 28 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
Current price
$
What is the ratio of market value per share to book value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
Ratio
14. Problem 2-28 Statement of cash flows [LO4]
Given is the Income Statement for the year ended December 31, 2010, Statement of Retained Earnings for the year ended December 31, 2010 and Comparative Balance Sheet s for 2009 and 2010 of Jeter Corporation: |
For the Year Ended December 31, 2010
$
3,9
40,000
2,5
80,000
Gross profits
1,360,000
Selling and administrative expense
697,000
272,000
Operating income
391,000
88,000
Earnings before taxes
303,000
234,000
Earnings after taxes
69,000
Preferred stock dividends
10,000
Earnings available to common stockholders
$
59,000
Shares outstanding
150,000
$
0.39
Statement of Retained Earnings |
||
Retained earnings, balance, January 1, 2010 |
342,700 |
|
Add: Earnings available to common stockholders, 2010 |
59,000 |
|
Deduct: Cash dividends declared and paid in 2010 |
218,000 |
|
Retained earnings, balance, December 31, 2010 |
183,700 |
Comparative Balance Sheets |
|||||||
Year-End |
Year-End |
||||||
Assets |
|||||||
Current assets: |
|||||||
Cash |
171,000 |
127,000
|
|||||
Accounts receivable (net) |
543,000 |
5 46,000 |
|||||
Inventory |
6 56,000 |
||||||
Prepaid expenses |
63,500 |
39,700 |
|||||
Total current assets |
1,433,500 |
1,409,700 |
|||||
Investments (long-term securities) |
92,000 |
81,100 |
|||||
Plant and equipment |
2,250,000 |
2,7 30,000 |
|||||
Less: Accumulated depreciation |
1,750,000 |
2,022,000 |
|||||
Net plant and equipment |
500,000 |
708,000 |
|||||
Total assets |
2,025,500 |
2,198,800 |
|||||
Liabilities and Stockholders’ Equity |
|||||||
Current liabilities: |
|||||||
Accounts payable |
365,000 |
626,000 |
|||||
Notes payable |
514,000 |
||||||
Accrued expenses |
79,800 |
57,100 |
|||||
Total current liabilities |
9 58,800 |
1,197,100 |
|||||
Long-term liabilities: |
|||||||
Bonds payable , 2015 |
134,000 |
228,000 |
|||||
Total liabilities |
1,092,800 |
1,425,100 |
|||||
Stockholders’ equity: |
|||||||
Preferred stock, $100 par value |
90,000 |
||||||
Common stock, $1 par value |
|||||||
Capital paid in excess of par |
350,000 |
||||||
Retained earnings |
183,700 |
||||||
Total stockholders’ equity |
932,700 |
773,700 |
|||||
Total liabilities and stockholders’ equity |
|||||||
Prepare a statement of cash flows for the Jeter Corporation. ( Amount s to be deducted should be indicated with a minus sign. Omit the “$” sign in your response.) |
16.Problem 2-4 Operating profit [LO1]
A-Rod Fishing Supplies had sales of $2,180,000 and cost of goods sold of $1,280,000. Selling and administrative expenses represented 15 percent of sales. Depreciation was 6 percent of the total assets of $4,840,000. |
What was the firm’s operating profit? (Omit the “$” sign in your response.) |
Operating profit |
20.Problem 3-17 Interpreting results from the Du Pont system of analysis [LO3]
Assume the following data for Cable Corporation and Multi-Media, Inc. |
Cable |
Multi |
|||
Net income |
32,400 |
127,000 | ||
377,000 |
2,830,000 |
|||
408,000 |
925,000 |
|||
Total debt |
195,000 |
547,000 |
||
Stockholders’ equity |
213,000 |
378,000 |
(a-1) |
Compute return on stockholders’ equity for both firms. (Round your answers to 2 decimal places. Omit the “%” sign in your response.) |
Return on |
Cable Corporation |
Multi Media, Inc. |
(a-2) |
Which firm has the higher return? |
(b) |
Compute the following additional ratios for both firms. (Enter only numeric values rounded to 2 decimal places. Omit the “%” sign in your response.) |
22.Problem 3-24 Debt utilization and Du Pont system of analysis [LO3]
Using the income statement for J. Lo Wedding Gowns, compute the following ratios: |
J. LO WEDDING GOWNS |
|||||
291,000 |
|||||
Less: Cost of goods sold |
172,000 |
||||
Gross profit |
119,000 |
||||
Less: Selling and administrative expense |
45,800 |
||||
Less: Lease expense |
13,300 |
||||
Operating profit * |
59,900 |
||||
Less: Interest expense |
8,300 |
||||
Earnings before taxes |
51,600 |
||||
Less: Taxes (30%) |
20,640 |
||||
Earnings after taxes |
30,960 |
||||
*Equals income before interest and taxes. |
Compute the interest coverage ratio. (Enter only numeric value rounded to 2 decimal places.) |
Compute the fixed charge coverage ratio. (Enter only numeric value rounded to 2 decimal places.) |
The total assets for this company equal $236,000. Compute the return on assets (investment). (Round your answer to 2 decimal places. Omit the “%” sign in your response.) |
25. Problem 3-31 Inflation and inventory accounting effect [LO5]
The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting. |
CANTON CORPORATION
Income Statement for 2010
$
224,750
(15,500 units at $14.50)
135,625
(15,500 units at $8.75)
89,125
13,485
11,000
64,640
Taxes (30%)
19,392
After tax income
$
45,2
48
Assume in 2011 the same 15,500-unit volume is maintained, but the sales price increases by 10 percent. Because of FIFO inventory policy, old inventory will still be charged off at $8.75 per unit. Also assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute after tax income for 2011. (Round your answer to the nearest whole number. Omit the “$” sign in your response.)
In part a, by what percent did after tax income increase as a result of a 10 percent increase in the sales price? (Round your answer to 2 decimal places. Omit the “%” sign in your response.) |
Gain in after tax income |
Now assume that in 2012 the volume remains constant at 15,500 units, but the sales price decreases by 15 percent from its year 2011 level. Also, because of FIFO inventory policy, cost of goods sold reflects the inflationary conditions of the prior year and is $9.25 per unit. Further, assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the after tax income. (Round your sales price to 2 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.) |
After tax income
27. Problem 3-36 Comparing all the ratios [LO2]
SNIDER CORPORATION | Balance Sheet |
51,800 |
|
Marketable securities |
24,200 |
174,000 |
|
2 27,000 |
|
Total current assets |
477,000 |
Plant and equipment. |
646,000 |
(246,000) |
|
400,000 |
|
940,500 |
|
Liabilities and Stockholders’ Equity |
|
91,100 |
|
73,400 |
|
Accrued taxes |
18,400 |
Total current liabilities |
182,900 |
Bonds payable |
156,700 |
Total liabilities |
339,600 |
Preferred stock, $50 par value |
|
80,000 | |
190,000 |
|
2 30,900 |
|
Total stockholders’ equity |
600,900 |
Total liabilities and stockholders’ equity |
SNIDER CORPORATION |
|||
Sales (on credit) |
2,034,000 |
||
1,308,000 |
|||
726,000 |
|||
Less: Selling and administrative expenses |
488,000 |
* | |
Operating profit (EBIT) |
238,000 |
||
34,900 |
|||
Earnings before taxes (EBT) |
203,100 |
||
Less: Taxes |
89,300 |
||
Earnings after taxes (EAT) |
113,800 |
||
*Includes $36,600 in lease payments. |
Using the above financial statements for the Snider Corporation, calculate the following ratios. (Enter only numeric values rounded to 2 decimal places. Omit the “%” sign in your response.) |
28. Problem 3-37 Ratio computation and analysis [LO2]
Given the financial statements for Jones Corporation and Smith Corporation: |
JONES CORPORATION |
||||||
Current Assets |
Liabilities |
|||||
186,400 |
Bonds payable (long term) |
81,600 |
||||
55,400 |
||||||
Long-Term Assets |
Stockholders’ Equity |
|||||
Fixed assets |
553,000 |
Common stock | ||||
(150,900) |
Paid-in capital |
|||||
Net fixed assets* |
402,100 |
333,300 |
||||
Total assets |
770,900 |
Total liabilities and equity |
||||
1,339,000 |
||
788,000 |
||
551,000 |
||
Selling and administrative expense† |
334,000 |
|
Less: Depreciation expense |
54,500 |
|
162,500 |
||
10,200 |
||
152,300 |
||
Tax expense |
99,000 |
|
53,300 |
*Use net fixed assets in computing fixed asset turnover. |
†Includes $15,200 in lease payments. |
SMITH CORPORATION |
||
40,000 |
76,700 |
|
13,200 |
246,000 |
|
78,800 |
||
77,800 |
||
Stockholders’ Equity |
||
75,000 | ||
(258,600) |
30,000 | |
Net fixed assets* |
292,400 |
74,500 |
502,200 |
1,190,000 |
695,000 |
495,000 |
257,000 |
58,800 |
179,200 |
30,900 |
148,300 |
55,700 |
92,600 |
†Includes $15,200 in lease payments.
Compute the following ratios. (Use 360 days for a year. Enter only numeric values rounded to 2 decimal places. Omit the “%” sign in your response.) |
To which one would you, as credit manager for a supplier, approve the extension of (short-term) trade credit? |
(b) |
In which one would you buy stocks? |
rev: 10_05_2012
29. Problem 4-1 Growth and financing [LO4]
Philip Morris is excited because sales for his clothing company are expected to double from $730,000 to $1,460,000 next year. Philip notes that net assets (Assets – Liabilities) will remain at 50 percent of Sales. His clothing firm will enjoy a 10 percent return on total sales. He will start the year with $330,000 in the bank and is already bragging about the two Mercedes he will buy and the European vacation he will take. |
Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 50 percent of the sales increase) and add in profit. (Negative amount should be indicated by a minus sign. Omit the “$” sign in your response.) |
Does his optimistic outlook for his cash position appear to be correct? |
31. Problem 4-4 Sales projections [LO2]
The Alliance Corp. expects to sell the following number of units of copper cables at the prices indicated, under three different scenarios in the economy. The probability of each outcome is indicated. |
Outcome |
Probability |
Units |
Price |
A |
.20 |
29 0
|
33 |
B |
.70 |
500 |
48 |
C |
.10 |
770 |
58 |
What is the expected value of the total sales projection? (Omit the “$” sign in your response.) |
32.Problem 4-6 Sales projections [LO2]
Cyber Security Systems had sales of 4,000 units at $90 per unit last year. The marketing manager projects a 25 percent increase in unit volume sales this year with a 30 percent price increase. Returned merchandise will represent 12 percent of total sales. |
What is your net dollar sales projection for this year? (Omit the “$” sign in your response.) |
Net sales |
34.Problem 4-11 Cost of goods sold-FIFO [LO2]
On December 31 of last year, Wolfson Corporation had in inventory 540 units of its product, which cost $21 per unit to produce. During January, the company produced 940 units at a cost of $24 per unit. |
Assuming that Wolfson Corporation sold 980 units in January, what was the cost of goods sold (assume FIFO inventory accounting)? (Omit the “$” sign in your response.) |
38.Problem 4-19 Schedule of cash receipts [LO2]
Watt’s Lighting Stores made the following sales projections for the next six months. All sales are credit sales. |
March |
32,000 |
June |
$ 36,000 |
|
April |
38,000 |
July |
44,000 |
|
May |
27,000 |
August |
46,000 |
Sales in January and February were $35,000 and $34,000, respectively. |
Prepare a monthly cash receipts schedule for the firm for March through August. (Omit the “$” sign in your response.) |
Of the sales expected to be made during the six months from March through August, how much will still be uncollected at the end of August? How much of this is expected to be collected later? (Omit the “$” sign in your response.) |
Amount | |
Uncollected |
|
Expected to be collected |
40. Problem 4-28 Percent-of-sales method [LO3]
The Manning Company has financial statements as shown below, which are representative of the company’s historical average. |
The firm is expecting a 40 percent increase in sales next year, and management is concerned about the company’s need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales. |
210,000 |
||
Expenses |
151,900 |
|
Earnings before interest and taxes |
58,100 |
|
Interest |
9,300 |
|
48,800 |
||
17,300 |
||
31,500 |
||
Dividends |
9,450 |
Assets |
Liabilities and Stockholders’ Equity |
||
4,000 |
22,200 |
||
56,000 |
Accrued wages |
2,350 |
|
66,000 |
Accrued taxes |
4,850 |
|
Current assets |
126,000 |
Current liabilities |
29,400 |
Long-term debt |
26,500 |
||
21,800 |
|||
214,000 |
Total liabilities and |
Using the percent-of-sales method, determine the amount of external financing needs, or a surplus of funds required by the company. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations. Input the amount as positive value. Omit the “$” sign in your response.) |
rev: 09_10_2011
41. Problem 5-5 Break-even analysis [LO2]
Eaton Tool Company has fixed costs of $232,400, sells its units for $62, and has variable costs of $34 per unit. |
Compute the break-even point. |
Break-even point |
units |
Ms. Eaton comes up with a new plan to cut fixed costs to $180,000. However, more labor will now be required, which will increase variable costs per unit to $37. The sales price will remain at $62. What is the new break-even point? (Round your answer to the nearest whole number.) |
New break-even point |
Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)? |
(c)
With less operating leverage and a smaller contribution margin, profitability is likely to be less than it would have been at very high volume levels. |
42.Problem 5-8 Cash break-even analysis [LO2]
Air Purifier, Inc., computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,520,000, but 20 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $54. How many units does the firm need to sell to reach the cash break-even point? (Round your answer to the nearest whole number.) |
Cash break-even point |
units |
45. Problem 5-12 Break-even point and degree of leverage [LO2, 5]
Mo & Chris’s Delicious Burgers, Inc., sells food to Military Cafeterias for $19 a box. The fixed costs of this operation are $98,000, while the variable cost per box is $12. |
What is the break-even point in boxes? |
boxes |
Calculate the profit or loss on 13,000 boxes and on 28,000 boxes. (Input all amounts as positive values. Omit the “$” sign in your response.) |
Boxes |
Profit/Loss |
|||
$ | ||||
What is the degree of operating leverage at 18,000 boxes and at 28,000 boxes? (Enter only numeric value rounded to 2 decimal places.) |
Degree of |
|||
|
(d) |
If the firm has an annual interest expense of $10,200, calculate the degree of financial leverage at both 18,000 and 28,000 boxes.(Enter only numeric value rounded to 2 decimal places.) |
Degree of |
(e) |
What is the degree of combined leverage at both sales levels? (Enter only numeric value rounded to 2 decimal places.) |
Degree of |
|
rev: 02_23_2012, 06_13_2013_QC_31736
46. Problem 5-16 Earnings per share and financial leverage [LO4]
Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below. |
Cain | Able | ||||
Debt @ 8% |
270,000 |
Debt @ 8% |
540,000 |
||
Common stock, $10 par |
Common stock, $10 par | ||||
Total |
810,000 |
Total | |||
Common shares |
Common shares |
Compute earnings per share if earnings before interest and taxes are $54,000, $64,800, and $72,000 (assume a 10 percent tax rate). (Round your answers to 2 decimal places. Leave no cells blank – be certain to enter “0” wherever required. Omit the “$” sign in your response.) |
Earnings per share at $54,000 |
Earnings per share at $64,800 |
Earnings per share at $72,000 |
What is the relationship between earnings per share and the level of EBIT? |
1. Before tax return on assets is less than cost of Debt |
2. Before tax return on assets equals cost of Debt |
3. Before tax return on assets is greater than cost of Debt |
If the cost of debt went up to 10 percent and all other factors remained equal, what would be the break-even level for EBIT? (Omit the “$” sign in your response.) |
Break-even level |
47.Problem 5-18 Combining operating and financial leverage [LO5]
Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $146,000. |
Sterling | Royal |
Debt @ 10% |
876,000 |
292,000 |
|
Common stock, $5 par |
584,000 |
1,168,000 |
|
Total |
1,460,000 |
||
116,800 |
233,600 |
Compute earnings per share for both firms. Assume a 25 percent tax rate. (Round your answers to 2 decimal places. Omit the “$” sign in your response.) |
Earnings per share | |
Sterling |
|
Royal |
In part a, you should have gotten the same answer for both companies’ earnings per share. Assuming a P/E ratio of 19 for each company, what would its stock price be? (Use rounded Earnings per share.Round your answer to 2 decimal places. Omit the “$” sign in your response.) |
Stock price |
Now as part of your analysis, assume the P/E ratio would be 13 for the riskier company in terms of heavy debt utilization in the capital structure and 24 for the less risky company. What would the stock prices for the two firms be under these assumptions? (Note: Although interest rates also would likely be different based on risk, we will hold them constant for ease of analysis.) (Use rounded Earnings per share. Round your answers to 2 decimal places. Omit the “$” sign in your response.) |
Stock price |
48. Problem 5-20 Combining operating and financial leverage [LO5]
Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows: |
Capital Structure |
||||
Sinclair | Boswell | |||
Debt @ 11% |
1,260,000 |
0 | ||
Common stock, $10 per share |
840,000 |
2,100,000 |
||
84,000 |
210,000 |
|||
Operating Plan |
||||
Sales (61,000 units at $20 each) |
1,220,000 |
|||
Less: Variable costs |
976,000 |
610,000 |
||
($ |
16 per unit) |
10 per unit) |
||
Fixed costs |
311,000 |
|||
Earnings before interest and taxes (EBIT) |
244,000 |
299,000 |
If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Enter only numeric value rounded to 2 decimal places.) |
Degree of combined leverage |
If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Enter only numeric value.) |
Degree of combined leverage
In part b, if sales double, by what percentage will EPS increase? (Omit the “%” sign in your response.) |
EPS will increase by |
% |