Busi 320 Dev Shell – 2012 Fall B Assignment 1

busi-320_corporate_finance-2013_fall-b_assignment_1 x

1.Problem 2-1 Income statement [LO1]

Frantic Fast Foods had earnings after taxes of $1,200,000 in the year 2009 with 322,000 shares outstanding. On January 1, 2010, the firm issued 30,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 24 percent.

  

(a)

Compute earnings per share for the year 2009. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

  

 

  Earnings per share

  

(b)

Compute earnings per share for the year 2010. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

  

  Earnings per share  

 

2.Problem 2-3 Gross profit [LO1]

Hillary Swank Clothiers had sales of $428,000 and cost of goods sold of $260,000.

 

(a)

What is the gross profit margin (ratio of gross profit to sales)? (Round your answer to the nearest whole percentage. Omit the “%” sign in your response.)

 

 

  Gross profit margin

 

(b)

If the average firm in the clothing industry had a gross profit of 35 percent, how is the firm doing?

 

  The firm is .

 

3.Problem 2-4 Operating profit [LO1]

A-Rod Fishing Supplies had sales of $2,160,000 and cost of goods sold of $1,550,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 6 percent of the total assets of $4,450,000.

 

What was the firm’s operating profit? (Omit the “$” sign in your response.)

 

 

  Operating profit

 

4.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

72,000  

  Depreciation expense

71,000  

  Sales

53

6,000  

  Interest expense

45,000  

  Cost of goods sold

179,000  

  Taxes

53,000  

 

5.Problem 2-7 Income statement [LO1]

Given the following information, prepare an income statement for Jonas Brothers Cough Drops. (Input all amounts as positive values. Omit the “$” sign in your response.)

 

  

  Selling and administrative expense$

  Depreciation expense 

  Sales 

  Interest expense 

  Cost of goods sold 

  Taxes 

326,000  

196,000  

1,600,000  

1

24,000  

5

51,000  

167,000  

 

6.Problem 2-11 Depreciation and earnings [LO1]

 

Stein Books, Inc., sold 2,300 finance textbooks for $200 each to High Tuition University in 2010. These books cost $170 to produce. Stein Books spent $12,300 (selling expense) to convince the university to buy its books.

     Depreciation expense for the year was $15,500. In addition, Stein Books borrowed $102,000 on January 1, 2010, on which the company paid 17 percent interest. Both the interest and principal of the loan were paid on December 31, 2010. The publishing firm’s tax rate is 30 percent.

Prepare an income statement for Stein Books. (Input all amounts as positive values. Omit the “$” sign in your response.)

 

7.Problem 2-15 Development of balance sheet [LO3]

Arrange 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):

 

   

$

 

 

 

 51,000  

 

 

 6,000  

 

 71,000  

 

 

 24,000  

 

 

  Accumulated depreciation

347,000  

  Retained earnings

46,000  

  Cash

14,000  

  Bonds payable

137,000  

  Accounts receivable

  Plant and equipment—original cost

668,000  

  Accounts payable

38,000  

  Allowance for bad debts

  Common stock, $1 par, 100,000 shares outstanding

100,000  

  Inventory

  Preferred stock, $52 par, 1,000 shares outstanding

52,000  

  Marketable securities

28,000  

  Investments

  Notes payable

39,000  

  Capital paid in excess of par (common stock)

91,000  

 

8.Problem 2-16 Earnings per share and retained earnings [LO1, 3]

Okra Snack Delights, Inc., has an operating profit of $241,000. Interest expense for the year was $35,800; preferred dividends paid were $34,100; and common dividends paid were $39,600. The tax was $61,400. The firm has 23,700 shares of common stock outstanding.

  

(a)

Calculate the earnings per share and the common dividends per share. (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

  

     Earnings per share 

 

  Common dividends per share

  

(b)

What was the increase in retained earnings for the year? (Omit the “$” sign in your response.)

  

 

  Increase in retained earnings

Busi 320 Dev Shell – 2012 Fall B

Foundations of Financial Management ( Block , 14th ed.)

assignment:

 

Homework 1

1.Problem 2-1 Income statement [LO1]

Frantic Fast Foods had earnings after taxes of $1,200,000 in the year 2009 with 322,000 shares outstanding. On January 1, 2010, the firm issued 30,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 24 percent.

  

(a)

Compute earnings per share for the year 2009. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

  

  Earnings per share

  

(b)

Compute earnings per share for the year 2010. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

  

  Earnings per share

  

2.Problem 2-3 Gross profit [LO1]

Hillary Swank Clothiers had sales of $428,000 and cost of goods sold of $260,000.

 

(a)

What is the gross profit margin (ratio of gross profit to sales)? (Round your answer to the nearest whole percentage. Omit the “%” sign in your response.)

 

  Gross profit margin

 

(b)

If the average firm in the clothing industry had a gross profit of 35 percent, how is the firm doing?

 

  The firm is .

3.Problem 2-4 Operating profit [LO1]

A-Rod Fishing Supplies had sales of $2,160,000 and cost of goods sold of $1,550,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 6 percent of the total assets of $4,450,000.

 

What was the firm’s operating profit? (Omit the “$” sign in your response.)

 

  Operating profit

4.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

$

72,000  

  Depreciation expense

 

71,000  

  Sales

 

536,000  

  Interest expense

 

45,000  

  Cost of goods sold

 

179,000  

  Taxes

 

53,000  

5.Problem 2-7 Income statement [LO1]

Given the following information, prepare an income statement for Jonas Brothers Cough Drops. (Input all amounts as positive values. Omit the “$” sign in your response.)

 

 

 

  Selling and administrative expense

$

326,000  

  Depreciation expense

 

196,000  

  Sales

 

1,600,000  

  Interest expense

 

124,000  

  Cost of goods sold

 

551,000  

  Taxes

 

167,000  

 

6.Problem 2-11 Depreciation and earnings [LO1]

Stein Books, Inc., sold 2,300 finance textbooks for $200 each to High Tuition University in 2010. These books cost $170 to produce. Stein Books spent $12,300 (selling expense) to convince the university to buy its books.

   

  Depreciation expense for the year was $15,500. In addition, Stein Books borrowed $102,000 on January 1, 2010, on which the company paid 17 percent interest. Both the interest and principal of the loan were paid on December 31, 2010. The publishing firm’s tax rate is 30 percent.

 

Prepare an income statement for Stein Books. (Input all amounts as positive values. Omit the “$” sign in your response.)

7.Problem 2-15 Development of balance sheet [LO3]

Arrange 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

$

347,000  

  Retained earnings

 

46,000  

  Cash

 

14,000  

  Bonds payable

 

137,000  

  Accounts receivable

 

51,000  

  Plant and equipment—original cost

 

668,000  

  Accounts payable

 

38,000  

  Allowance for bad debts

 

6,000  

  Common stock, $1 par, 100,000 shares outstanding

 

100,000  

  Inventory

 

71,000  

  Preferred stock, $52 par, 1,000 shares outstanding

 

52,000  

  Marketable securities

 

28,000  

  Investments

 

24,000  

  Notes payable

 

39,000  

  Capital paid in excess of par (common stock)

 

91,000  

 

8.Problem 2-16 Earnings per share and retained earnings [LO1, 3]

Okra Snack Delights, Inc., has an operating profit of $241,000. Interest expense for the year was $35,800; preferred dividends paid were $34,100; and common dividends paid were $39,600. The tax was $61,400. The firm has 23,700 shares of common stock outstanding.

  

(a)

Calculate the earnings per share and the common dividends per share. (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

  

  

 

  Earnings per share

  Common dividends per share

  

(b)

What was the increase in retained earnings for the year? (Omit the “$” sign in your response.)

  

  Increase in retained earnings

9.Problem 2-17 Earnings per share and retained earnings [LO1, 3]

Quantum Technology had $644,000 of retained earnings on December 31, 2010. The company paid common dividends of $30,100 in 2010 and had retained earnings of $524,000 on December 31, 2009.

 

(a)

How much did Quantum Technology earn during 2010? (Omit the “$” sign in your response.)

 

  Earnings available to common stockholders

 

(b)

What would earnings per share be if 42,700 shares of common stock were outstanding? (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

 

  Earnings per share

10.Problem 2-18 Price-earnings ratio [LO2]

Botox Facial Care had earnings after taxes of $325,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $95.60. In 2010, earnings after taxes increased to $407,000 with the same 200,000 shares outstanding. The stock price was $104.00.

 

(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.)

 

 

 

  Earnings per share

  P/E ratio

 

(c)

Why the P/E ratio changed? (Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)

  The stock price % while EPS only 

11.Problem 2-21 Depreciation and cash flow [LO5]

The Jupiter Corporation has a gross profit of $726,000 and $337,000 in depreciation expense. The Saturn Corporation also has $726,000 in gross profit, with $48,300 in depreciation expense. Selling and administrative expense is $220,000 for each company.

  

(a)

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

  

(b)

What is the difference in cash flow between the two firms? (Omit the “$” sign in your response.)

  

  Difference in cash flow

12.Problem 2-22 Free cash flow [LO4]

Coastal Pipeline, Inc., anticipated cash flow from operating activities of $9 million in 2010. It will need to spend $6.0 million on capital investments in order to remain competitive within the industry. Common stock dividends are projected at $1.20 million and preferred stock dividends at $.65 million.

  

(a)

What is the firm’s projected free cash flow for the year 2010? (Enter your answer in millions of dollars rounded to 2 decimal places. Omit the “$” sign in your response.)

  

  Free cash flow

$  million 

  

(b)

What does the concept of free cash flow represent?

 

 

 

 13.Problem 2-24 Book value and market value [LO2, 3]

The Rockford Corporation has assets of $418,000, current liabilities of $126,000, and long-term liabilities of $131,000. There is $38,700 in preferred stock outstanding; 20,000 shares of common stock have been issued.

  

(a)

Compute book value (net worth) per share. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

  

  Book value per share

$   

  

(b)

If there is $32,300 in earnings available to common stockholders and Rockford’s stock has a P/E of 21 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” 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

 

 
14.Problem 2-25 Book value and market value [LO2, 3]

Amigo Software, Inc., has total assets of $820,000, current liabilities of $181,000, and long-term liabilities of $210,000. There is $90,000 in preferred stock outstanding. Thirty thousand shares of common stock have been issued.

 

(a)

Compute book value (net worth) per share. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)

 

  Book value per share

$   

 

(b)

If there is $52,800 in earnings available to common stockholders and the firm’s stock has a P/E of 26 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” 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

 

 
15.Problem 2-27 Construction of income statement and balance sheet [LO1, 3]

On December 31, 2009, the balance sheet of Baxter Corporation was as follows:

 

 

 

 

 

 

Current Assets

 

 

Liabilities

 

 

  Cash

$

13,000 

  Accounts payable

$

15,000  

  Accounts receivable

 

18,000 

  Notes payable

 

23,000  

  Inventory

 

28,000 

  Bonds payable

 

53,000  

  Prepaid expenses

 

12,300 

 

 

 

Fixed Assets

 

 

Stockholders’ Equity

 

 

  Plant and equipment (gross)

$

253,000 

  Preferred stock

$

23,000  

    

Less: Accumulated depreciation

 

50,600 

  Common stock

 

58,000  

  

 

 

  Paid-in capital

 

28,000  

  Net plant and equipment

 

202,400 

  Retained earnings

 

73,700  

 

 

  Total assets

$

273,700 

  Total liabilities and stockholders’ equity

$

273,700  

 

 

     

Sales for 2010 were $235,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $23,500. Depreciation expense was 11 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 9 percent, while the interest rate on the bonds payable was 15 percent. This interest expense is based on December 31, 2009, balances. The tax rate averaged 20 percent.

 

     $2,300 in preferred stock dividends were paid and $9,560 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

 

     During 2010, the cash balance and prepaid expenses balances were unchanged. Accounts receivable and inventory increased by 9 percent. A new machine was purchased on December 31, 2010, at a cost of $38,000.

 

     Accounts payable increased by 35 percent. Notes payable increased $6,300 and bonds payable decreased $11,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.

(a)

Prepare an income statement for 2010. (Round EPS answer to 2 decimal places. Input all amounts as positive values. Omit the “$” sign in your response.)

(b)

Prepare a statement of retained earnings for 2010. (Input all amounts as positive values. Omit the “$” sign in your response.)

(c)

Prepare a balance sheet as of December 31, 2010. (Be sure to list the assets and liabilities in order of their liquidity. Input all amounts as positive values. Omit the “$” sign in your response.)

16.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 Sheets for 2009 and 2010 of Jeter Corporation:

   

JETER CORPORATION
Income Statement
For the Year Ended December 31, 2010

  Sales

$

4,240,000  

  Cost of goods sold

 

2,810,000  

  

     Gross profits

 

1,430,000  

  Selling and administrative expense

 

738,000  

  Depreciation expense

 

236,000  

  

     Operating income

 

456,000  

  Interest expense

 

88,000  

 

     Earnings before taxes

 

368,000  

  Taxes

 

173,000  

  

     Earnings after taxes

 

195,000  

  Preferred stock dividends

 

10,000  

  

  Earnings available to common stockholders

$

185,000  

  Shares outstanding

 

150,000  

  Earnings per share

$

1.23  

  

Statement of Retained Earnings
For the Year Ended December 31, 2010

  Retained earnings, balance, January 1, 2010

$

320,500  

     Add: Earnings available to common stockholders, 2010

 

185,000  

     Deduct: Cash dividends declared and paid in 2010

 

181,000  

  Retained earnings, balance, December 31, 2010

$

324,500  

  

Comparative Balance Sheets
For 2009 and 2010

 

 Year-End
2009

 

Year-End
2010 

  Assets

 

 

 

 

 

  Current assets:

 

 

 

 

 

     Cash

$

113,000  

 

$

481,600  

     Accounts receivable (net)

 

563,000  

 

 

607,000  

     Inventory

 

602,000  

 

 

664,000  

     Prepaid expenses

 

60,900  

 

 

30,900  

  

 

       Total current assets

 

 1,338,900  

 

 

1,783,500  

     Investments (long-term securities)

 

91,600  

 

 

89,600  

     Plant and equipment

 

2,520,000  

 

 

2,640,000  

     Less: Accumulated depreciation

 

1,940,000  

 

 

2,176,000  

  

 

     Net plant and equipment

 

580,000  

 

 

464,000  

 

 

  Total assets

$

2,010,500  

 

$

2,337,100  

 

 

  Liabilities and Stockholders’ Equity

 

 

 

 

 

  Current liabilities:

 

 

 

 

 

     Accounts payable

$

342,000  

 

$

581,000  

     Notes payable

 

548,000  

 

 

548,000  

     Accrued expenses

 

75,000  

 

 

51,600  

  

 

       Total current liabilities

 

965,000  

 

 

1,180,600  

  Long-term liabilities:

 

 

 

 

 

     Bonds payable, 2015

 

135,000  

 

 

242,000  

  

 

       Total liabilities

 

1,100,000  

 

 

1,422,600  

  Stockholders’ equity:

 

 

 

 

 

     Preferred stock, $100 par value

 

90,000  

 

 

90,000  

     Common stock, $1 par value

 

150,000  

 

 

150,000  

     Capital paid in excess of par

 

350,000  

 

 

350,000  

     Retained earnings

 

320,500  

 

 

 324,500  

  

 

       Total stockholders’ equity

 

910,500  

 

 

914,500  

  

 

  Total liabilities and stockholders’ equity

$

2,010,500  

 

$

2,337,100  

  

 

  

Prepare a statement of cash flows for the Jeter Corporation. (Amounts to be deducted should be indicated with a minus sign. Omit the “$” sign in your response.)

  

17.Problem 2-32 P/E ratio [LO2]

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 Sheets for 2009 and 2010 of Jeter Corporation:

   

JETER CORPORATION
Income Statement
For the Year Ended December 31, 2010

  Sales

$

4,190,000  

  Cost of goods sold

 

2,820,000  

  

     Gross profits

 

1,370,000  

  Selling and administrative expense

 

685,000  

  Depreciation expense

 

319,000  

  

     Operating income

 

366,000  

  Interest expense

 

89,300  

  

     Earnings before taxes

 

276,700  

  Taxes

 

227,000  

  

     Earnings after taxes

 

49,700  

  Preferred stock dividends

 

10,000  

  

  Earnings available to common stockholders

$

39,700  

  Shares outstanding

 

150,000  

  Earnings per share

$

.26  

  

Statement of Retained Earnings
For the Year Ended December 31, 2010

  Retained earnings, balance, January 1, 2010

$

45,900  

     Add: Earnings available to common stockholders, 2010

 

39,700  

     Deduct: Cash dividends declared and paid in 2010

 

25,000  

  Retained earnings, balance, December 31, 2010

$

60,600  

  

Comparative Balance Sheets
For 2009 and 2010

 

 Year-End
2009

 

Year-End
2010 

  Assets

 

 

 

 

 

  Current assets:

 

 

 

 

 

     Cash

$

173,000  

 

$

60,000  

     Accounts receivable (net)

 

549,000  

 

 

573,000  

     Inventory

 

645,000  

 

 

686,000  

     Prepaid expenses

 

61,600  

 

 

37,800  

  

 

       Total current assets

 

1,428,600  

 

 

1,356,800  

     Investments (long-term securities)

 

90,100  

 

 

84,700  

     Plant and equipment

 

2,240,000  

 

 

2,930,000  

     Less: Accumulated depreciation

 

1,990,000  

 

 

2,309,000  

  

 

     Net plant and equipment

 

250,000  

 

 

621,000  

  

 

  Total assets

$

1,768,700  

 

$

2,062,500  

  

 

  Liabilities and Stockholders’ Equity

 

 

 

 

 

  Current liabilities:

 

 

 

 

 

     Accounts payable

$

307,000  

 

$

555,000  

     Notes payable

 

558,000  

 

 

558,000  

     Accrued expenses

 

72,800  

 

 

50,900  

  

 

       Total current liabilities

 

937,800  

 

 

1,163,900  

  Long-term liabilities:

 

 

 

 

 

     Bonds payable, 2015

 

195,000  

 

 

248,000  

  

 

       Total liabilities

 

1,132,800  

 

 

1,411,900  

  Stockholders’ equity:

 

 

 

 

 

     Preferred stock, $100 par value

 

90,000  

 

 

90,000  

     Common stock, $1 par value

 

150,000  

 

 

150,000  

     Capital paid in excess of par

 

350,000  

 

 

350,000  

     Retained earnings

 

45,900  

 

 

60,600  

  

 

       Total stockholders’ equity

 

635,900  

 

 

650,600  

  

 

  Total liabilities and stockholders’ equity

$

1,768,700  

 

$

2,062,500  

  

 

  

If the market value of a share of common stock is 3.2 times book value for 2010, what is the firm’s P/E ratio for 2010? (Round your intermediate calculations to 2 decimal places. Enter only numeric value rounded to the nearest whole number.)

  

  P/E ratio

  

 
18.Problem 3-14 Du Pont system of analysis [LO3]

The King Card Company has a return-on-assets (investment) ratio of 19 percent.

(a)

If the debt-to-total-assets ratio is 60 percent, what is the return on equity? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

  Return on equity

(b)

If the firm had no debt, what would the return-on-equity ratio be? (Omit the “%” sign in your response.)

  Return on equity

19.Problem 3-15 Du Pont system of analysis [LO3]

Using the Du Pont method, evaluate the effects of the following relationships for the Lollar Corporation.

(a)

Lollar Corporation has a profit margin of 5.5 percent and its return on assets (investment) is 8.75 percent.  What is its assets turnover ratio?(Enter only numeric value rounded to 2 decimal places.)

  Assets turnover ratio

(b)

If the Lollar Corporation has a debt-to-total-assets ratio of 65 percent, what would the firm’s return on equity be? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

  Return on equity

(c)

What would happen to return on equity if the debt-to-total-assets ratio decreased to 60 percent? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

  Return on equity

20.Problem 3-16 Du Pont system of analysis [LO3]

Jerry Rice and Grain Stores has $4,670,000 in yearly sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 3.5 times per year. It has $193,000 in current liabilities and $374,000 in long-term liabilities.

 

(a)

What is its return on stockholders’ equity? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “%” sign in your response.)

  Return on stockholders’ equity

 

(b)

If the asset base remains the same as computed in part a, but total asset turnover goes up to 4.00, what will be the new return on stockholders’ equity? Assume that the profit margin stays the same as do current and long-term liabilities. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “%” sign in your response.)

  New return on stock holders’ equity

21.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
Corporation

Multi
Media, Inc.

  Net income

$

30,700

 

$

139,000

 

  Sales

 

314,000

 

 

2,120,000

 

  Total assets

 

468,000

 

 

925,000

 

  Total debt

 

194,000

 

 

478,000

 

  Stockholders’ equity

 

274,000

 

 

447,000

 

 

(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
stockholders’ equity

  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.)

 

 

Cable Corporation

Multi-Media, Inc.

  Net income / Sales

  Net income / Total assets

  Sales / Total assets

  Debt / Total assets

22.Problem 3-22 Overall ratio analysis [LO2]

The balance sheet for the Bryan Corporation is shown below. Sales for the year were $3,680,000, with 75 percent of sales sold on credit.

BRYAN CORPORATION
Balance Sheet 201X

Assets

Liabilities and Stockholders’ Equity

  Cash

$

21,000   

    Accounts payable

$

222,000   

  Accounts receivable

 

324,000   

    Accrued taxes

 

93,000   

  Inventory

 

244,000   

    Bonds payable (long-term)

 

194,000   

  Plant and equipment

 

461,000   

    Common stock

 

100,000   

 

 

 

 

 

 

 

 

 

    Paid-in capital

 

150,000   

 

 

 

    Retained earnings

 

291,000   

  

 

      Total assets

$

1,050,000   

       Total liabilities and
           stockholders’ equity

$

1,050,000   

  

 

Compute the following ratios (Enter only numeric values rounded to 2 decimal places. Omit the “%” sign in your response):

 

 

 

 

(a)

Current ratio

 

(b)

Quick ratio

 

(c)

Debt-to-total-assets ratio

 %

(d)

Asset turnover

 

(e)

Average collection period

 days

23.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
Income Statement

  Sales

$

281,000  

     Less: Cost of goods sold

 

169,000  

  

  Gross profit

 

112,000  

     Less: Selling and administrative expense

 

44,800  

     Less: Lease expense

 

17,500  

  

  Operating profit*

$

49,700  

     Less: Interest expense

 

8,100  

  

  Earnings before taxes

$

41,600  

     Less: Taxes (30%)

 

16,640  

  

  Earnings after taxes

$

24,960  

  

  *Equals income before interest and taxes.

 

 

(a)

Compute the interest coverage ratio. (Enter only numeric value rounded to 2 decimal places.)

  Interest coverage

(b)

Compute the fixed charge coverage ratio. (Enter only numeric value rounded to 2 decimal places.)

  Fixed charge coverage

(c)

The total assets for this company equal $211,000. Compute the return on assets (investment). (Round your answer to 2 decimal places. Omit the “%” sign in your response.)

  Return on assets

24.Problem 3-25 Debt utilization [LO2]

A firm has net income before interest and taxes of $135,000 and interest expense of $27,500.

   

(a)

What is the times-interest-earned ratio? (Enter only numeric value rounded to 2 decimal places.)

   

  Times-interest earned

  

   

(b)

If the firm’s lease payments are $43,700, what is the fixed charge coverage? (Enter only numeric value rounded to 2 decimal places.)

   

  Fixed charge coverage

  

25.Problem 3-28 Trend analysis [LO4]

Quantum Moving Company has the following data.  Industry information also is shown.

Company data

Industry data on

  Year

Net income

Total assets

Net income/Total assets

  2008

$

447,000

 

$

2,899,000

 

 

13.5

 %

 

  2009

 

429,000

 

$

3,262,000

 

 

9.2

 

 

  2010

 

442,000

 

$

3,826,000

 

 

7.0

 

 

 

  Year

Debt

Total assets

Industry data on
debt/Total assets

  2008

$

1,639,000

 

$

2,899,000

 

 

54.2

 %

 

  2009

 

1,748,000

 

$

3,262,000

 

 

44.8

 

 

  2010

 

1,943,000

 

$

3,826,000

 

 

33.0

 

 

 

(a)

Calculate the company’s data in terms of (Round your answers to 1 decimal place. Omit the “%” sign in your response):

 

2008

2009

2010

  Net income / Total assets

 %  

 %  

 %  

  Debt / Total assets

 %  

 %  

 %  

 

(b)

As an industry analyst comparing the firm to the industry, are you likely to praise or criticize the firm in terms of:

 

 

Praise/Criticize

  Net income / Total assets

  Debt / Total assets

 
26.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

  Sales

$

141,600  

 (11,800 units at $12.00)

  Cost of goods sold

 

82,600  

 (11,800 units at $7.00)

 

 

  Gross profit

 

59,000  

 

  Selling and administrative expense

 

8,496  

 

  Depreciation

 

12,300  

 

 

 

  Operating profit

 

38,204  

 

  Taxes (30%)

 

11,461  

 

 

 

  After tax income

$

26,743  

 

 

 

    

(a)

Assume in 2011 the same 11,800-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 $7.00 per unit. Also assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute after tax income for 2011. (Round your answer to the nearest whole number. Omit the “$” sign in your response.)

   

  After tax income

$   

    

(b)

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

 %  

   

(c)

Now assume that in 2012 the volume remains constant at 11,800 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 $7.50 per unit. Further, assume selling and administrative expense will be 6 percent of sales and depreciation will be unchanged. The tax rate is 30 percent. Compute the after tax income. (Round your sales price to 2 decimal places and final answer to the nearest dollar amount. Omit the “$” sign in your response.)

   

  After tax income

$   

27.Problem 3-33 Using ratios to construct financial statements [LO2]

The Shannon Corporation has credit sales of $957,600.

   

 

 

 

  Total assets turnover

2.85

 times

  Cash to total assets

1.20

 percent

  Accounts receivable turnover

20

 times

  Inventory turnover

14

 times

  Current ratio

1.70

 times

  Debt to total assets

35

 percent

   

Using the above ratios, fill in the balance sheet. (Round your intermediate calculations and final answers to the nearest dollar amount. Omit the “$” sign in your response.)

   

28.Problem 3-36 Comparing all the ratios [LO2]

SNIDER CORPORATION
Balance Sheet
December 31, 2010

  Assets

 

 

  Current assets:

 

 

     Cash

$

52,500  

     Marketable securities

 

22,500  

     Accounts receivable (net)

 

178,000  

     Inventory

 

290,000  

 

        Total current assets

$

543,000  

  Investments

 

66,200  

 

 

 

  Plant and equipment.

 

611,000  

     Less: Accumulated depreciation

 

(272,000) 

     Net plant and equipment

 

339,000  

 

  Total assets

$

948,200  

 

  Liabilities and Stockholders’ Equity

 

 

  Current liabilities:

 

 

     Accounts payable

$

95,100  

     Notes payable

 

78,700  

     Accrued taxes

 

12,000  

 

        Total current liabilities

 

185,800  

  Long-term liabilities:

 

 

     Bonds payable

 

159,400  

 

     Total liabilities

$

345,200  

  Stockholders’ equity

 

 

     Preferred stock, $50 par value

 

100,000  

     Common stock, $1 par value

 

80,000  

     Capital paid in excess of par

 

190,000  

     Retained earnings

 

233,000  

 

        Total stockholders’ equity

 

603,000  

 

  Total liabilities and stockholders’ equity

$

948,200  

 

 

SNIDER CORPORATION
Income Statement
For the Year Ending December 31, 2010

  Sales (on credit)

$

2,067,000

 

     Less: Cost of goods sold

 

1,323,000

 

 

  Gross profit

 

744,000

 

     Less: Selling and administrative expenses

 

516,000

*

 

  Operating profit (EBIT)

 

228,000

 

     Less: Interest expense

 

30,100

 

 

  Earnings before taxes (EBT)

 

197,900

 

     Less: Taxes

 

83,000

 

 

  Earnings after taxes (EAT)

$

114,900

 

 

*Includes $39,600 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.)

 

(a)

Profitability ratios

 

      Profitability ratios

  Profit margin

 %  

  Return on assets (investment)

 %  

  Return on equity

 %  

(b)

Assets utilization ratios

 

Assets utilization ratios

  Receivable turnover

 

  Average collection period

 days

  Inventory turnover

 

  Fixed asset turnover

 

  Total asset turnover

 

(c)

Liquidity ratios

 

        Liquidity ratios

  Current ratio

  

  Quick ratio

  

(d)

Debt utilization ratios

 

Debt utilization ratios

  Debt to total assets

 %

  Times interest earned

 

  Fixed charge coverage

 

  
 
29.Problem 3-37 Ratio computation and analysis [LO2]

Given the financial statements for Jones Corporation and Smith Corporation:

  

JONES CORPORATION

Current Assets

Liabilities

  Cash

$

29,700  

  Accounts payable

$

166,000  

  Accounts receivable

 

88,500  

  Bonds payable (long term)

 

82,100  

  Inventory

 

51,300  

 

 

 

Long-Term Assets

  Stockholders’ Equity

  Fixed assets

$

542,000  

  Common stock

$

150,000  

     Less: Accumulated depreciation

 

(154,700) 

  Paid-in capital

 

70,000  

     Net fixed assets*

 

387,300  

  Retained earnings

 

88,700  

 

 

       Total assets

$

556,800  

       Total liabilities and equity

$

556,800  

 

 

     

 

  Sales (on credit)

$

1,914,000  

  Cost of goods sold

 

771,000  

 

  Gross profit

 

1,143,000  

     Selling and administrative expense†

 

325,000  

     Less: Depreciation expense

 

59,600  

 

  Operating profit

 

758,400  

  Interest expense

 

9,200  

 

  Earnings before taxes

 

749,200  

  Tax expense

 

102,300  

 

  Net income

$

646,900  

 

   

*Use net fixed assets in computing fixed asset turnover.

†Includes $7,900 in lease payments.

   

SMITH CORPORATION

Current Assets

Liabilities

  Cash

$

39,800  

  Accounts payable

$

76,500  

  Marketable securities

 

12,200  

  Bonds payable (long term)

 

225,000  

  Accounts receivable

 

74,600  

 

 

 

  Inventory

 

77,700  

 

 

 

Long-Term Assets

Stockholders’ Equity

  Fixed assets

$

509,000  

  Common stock

$

75,000  

     Less: Accumulated depreciation

 

(252,600) 

  Paid-in capital

 

30,000  

  Net fixed assets*

 

256,400  

  Retained earnings

 

54,200  

 

 

       Total assets

$

460,700  

       Total liabilities and equity

$

460,700  

 

 

   

*Use net fixed assets in computing fixed asset turnover.

   

SMITH CORPORATION

  Sales (on credit)

$

1,150,000  

  Cost of goods sold

 

687,000  

 

  Gross profit

 

463,000  

     Selling and administrative expense†

 

281,000  

     Less: Depreciation expense

 

59,200  

 

  Operating profit

 

122,800  

  Interest expense

 

27,100  

 

  Earnings before taxes

 

95,700  

  Tax expense

 

54,200  

 

  Net income

$

41,500  

 

   

†Includes $7,900 in lease payments.

   

(a-1)

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.)

 

 

  

(a-2)

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?

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