Connect BUS 530 Finance Homework Week 2

McGraw Hill Connect BUS 530 Finance Week 2, full homework, 25 problems with fully worked solutions, work shown. Text: Fundamentals of Corporate Finance, Brealy, 7th edition

You have set up your tax preparation firm as an incorporated business. You took $77,500 from the firm as your salary. The firm’s taxable income for the year (net of your salary) was $15,000. Assume you pay personal taxes as an unmarried taxpayer. Use the tax rates presented in Table 3-5 and Table 3-7.

How much taxes must be paid to the federal government, including both your personal taxes and the firm’s taxes?

By how much will you reduce the total tax bill by reducing your salary to $57,500, thereby leaving the firm with taxable income of $35,000?

The year-end 2010 balance sheet of Brandex Inc. listed common stock and other paid-in capital at $2,600,000 and retained earnings at $4,900,000. The next year, retained earnings were listed at $5,200,000. The firm’s net income in 2011 was $1,050,000. There were no stock repurchases during the year. What were the dividends paid by the firm in 2011?

Construct a balance sheet for Sophie’s Sofas given the following data. (Be sure to list the assets and liabilities in order of their liquidity.)

Cash balances

5,000

Inventory of sofas

150,000

Store and property

50,000

Accounts receivable

17,000

Accounts payable

12,000

Long-term debt

120,000

The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology. He then formed a corporation and invested $100,000 in setting up a production plant. He believes that he could sell his patent for $24 million.

a.	What are the book value and market value of the firm? (Enter your answers in dollars not in millions.)

b.	If there are 1 million shares of stock in the new corporation, what would be the price per share and the book value per share? (Round your answers to 2 decimal places.)

Sheryl’s Shipping had sales last year of $13,500. The cost of goods sold was $7,200, general and administrative expenses were $1,700, interest expenses were $1,200, and depreciation was $1,700. The firm’s tax rate is 30%.

a.What are earnings before interest and taxes?b. what is net income? c. What is cash flows from operations?

Ponzi Products produced 118 chain letter kits this quarter, resulting in a total cash outlay of $10 per unit. It will sell 59 of the kits next quarter at a price of $11, and the other 59 kits in two quarters at a price of $12. It takes a full quarter for it to collect its bills from its customers. (Ignore possible sales in earlier or later quarters and assume all positive cash flow is distributed as expenses or earnings to shareholders.)

Prepare an income statement for Ponzi for today and for each of the next three quarters. Ignore taxes. (Leave no cells blank - be certain to enter "0" wherever required.)

What are the cash flows for the company today and in each of the next three quarters?

What is Ponzi’s net working capital in each quarter?

During the last year of operations, accounts receivable increased by $10,900, accounts payable increased by $5,900, and inventories decreased by $2,900. What is the total impact of these changes on the difference between profits and cash flow?

b.	What would happen to net income and cash flow if depreciation were increased by $2.30 million? (Input all amounts as positive values. Enter your answers in millions rounded to 2 decimal places.)

Butterfly Tractors had $20.50 million in sales last year. Cost of goods sold was $9.30 million, depreciation expense was $3.30 million, interest payment on outstanding debt was $2.30 million, and the firm’s tax rate was 30%.

What was the firm’s net income and net cash flow? (Enter your answers in millions rounded to 2 decimal places.)

What would be the impact on net income and cash flow if the firm’s interest expense were $2.30 million higher. (Input all amounts as positive values. Enter your answers in millions rounded to 2 decimal places.)

Candy Canes, Inc., spends $235,000 to buy sugar and peppermint in April. It produces its candy and sells it to distributors in May for $300,000, but it does not receive payment until June. For each month, find the firm’s sales, net income, and net cash flow

The table below contains data on Fincorp, Inc., the balance sheet items correspond to values at year-end of 2010 and 2011, while the income statement items correspond to revenues or expenses during the year ending in either 2010 or 2011. All values are in thousands of dollars.

	2010	2011
Revenue	$4,700	$4,800
Cost of goods sold	1,950	2,050
Depreciation	570	590
Inventories	335	420
Administrative expenses	570	620
Interest expense	220	220
Federal and state taxes*	470	490
Accounts payable	335	420
Accounts receivable	442	520
Net fixed assets^†	5,700	6,570
Long-term debt	2,700	3,100
Notes payable	1,035	670
Dividends paid	550	550
Cash and marketable securities	870	370

* Taxes are paid in their entirety in the year that the tax obligation is incurred.

^† Net fixed assets are fixed assets net of accumulated depreciation since the asset was installed.

Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share? (Round your answers to 2 decimal places.)

	2010	2011
Revenue	$3,800	$3,900
Cost of goods sold	1,500	1,600
Depreciation	480	500
Inventories	360	470
Administrative expenses	480	530
Interest expense	130	130
Federal and state taxes*	380	400
Accounts payable	360	470
Accounts receivable	472	570
Net fixed assets^†	4,800	5,580
Long-term debt	1,800	2,200
Notes payable	1,060	720
Dividends paid	370	370
Cash and marketable securities	780	280

* Taxes are paid in their entirety in the year that the tax obligation is incurred.

^† Net fixed assets are fixed assets net of accumulated depreciation since the asset was installed.

What was the firm’s average tax bracket for each year? (Round your answers to 2 decimal places.)

Here are simplified financial statements of Phone Corporation from a recent year:

INCOME STATEMENT (Figures in millions of dollars)
Net sales	13,300
Cost of goods sold	4,160
Other expenses	4,087
Depreciation	2,578

Earnings before interest and taxes (EBIT)	2,475
Interest expense	695

Income before tax	1,780
Taxes (at 30%)	534

Net income	1,246
Dividends	876

BALANCE SHEET (Figures in millions of dollars)
	End of Year	Start of Year
Assets
Cash and marketable securities	91	160
Receivables	2,482	2,530
Inventories	197	248
Other current assets	877	942

Total current assets	3,647	3,880
Net property, plant, and equipment	19,993	19,935
Other long-term assets	4,236	3,790

Total assets	27,876	27,605

Liabilities and shareholders’ equity
Payables	2,584	3,060
Short-term debt	1,429	1,583
Other current liabilities	821	797

Total current liabilities	4,834	5,440
Long-term debt and leases	6,520	6,475
Other long-term liabilities	6,198	6,169
Shareholders’ equity	10,324	9,521

Total liabilities and shareholders’ equity	27,876	27,605

Calculate the following financial ratios: (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 2 decimal places.)


a.	Long-term debt ratio	[removed]
b.	Total debt ratio	[removed]
c.	Times interest earned	[removed]
d.	Cash coverage ratio	[removed]
e.	Current ratio	[removed]
f.	Quick ratio	[removed]
g.	Operating profit margin	[removed]	%
h.	Inventory turnover	[removed]
i.	Days in inventory	[removed]	days
j.	Average collection period	[removed]	days
k.	Return on equity	[removed]	%*
l.	Return on assets	[removed]	%
m.	Return on capital	[removed]	%**
n.	Payout ratio	[removed]

* - use average equity
** - use average capital

Here are simplified financial statements of Phone Corporation from a recent year:

INCOME STATEMENT (Figures in millions of dollars)
Net sales	12,800
Cost of goods sold	3,860
Other expenses	4,127
Depreciation	2,398

Earnings before interest and taxes (EBIT)	2,415
Interest expense	665

Income before tax	1,750
Taxes (at 30%)	525

Net income	1,225
Dividends	836

BALANCE SHEET (Figures in millions of dollars)
	End of Year	Start of Year
Assets
Cash and marketable securities	85	154
Receivables	2,182	2,410
Inventories	167	218
Other current assets	847	912

Total current assets	3,281	3,694
Net property, plant, and equipment	19,933	19,875
Other long-term assets	4,176	3,730

Total assets	27,390	27,299

Liabilities and shareholders’ equity
Payables	2,524	3,000
Short-term debt	1,399	1,553
Other current liabilities	791	767

Total current liabilities	4,714	5,320
Long-term debt and leases	8,014	7,549
Other long-term liabilities	6,138	6,109
Shareholders’ equity	8,524	8,321

Total liabilities and shareholders’ equity	27,390	27,299

Phone Corp.’s stock price was $80 at the end of the year. There were 201 million shares outstanding.

What was the company’s market capitalization and market value added? (Enter your answers in billions rounded to 2 decimal places.)

b.	What was its market-to-book ratio? (Round your answer to 2 decimal places.)

Here are simplified financial statements of Phone Corporation from a recent year:

INCOME STATEMENT (Figures in millions of dollars)
Net sales	12,300
Cost of goods sold	3,610
Other expenses	4,022
Depreciation	2,248

Earnings before interest and taxes (EBIT)	2,420
Interest expense	640

Income before tax	1,780
Taxes (at 35%)	623

Net income	1,157
Dividends	756

BALANCE SHEET (Figures in millions of dollars)
	End of Year	Start of Year
Assets
Cash and marketable securities	80	149
Receivables	1,932	2,310
Inventories	142	193
Other current assets	822	887

Total current assets	2,976	3,539
Net property, plant, and equipment	19,883	19,825
Other long-term assets	4,126	3,680

Total assets	26,985	27,044

Liabilities and shareholders’ equity
Payables	2,474	2,950
Short-term debt	1,374	1,528
Other current liabilities	766	742

Total current liabilities	4,614	5,220
Long-term debt and leases	9,259	8,444
Other long-term liabilities	6,088	6,059
Shareholders’ equity	7,024	7,321

Total liabilities and shareholders’ equity	26,985	27,044

Phone Corp.’s cost of capital was 7.4%.

What was Phone Corp.’s economic value added? (Enter your answer in millions rounded to 2 decimal places.)

Consider the following information:

	Davis Chili’s	Bagwell Company
Return on equity (ROE)	14.40%	9.30%
Plowback ratio	0.37	0.72
Sustainable growth	5.90%	7.10%

What would the sustainable growth rate be if Davis Chili’s plowback ratio rose to the same value as Bagwell Company? (Round your answer to 2 decimal places.)

What would the sustainable growth rate be if Davis Chili’s return on equity were only 13.4%? (Round your answer to 2 decimal places.)

Chik’s Chickens has average accounts receivable of $6,983. Sales for the year were $10,500. What is its average collection period? (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Salad Daze maintains an inventory of produce worth $590. Its total bill for produce over the course of the year was $83,000. How old on average is the lettuce it serves its customers? (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Assume a firm’s inventory level of $13,000 represents 36 days' sales. What is the inventory turnover ratio? (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Lever Age pays a(n) 9% rate of interest on $10.1 million of outstanding debt with face value $10.1 million. The firm’s EBIT was $1.1 million.

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

If depreciation is $210,000, what is cash coverage? (Round your answer to 2 decimal places.)

If the firm must retire $310,000 of debt for the sinking fund each year, what is its “fixed-payment cash-coverage ratio” (the ratio of cash flow to interest plus other fixed debt payments)? (Round your answer to 2 decimal places.)

Keller Cosmetics maintains an operating profit margin of 5.8% and asset turnover ratio of 3.8.

a.	What is its ROA? (Round your answer to 2 decimal places.)

If its debt-equity ratio is 1, its interest payments and taxes are each $8,800, and EBIT is $20,800, what is its ROE? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Torrid Romance Publishers has total receivables of $3,120, which represents 20 days’ sales. Total assets are $94,900. The firm’s operating profit margin is 5.5%. Find the firm’s asset turnover ratio and ROA. (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 2 decimal places.)

A firm has a debt-to-equity ratio of 0.63 and a market-to-book ratio of 3.0. What is the ratio of the book value of debt to the market value of equity? (Round your answer to 2 decimal places.)

In the past year, TVG had revenues of $2.90 million, cost of goods sold of $2.40 million, and depreciation expense of $110,000. The firm has a single issue of debt outstanding with book value of $1.20 million on which it pays an interest rate of 10%. What is the firm’s times interest earned ratio? (Round your answer to 2 decimal places.)

A firm has a long-term debt-equity ratio of 0.5. Shareholders’ equity is $1.07 million. Current assets are $256,500, and the current ratio is 1.9. The only current liabilities are notes payable. What is the total debt ratio? (Round your answer to 2 decimal places.)

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