# BUSI-320 Corporate Finance-2013 Fall-B (Moten) Exam-1

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.)

\$

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]

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

\$

309,000

Retained earnings

187,000

Cash

14,000

Bonds payable

136,000

Accounts receivable

54,000

Plant and equipmentoriginal cost

775,000

Accounts payable

35,000

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.)

Earnings per share

P/E ratio

(c)

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.

(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 2-24 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.

(a)

Book value per share

\$

(b)

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.

(a)

Book value per share

\$

(b)

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

\$

(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 2-28 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

\$

3,940,000

Cost of goods sold

2,580,000

Gross profits

1,360,000

697,000

Depreciation expense

272,000

Operating income

391,000

Interest expense

88,000

Earnings before taxes

303,000

Taxes

234,000

Earnings after taxes

69,000

Preferred stock dividends

10,000

Earnings available to common stockholders

\$

59,000

Shares outstanding

150,000

Earnings per share

\$

0.39

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

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
For 2009 and 2010

Year-End
2009

Year-End
2010

Assets

Current assets:

Cash

\$

171,000

\$

127,000

Accounts receivable (net)

543,000

546,000

Inventory

656,000

697,000

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

2,730,000

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

514,000

Accrued expenses

79,800

57,100

Total current liabilities

958,800

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

90,000

Common stock, \$1 par value

150,000

150,000

Capital paid in excess of par

350,000

350,000

Retained earnings

342,700

183,700

Total stockholders equity

932,700

773,700

Total liabilities and stockholders equity

\$

2,025,500

\$

2,198,800

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.)

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.

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
Corporation

Multi
Media, Inc.

Net income

\$

32,400

\$

127,000

Sales

377,000

2,830,000

Total assets

408,000

925,000

Total debt

195,000

547,000

Stockholders’ equity

213,000

378,000

(a-1)

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.)

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
Income Statement

Sales

\$

291,000

Less: Cost of goods sold

172,000

Gross profit

119,000

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.

(a)

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

(b)

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

(c)

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

Sales

\$

224,750

(15,500 units at \$14.50)

Cost of goods sold

135,625

(15,500 units at \$8.75)

Gross profit

89,125

13,485

Depreciation

11,000

Operating profit

64,640

Taxes (30%)

19,392

After tax income

\$

45,248

(a)

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.)

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 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
December 31, 2010

Assets

Current assets:

Cash

\$

51,800

Marketable securities

24,200

Accounts receivable (net)

174,000

Inventory

227,000

Total current assets

\$

477,000

Investments

63,500

Plant and equipment.

646,000

Less: Accumulated depreciation

(246,000)

Net plant and equipment

400,000

Total assets

\$

940,500

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

\$

91,100

Notes payable

73,400

Accrued taxes

18,400

Total current liabilities

182,900

Long-term liabilities:

Bonds payable

156,700

Total liabilities

\$

339,600

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

230,900

Total stockholders’ equity

600,900

Total liabilities and stockholders’ equity

\$

940,500

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

Sales (on credit)

\$

2,034,000

Less: Cost of goods sold

1,308,000

Gross profit

726,000

488,000

*

Operating profit (EBIT)

238,000

Less: Interest expense

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

Cash

\$

127,000

Accounts payable

\$

136,000

Accounts receivable

186,400

Bonds payable (long term)

81,600

Inventory

55,400

Long-Term Assets

Stockholders’ Equity

Fixed assets

\$

553,000

Common stock

\$

150,000

Less: Accumulated depreciation

(150,900)

Paid-in capital

70,000

Net fixed assets*

402,100

Retained earnings

333,300

Total assets

\$

770,900

Total liabilities and equity

\$

770,900

Sales (on credit)

\$

1,339,000

Cost of goods sold

788,000

Gross profit

551,000

334,000

Less: Depreciation expense

54,500

Operating profit

162,500

Interest expense

10,200

Earnings before taxes

152,300

Tax expense

99,000

Net income

\$

53,300

*Use net fixed assets in computing fixed asset turnover.

Includes \$15,200 in lease payments.

SMITH CORPORATION

Current Assets

Liabilities

Cash

\$

40,000

Accounts payable

\$

76,700

Marketable securities

13,200

Bonds payable (long term)

246,000

Accounts receivable

78,800

Inventory

77,800

Long-Term Assets

Stockholders’ Equity

Fixed assets

\$

551,000

Common stock

\$

75,000

Less: Accumulated depreciation

(258,600)

Paid-in capital

30,000

Net fixed assets*

292,400

Retained earnings

74,500

Total assets

\$

502,200

Total liabilities and equity

\$

502,200

*Use net fixed assets in computing fixed asset turnover.

SMITH CORPORATION

Sales (on credit)

\$

1,190,000

Cost of goods sold

695,000

Gross profit

495,000

257,000

Less: Depreciation expense

58,800

Operating profit

179,200

Interest expense

30,900

Earnings before taxes

148,300

Tax expense

55,700

Net income

\$

92,600

Includes \$15,200 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?

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.

(a)

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.)

(b)

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

290

\$

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.

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.)

Cost of goods sold

\$

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.
Experience has shown that of total sales, 10 percent are uncollectible, 30 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected two months after sale.

(a)

Prepare a monthly cash receipts schedule for the firm for March through August. (Omit the “\$” sign in your response.)

(b)

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.

Income Statement

Sales

\$

210,000

Expenses

151,900

Earnings before interest and taxes

\$

58,100

Interest

9,300

Earnings before taxes

\$

48,800

Taxes

17,300

Earnings after taxes

\$

31,500

Dividends

\$

9,450

Balance Sheet

Assets

Liabilities and Stockholders’ Equity

Cash

\$

4,000

Accounts payable

\$

22,200

Accounts receivable

56,000

Accrued wages

2,350

Inventory

66,000

Accrued taxes

4,850

Current assets

\$

126,000

Current liabilities

\$

29,400

Fixed assets

88,000

Notes payable

9,300

Long-term debt

26,500

Common stock

127,000

Retained earnings

21,800

Total assets

\$

214,000

Total liabilities and
stockholders’ equity

\$

214,000

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

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