BUSI 320 Quiz 1 Financial Analysis, Forecasting and Leverage solutions complete answers

BUSI 320 Quiz 1 Financial Analysis, Forecasting and Leverage solutions complete answers

 

Eaton Tool Company has fixed costs of $290,400, sells its units for $72, and has variable costs of $39 per unit.

 

b. Ms. Eaton comes up with a new plan to cut fixed costs to $230,000. However, more labor will now be required, which will increase variable costs per unit to $42. The sales price will remain at $72. What is the new break-even point? (Round your answer to the nearest whole number.)

 

a. Complete the following table given earnings before interest and taxes of $18,000, $42,000, and $59,000. Assume the tax rate is 30 percent. (Negative amounts should be indicated by parentheses or a minus sign. Round your answers to 2 decimal places.)

 

The Hartnett Corporation manufactures baseball bats with Pudge Rodriguez’s autograph stamped on them. Each bat sells for $47 and has a variable cost of $25. There are $36,960 in fixed costs involved in the production process.

 

Healthy Foods Inc. sells 50-pound bags of grapes to the military for $20 a bag. The fixed costs of this operation are $100,000, while the variable costs of grapes are $0.25 per pound.

 

Sales for Ross Pro’s Sports Equipment are expected to be 53,000 units for the coming month. The company likes to maintain 20 percent of unit sales for each month in ending inventory. Beginning inventory is 15,000 units.

 

Beginning inventory at these costs on July 1 was 12,400 units. From July 1 to December 1, Convex produced 27,500 units. These units had a material cost of $9 per unit. The costs for labor and overhead were the same. Convex uses FIFO inventory accounting.
 

a. Assuming that Convex sold 29,500 units during the last six months of the year at $18 each, what would gross profit be?

 

Galehouse Gas Stations Inc. expects sales to increase from $1,610,000 to $1,810,000 next year. Galehouse believes that net assets (Assets − Liabilities) will represent 40 percent of sales. His firm has an 7 percent return on sales and pays 60 percent of profits out as dividends.

 

Using the Du Pont method, evaluate the effects of the following relationships for the Butters Corporation.  
  
a. Butters Corporation has a profit margin of 7.5 percent and its return on assets (investment) is 9.5 percent.  What is its assets turnover? (Round your answer to 2 decimal places.)
  
b. If the Butters Corporation has a debt-to-total-assets ratio of 45.00 percent, what would the firm’s return on equity be? (Input your answer as a percent rounded to 2 decimal places.)
  
c. What would happen to return on equity if the debt-to-total-assets ratio decreased to 35.00 percent? (Input your answer as a percent rounded to 2 decimal places.)

 

The balance sheet for Stud Clothiers is shown next. Sales for the year were $3,530,000, with 75 percent of sales sold on credit.

 

Database Systems is considering expansion into a new product line. Assets to support expansion will cost $580,000. It is estimated that Database can generate $1,640,000 in annual sales, with an 10 percent profit margin.

 

Low Carb Diet Supplement Inc. has two divisions. Division A has a profit of $150,000 on sales of $2,780,000. Division B is able to make only $28,400 on sales of $307,000.

 

Botox Facial Care had earnings after taxes of $362,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $81.80. In 20X2, earnings after taxes increased to $450,000 with the same 200,000 shares outstanding. The stock price was $95.00.

 

A-Rod Fishing Supplies had sales of $2,150,000 and cost of goods sold of $1,500,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 5 percent of the total assets of $4,410,000.

 

Elite Trailer Parks has an operating profit of $224,000. Interest expense for the year was $35,100; preferred dividends paid were $28,900; and common dividends paid were $40,000. The tax was $62,500. The firm has 18,700 shares of common stock outstanding.  

 

Swank Clothiers had sales of $385,000 and cost of goods sold of $297,000.

 

The Holtzman Corporation has assets of $442,000, current liabilities of $129,000, and long-term liabilities of $120,000. There is $33,900 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.)

 

b. If there is $32,800 in earnings available to common stockholders, and Holtzman’s stock has a P/E of 17 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)  

 

A-Rod Fishing Supplies had sales of $2,860,000 and cost of goods sold of $2,150,000. Selling and administrative expenses represented 8 percent of sales. Depreciation was 6 percent of the total assets of $4,980,000.

 

What was the firm’s operating profit?

 

Frantic Fast Foods had earnings after taxes of $1,190,000 in 20X1 with 399,000 shares outstanding. On January 1, 20X2, the firm issued 27,000 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 20X1. (Round your answer to 2 decimal places.)

 

b. Compute earnings per share for the year 20X2. (Round your answer to 2 decimal places.)

 

A firm has net income before interest and taxes of $144,000 and interest expense of $33,600.

 

a. What is the times-interest-earned ratio? (Round your answer to 2 decimal places.)

 

b. If the firm’s lease payments are $42,800, what is the fixed charge coverage? (Round your answer to 2 decimal places.)

 

Gates Appliances has a return-on-assets (investment) ratio of 8 percent.

 

a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity? (Input your answer as a percent rounded to 2 decimal places.)

 

b. If the firm had no debt, what would the return-on-equity ratio be? (Input your answer as a percent rounded to 2 decimal places.)

 

Eli Lilly is very excited because sales for his nursery and plant company are expected to double from $630,000 to $1,260,000 next year. Eli notes that net assets (Assets − Liabilities) will remain at 30 percent of sales. His firm will enjoy an 10 percent return on total sales. He will start the year with $230,000 in the bank and is bragging about the Jaguar and luxury townhouse he will buy.

 

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 30 percent of the sales increase) and add in profit. (Negative amount should be indicated by a minus sign.)

 

b. Does his optimistic outlook for his cash position appear to be correct?

 

Sales for Ross Pro’s Sports Equipment are expected to be 42,000 units for the coming month. The company likes to maintain 15 percent of unit sales for each month in ending inventory. Beginning inventory is 9,500 units.

 

How many units should the firm produce for the coming month?

 

On December 31 of last year, Wolfson Corporation had in inventory 490 units of its product, which cost $21 per unit to produce. During January, the company produced 890 units at a cost of $24 per unit.

 

Assuming that Wolfson Corporation sold 880 units in January, what was the cost of goods sold? (Assume FIFO inventory accounting.)

 

 
Given the following information, prepare an income statement for the Dental Drilling Company.
 

 
Given the following information, prepare an income statement for Jonas Brothers Cough Drops.
 

 
Stein Books Inc. sold 2,300 finance textbooks for $200 each to High Tuition University in 20X1. These books cost $170 to produce. Stein Books spent $12,100 (selling expense) to convince the university to buy its books.
 

Depreciation expense for the year was $15,700. In addition, Stein Books borrowed $104,000 on January 1, 20X1, on which the company paid 19 percent interest. Both the interest and principal of the loan were paid on December 31, 20X1. The publishing firm’s tax rate is 30 percent.

 

 
Arrange the following items in proper balance sheet presentation: (Amounts to be deducted should be indicated with parentheses or a minus sign.)
 

 
Elite Trailer Parks has an operating profit of $285,000. Interest expense for the year was $30,500; preferred dividends paid were $28,900; and common dividends paid were $36,800. The tax was $68,500. The firm has 21,600 shares of common stock outstanding.  
 

a. Calculate the earnings per share and the common dividends per share for Elite Trailer Parks. (Round your answers to 2 decimal places.)  

 

b. What was the increase in retained earnings for the year?  

 

 
Botox Facial Care had earnings after taxes of $292,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $45.80. In 20X2, earnings after taxes increased to $320,000 with the same 200,000 shares outstanding. The stock price was $74.00.
 

a. Compute earnings per share and the P/E ratio for 20X1. (The P/E ratio equals the stock price divided by earnings per share.) (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

b. Compute earnings per share and the P/E ratio for 20X2. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

c. Why did the P/E ratio change? (Do not round intemediate calculations. Input your answers as percents rounded to 2 decimal places.)

 

 
The Rogers Corporation has a gross profit of $716,000 and $283,000 in depreciation expense. The Evans Corporation also has $716,000 in gross profit, with $47,000 in depreciation expense. Selling and administrative expense is $221,000 for each company.  
 

a. Given that the tax rate is 40 percent, compute the cash flow for both companies.

 

b. Calculate the difference in cash flow between the two firms.

 

 
The Holtzman 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. Compute book value (net worth) per share. (Round your answer to 2 decimal places.)

 

b. If there is $25,700 in earnings available to common stockholders, and Holtzman’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 final answer to 2 decimal places.) 

 

c. What is the ratio of market value per share to book value per share? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

 
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:
 

Sales for 20X2 were $290,000, and the cost of goods sold was 55 percent of sales. Selling and administrative expense was $29,000. Depreciation expense was 12 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 8 percent, while the interest rate on the bonds payable was 16 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 40 percent.

 

$3,400 in preferred stock dividends were paid, and $6,156 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

 

During 20X2, the cash balance and prepaid expenses balances were unchanged. Accounts receivable and inventory increased by 8 percent. A new machine was purchased on December 31, 20X2, at a cost of $49,000.

 

Accounts payable increased by 30 percent. Notes payable increased by $7,400 and bonds payable decreased by $17,000, both at the end of the year. The preferred stock, common stock, and capital paid in excess of par accounts did not change.

 

a. Prepare an income statement for 20X2. (Round EPS answer to 2 decimal places.)

 

b. Prepare a statement of retained earnings for 20X2.

 

c. Prepare a balance sheet as of December 31, 20X2. (Amounts to be deducted should be indicated with parentheses or a minus sign.)

 

 
Refer to the following financial statements for Crosby Corporation:   
 

a. Prepare a statement of cash flows for the Crosby Corporation: (Amounts to be deducted should be indicated with parentheses or a minus sign.)

 

b. Compute the book value per common share for both 20X1 and 20X2 for the Crosby Corporation. (Round your answers to 2 decimals places.)

 

c. If the market value of a share of common stock is 3.3 times book value for 20X1, what is the firm’s P/E ratio for 20X2 vs. 20X1? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

 
Amigo Software Inc. has total assets of $889,000, current liabilities of $192,000, and long-term liabilities of $154,000. There is $87,000 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.)

 

b. If there is $56,300 in earnings available to common stockholders, and the firm’s stock has a P/E of 23 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

c. What is the ratio of market value per share to book value per share? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)

 

 
Using the Du Pont method, evaluate the effects of the following relationships for the Butters Corporation.  
a. Butters Corporation has a profit margin of 6 percent and its return on assets (investment) is 14 percent.  What is its assets turnover? (Round your answer to 2 decimal places.)
 

b. If the Butters Corporation has a debt-to-total-assets ratio of 50.00 percent, what would the firm’s return on equity be? (Input your answer as a percent rounded to 2 decimal places.)

 

c. What would happen to return on equity if the debt-to-total-assets ratio decreased to 45.00 percent? (Input your answer as a percent rounded to 2 decimal places.)

 

 
Jerry Rice and Grain Stores has $4,880,000 in yearly sales. The firm earns 3 percent on each dollar of sales and turns over its assets 2.8 times per year. It has $196,000 in current liabilities and $359,000 in long-term liabilities.   
 

a. What is its return on stockholders’ equity? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

b. If the asset base remains the same as computed in part a, but total asset turnover goes up to 3.40, 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. Input your answer as a percent rounded to 2 decimal places.)

 

 
Assume the following data for Cable Corporation and Multi-Media Inc.   
 

a-1. Compute return on stockholders’ equity for both firms. (Input your answers as a percent rounded to 2 decimal places.)

 

a-2. Which firm has the higher return?   

 

b. Compute the following additional ratios for both firms. (Input your Net income/Sales, Net income/Total assets and Debt/Total asset answers as a percent rounded to 2 decimal places. Round your Sales/Total assets answers to 2 decimal places.)

 

 
The balance sheet for Stud Clothiers is shown next. Sales for the year were $3,510,000, with 75 percent of sales sold on credit.
 

Compute the following ratios: (Use a 360-day year. Do not round intermediate calculations. Round your answers to 2 decimal places. Input your debt-to-total assets answer as a percent rounded to 2 decimal places.)

 

 
Using the income statement for Times Mirror and Glass Co., compute the following ratios:
 

a.Compute the interest coverage ratio. (Round your answer to 2 decimal places.)

 

b.Compute the fixed charge coverage ratio. (Round your answer to 2 decimal places.)

 

The total assets for this company equal $171,000. Set up the equation for the Du Pont system of ratio analysis.  

 

c.Compute the profit margin ratio. (Input your answer as a percent rounded to 2 decimal places.)

 

d.Compute the total asset turnover ratio. (Round your answer to 2 decimal places.)

 

e. Compute the return on assets (investment). (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

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

a. Calculate the company's data in terms of: (Input your answers as a percent rounded to 1 decimal place.)

 

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

 

 
The Canton Corporation shows the following income statement. The firm uses FIFO inventory accounting.   
 

a. Assume in 20X2 the same 15,600-unit volume is maintained, but that 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 aftertax income for 20X2. (Do not round intermediate calculations. Round your answer to the nearest whole number.)

 

b. In part a, by what percent did aftertax income increase as a result of a 10 percent increase in the sales price? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

c. Now assume that in 20X3 the volume remains constant at 15,600 units, but the sales price decreases by 15 percent from its year 20X2 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 aftertax income. (Round the sales price per unit to 2 decimal places but do not round any other intermediate calculations. Round your final answer to the nearest whole dollar amount.)

 

 
The Griggs Corporation has credit sales of $971,600.
 

Using the above ratios, complete the balance sheet. (Round your answers to the nearest whole number.)

 

 
Using the financial statements for the Snider Corporation, calculate the 13 basic ratios found in the chapter. 
 

Using the above financial statements for the Snider Corporation, calculate the following ratios.
a. Profitability ratios. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.)
 

b. Assets utilization ratios. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

c. Liquidity ratios. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

d. Debt utilization ratios. (Do not round intermediate calculations. Input your debt to total assets answer as a percent rounded to 2 decimal places. Round your other answers to 2 decimal places.)

 

 
Given the financial statements for Jones Corporation and Smith Corporation:  
 

a. Compute the following ratios. (Use a 360-day year. Do not round intermediate calculations. Input your profit margin, return on assets, return on equity, and debt to total assets answers as a percent rounded to 2 decimal places. Round all other answers to 2 decimal places.)

 

 

At the end of January, Mineral Labs had an inventory of 955 units, which cost $12 per unit to produce. During February, the company produced 1,800 units at a cost of $16 per unit.

 

a. If the firm sold 2,650 units in February, what was the cost of goods sold? (Assume LIFO inventory accounting.)

 

b. If the firm sold 2,650 units in February, what was the cost of goods sold? (Assume FIFO inventory accounting.)

 

Convex Mechanical Supplies produces a product with the following costs as of July 1, 20X1:

 

Beginning inventory at these costs on July 1 was 9,400 units. From July 1 to December 1, Convex produced 22,500 units. These units had a material cost of $8 per unit. The costs for labor and overhead were the same. Convex uses FIFO inventory accounting.

 

a. Assuming that Convex sold 24,500 units during the last six months of the year at $16 each, what would gross profit be?

 

b. What is the value of ending inventory?

 

The Bradley Corporation produces a product with the following costs as of July 1, 20X1:

 

Beginning inventory at these costs on July 1 was 3,450 units. From July 1 to December 1, 20X1, Bradley produced 12,900 units. These units had a material cost of $4, labor of $6, and overhead of $3 per unit. Bradley uses LIFO inventory accounting.

 

a. Assuming that Bradley sold 14,800 units during the last six months of the year at $18 each, what is its gross profit?

 

 

Watt’s Lighting Stores made the following sales projection for the next six months. All sales are credit sales.

 

Sales in January and February were $54,000 and $53,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible, 25 percent are collected in the month of sale, 35 percent are collected in the following month, and 30 percent are collected two months after sale.

 

a. Prepare a monthly cash receipts schedule for the firm for March through August.

 

 

The Volt Battery Company has forecast its sales in units as follows:

 

Volt Battery always keeps an ending inventory equal to 120% of the next month’s expected sales. The ending inventory for December (January’s beginning inventory) is 2,640 units, which is consistent with this policy.

 

Materials cost $11 per unit and are paid for in the month after purchase. Labor cost is $4 per unit and is paid in the month the cost is incurred. Overhead costs are $13,000 per month. Interest of $9,400 is scheduled to be paid in March, and employee bonuses of $14,600 will be paid in June.

 

a. Prepare a monthly production schedule for January through June.

 

b. Prepare a monthly summary of cash payments for January through June. Volt produced 2,000 units in December.

 

 

Harry’s Carryout Stores has eight locations. The firm wishes to expand by two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm can present an acceptable three-month financial plan for January through March. The following are actual and forecasted sales figures:

 

Of the firm’s sales, 45 percent are for cash and the remaining 55 percent are on credit. Of credit sales, 40 percent are paid in the month after sale and 60 percent are paid in the second month after the sale. Materials cost 25 percent of sales and are purchased and received each month in an amount sufficient to cover the following month’s expected sales. Materials are paid for in the month after they are received. Labor expense is 50 percent of sales and is paid for in the month of sales. Selling and administrative expense is 15 percent of sales and is also paid in the month of sales. Overhead expense is $40,000 in cash per month.

 

Depreciation expense is $12,400 per month. Taxes of $10,400 will be paid in January, and dividends of $14,000 will be paid in March. Cash at the beginning of January is $128,000, and the minimum desired cash balance is $123,000.

 

a. Prepare a schedule of monthly cash receipts for January, February, and March.

 

b. Prepare a schedule of monthly cash payments for January, February, and March.

 

c. Prepare a monthly cash budget with borrowings and repayments for January, February, and March. (Negative amounts should be indicated by a minus sign. Assume the January beginning loan balance is $0.)

 

 

The Manning Company has financial statements as shown next, which are representative of the company’s historical average.

 

The firm is expecting a 35 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.

 

Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.) (Do not round intermediate calculations.)

 

 

The Hartnett Corporation manufactures baseball bats with Pudge Rodriguez’s autograph stamped on them. Each bat sells for $45 and has a variable cost of $24. There are $35,910 in fixed costs involved in the production process.

 

a. Compute the break-even point in units.

 

b. Find the sales (in units) needed to earn a profit of $16,485.

 

 

Eaton Tool Company has fixed costs of $450,000, sells its units for $96, and has variable costs of $51 per unit.

 

a. Compute the break-even point.

 

b. Ms. Eaton comes up with a new plan to cut fixed costs to $350,000. However, more labor will now be required, which will increase variable costs per unit to $54. The sales price will remain at $96. What is the new break-even point? (Round your answer to the nearest whole number.)

 

c. Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?

 

 

Healthy Foods Inc. sells 60-pound bags of grapes to the military for $15 a bag. The fixed costs of this operation are $90,000, while the variable costs of grapes are $.15 per pound.

 

a. What is the break-even point in bags?

 

b. Calculate the profit or loss (EBIT) on 11,000 bags and on 32,000 bags.

 

c. What is the degree of operating leverage at 19,000 bags and at 32,000 bags? (Round your answers to 2 decimal places.)

 

d. If Healthy Foods has an annual interest expense of $14,000, calculate the degree of financial leverage at both 19,000 and 32,000 bags. (Round your answers to 2 decimal places.)

 

e. What is the degree of combined leverage at both 19,000 and 32,000 bags? (Round your answers to 2 decimal places.)

 

 

International Data Systems' information on revenue and costs is relevant only up to a sales volume of 119,000 units. After 119,000 units, the market becomes saturated and the price per unit falls from $6.00 to $4.80. Also, there are cost overruns at a production volume of over 119,000 units, and variable cost per unit goes up from $3.00 to $3.20. Fixed costs remain the same at $69,000.

 

a. Compute operating income at 119,000 units.

 

b. Compute operating income at 219,000 units.

 

 

Lenow’s Drug Stores and Hall’s Pharmaceuticals are competitors in the discount drug chain store business. The separate capital structures for Lenow and Hall are presented here.

 

a. Complete the following table given earnings before interest and taxes of $29,000, $67,500, and $73,000. Assume the tax rate is 20 percent. (Negative amounts should be indicated by parentheses or a minus sign. Round your answers to 2 decimal places.)

 

b-1. What is the EBIT/TA rate when the firm's have equal EPS?

 

b-2. What is the cost of debt?

 

b-3. State the relationship between earnings per share and the level of EBIT.

 

c. If the cost of debt went up to 11 percent and all other factors remained equal, what would be the break-even level for EBIT?

 

Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $129,800. The separate capital structures for Sterling and Royal are shown here:

 

a. Compute earnings per share for both firms. Assume a 30 percent tax rate. (Round your answers to 2 decimal places.)

 

b. 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? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

c. 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 22 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.) (Do not round intermediate calculations. Round your answers to 2 decimal places.)

 

 

Sinclair Manufacturing and Boswell Brothers Inc. are both involved in the production of brick for the homebuilding industry. Their financial information is as follows:

 

The variable costs for Sinclair are $16 per unit compared to $10 per unit for Boswell.

 

a. If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Round your answer to 2 decimal places.)

 

b. If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Round your answer to the nearest whole number.)

 

c. In part b, if sales double, by what percentage will earnings per share (EPS) increase? (Round your answer to the nearest whole percent.)

 

 

Dickinson Company has $11,900,000 million in assets. Currently half of these assets are financed with long-term debt at 9.5 percent and half with common stock having a par value of $8. Ms. Smith, Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 9.5 percent. The tax rate is 40 percent. Tax loss carryover provisions apply, so negative tax amounts are permissable.

 

Under Plan D, a $2,975,000 million long-term bond would be sold at an interest rate of 11.5 percent and 371,875 shares of stock would be purchased in the market at $8 per share and retired.

 

Under Plan E, 371,875 shares of stock would be sold at $8 per share and the $2,975,000 in proceeds would be used to reduce long-term debt.

 

a. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Round your answers to 2 decimal places.)

 

b-1. Compute the earnings per share if return on assets fell to 4.75 percent. (Negative amounts should be indicated by a minus sign. Round your answers to 2 decimal places.)

 

b-2. Which plan would be most favorable if return on assets fell to 4.75 percent? Consider the current plan and the two new plans.

 

b-3. Compute the earnings per share if return on assets increased to 14.5 percent. (Round your answers to 2 decimal places.)

 

b-4. Which plan would be most favorable if return on assets increased to 14.5 percent? Consider the current plan and the two new plans.

 

c-1. If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $2,975,000 million in debt will be used to retire stock in Plan D and $2,975,000 million of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.5 percent. (Round your answers to 2 decimal places.)

 

c-2. If the market price for common stock rose to $10 before the restructuring, which plan would then be most attractive?

 

 

The Lopez-Portillo Company has $12.3 million in assets, 70 percent financed by debt  and 30 percent financed by common stock. The interest rate on the debt is 8 percent and the par value of the stock is $10 per share. President Lopez-Portillo is considering two financing plans for an expansion to $26.5 million in assets.

 

Under Plan A, the debt-to-total-assets ratio will be maintained, but new debt will cost a whopping 11 percent! Under Plan B, only new common stock at $10 per share will be issued. The tax rate is 35 percent.

 

a. If EBIT is 9 percent on total assets, compute earnings per share (EPS) before the expansion and under the two alternatives. (Round your answers to 2 decimal places.)

 

b. What is the degree of financial leverage under each of the three plans? (Round your answers to 2 decimal places.)

 

c. If stock could be sold at $20 per share due to increased expectations for the firm’s sales and earnings, what impact would this have on earnings per share for the two expansion alternatives? Compute earnings per share for each. (Round your answers to 2 decimal places.)

 

 

Delsing Canning Company is considering an expansion of its facilities. Its current income statement is as follows:

 

The company is currently financed with 50 percent debt and 50 percent equity (common stock, par value of $10). In order to expand the facilities, Mr. Delsing estimates a need for $4.2 million in additional financing. His investment banker has laid out three plans for him to consider:

 

Variable costs are expected to stay at 50 percent of sales, while fixed expenses will increase to $2,520,000 per year. Delsing is not sure how much this expansion will add to sales, but he estimates that sales will rise by $2.10 million per year for the next five years.

 

Delsing is interested in a thorough analysis of his expansion plans and methods of financing.He would like you to analyze the following:

 

a. The break-even point for operating expenses before and after expansion (in sales dollars). (Enter your answers in dollars not in millions, i.e, $1,234,567.)

 

b. The degree of operating leverage before and after expansion. Assume sales of $7.2 million before expansion and $8.2 million after expansion. Use the formula: DOL = (S − TVC) / (S − TVC − FC). (Round your answers to 2 decimal places.)

 

c-1. The degree of financial leverage before expansion. (Round your answers to 2 decimal places.)

 

c-2. The degree of financial leverage for all three methods after expansion. Assume sales of $8.2 million for this question. (Round your answers to 2 decimal places.)

 

d. Compute EPS under all three methods of financing the expansion at $8.2 million in sales (first year) and $10.0 million in sales (last year). (Round your answers to 2 decimal places.)

 

Question 
Swank Clothiers had sales of $442,000 and cost of goods sold of $328,000.
 

a. What is the gross profit margin (ratio of gross profit to sales)? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)

 

b. If the average firm in the clothing industry had a gross profit of 20 percent, how is the firm doing?

 

Question 

Stein Books Inc. sold 2,300 finance textbooks for $200 each to High Tuition University in 20X1. These books cost $170 to produce. Stein Books spent $12,100 (selling expense) to convince the university to buy its books.

 

Depreciation expense for the year was $15,700. In addition, Stein Books borrowed $104,000 on January 1, 20X1, on which the company paid 19 percent interest. Both the interest and principal of the loan were paid on December 31, 20X1. The publishing firm’s tax rate is 30 percent.

 

Prepare an income statement for Stein Books.

 

Question

Indicate whether the item is on the balance sheet or the income statement. If it is on the balance sheet, designate which category. (If there is no category, select "None" from the drop down menu.)

 

Question 

Elite Trailer Parks has an operating profit of $285,000. Interest expense for the year was $30,500; preferred dividends paid were $28,900; and common dividends paid were $36,800. The tax was $68,500. The firm has 21,600 shares of common stock outstanding.  

 

a. Calculate the earnings per share and the common dividends per share for Elite Trailer Parks. (Round your answers to 2 decimal places.)  

 

b. What was the increase in retained earnings for the year?  

 

Question

Botox Facial Care had earnings after taxes of $292,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $45.80. In 20X2, earnings after taxes increased to $320,000 with the same 200,000 shares outstanding. The stock price was $74.00.

 

a. Compute earnings per share and the P/E ratio for 20X1. (The P/E ratio equals the stock price divided by earnings per share.) (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

b. Compute earnings per share and the P/E ratio for 20X2. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)

 

c. Why did the P/E ratio change? (Do not round intemediate calculations. Input your answers as percents rounded to 2 decimal places.)

 

Question 

Low Carb Diet Supplement Inc. has two divisions. Division A has a profit of $178,000 on sales of $2,680,000. Division B is able to make only $32,600 on sales of $386,000.

 

a. Compute the profit margins (return on sales) for each division. (Input your answers as a percent rounded to 2 decimal places.)

 

b. Based on the profit margins (returns on sales), which division is superior?

 

Question 

Database Systems is considering expansion into a new product line. Assets to support expansion will cost $360,000. It is estimated that Database can generate $1,670,000 in annual sales, with an 4 percent profit margin.

 

What would net income and return on assets (investment) be for the year? (Input your return on assets answer as a percent rounded to 2 decimal places.)

 

Question 

Philip Morris expects the sales for his clothing company to be $670,000 next year. Philip notes that net assets (Assets − Liabilities) will remain unchanged. His clothing firm will enjoy a 9 percent return on total sales. He will start the year with $270,000 in the bank.

 

What will Philip's ending cash balance be?

 

Question 

Galehouse Gas Stations Inc. expects sales to increase from $1,600,000 to $1,800,000 next year. Galehouse believes that net assets (Assets − Liabilities) will represent 55 percent of sales. His firm has an 8 percent return on sales and pays 40 percent of profits out as dividends.

 

a. What effect will this growth have on funds?

 

b. If the dividend payout is only 15 percent, what effect will this growth have on funds?

 

The cash balance will

 

Question 

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.

 

What is the expected value of the total sales projection?

 

Total expected value

 

Question 

Cyber Security Systems had sales of 3,200 units at $60 per unit last year. The marketing manager projects a 15 percent increase in unit volume sales this year with a 40 percent price increase. Returned merchandise will represent 5 percent of total sales.

 

What is your net dollar sales projection for this year?

 

Question 

J. Lo’s Clothiers has forecast credit sales for the fourth quarter of the year:

 

Experience has shown that 20 percent of sales are collected in the month of sale, 70 percent are collected in the following month, and 10 percent are never collected.

 

Prepare a schedule of cash receipts for J. Lo’s Clothiers covering the fourth quarter (October through December).

 

Question 

Wright Lighting Fixtures forecasts its sales in units for the next four months as follows:

 

Wright maintains an ending inventory for each month in the amount of three times the expected sales in the following month. The ending inventory for February (March’s beginning inventory) reflects this policy. Materials cost $8 per unit and are paid for in the month after production. Labor cost is $12 per unit and is paid for in the month incurred. Fixed overhead is $24,500 per month. Dividends of $22,500 are to be paid in May. The firm produced 30,000 units in February.

 

Complete a production schedule and a summary of cash payments for March, April, and May. Remember that production in any one month is equal to sales plus desired ending inventory minus beginning inventory.

 

Question 

The Harding Company manufactures skates. The company’s income statement for 20X1 is as follows:

 

a. Compute the degree of operating leverage. (Round your answer to 2 decimal places.)

 

b. Compute the degree of financial leverage. (Round your answer to 2 decimal places.)

 

c. Compute the degree of combined leverage. (Round your answer to 2 decimal places.)

 

d. Compute the break-even point in units (number of skates). (Round your answer to the nearest whole number.)