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

Given the following information, prepare an income statement for the Dental Drilling Company. (Input all amounts as positive values. Omit the "$" sign in your response.)

  Selling and administrative expense

$

73,000  

  Depreciation expense

78,000  

  Sales

521,000  

  Interest expense

48,000  

  Cost of goods sold

200,000  

  Taxes

47,000  

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  

  Allowance for bad debts

9,000  

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

100,000  

  Inventory

70,000  

  Preferred stock, $59 par, 1,000 shares outstanding

59,000  

  Marketable securities

24,000  

  Investments

20,000  

  Notes payable

34,000  

  Capital paid in excess of par (common stock)

88,000  

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)

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

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

$   

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)

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 $25,700 in earnings available to common stockholders and Rockford’s stock has a P/E of 19 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" 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

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)

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 $53,000 in earnings available to common stockholders and the firm’s stock has a P/E of 28 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" 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

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  

  Selling and administrative expense

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.)

A-Rod Fishing Supplies had sales of $2,180,000 and cost of goods sold of $1,280,000. Selling and administrative expenses represented 15 percent of sales. Depreciation was 6 percent of the total assets of $4,840,000.

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

  Operating profit

$ 

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)

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.)

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  

     Less: Selling and administrative expense

45,800  

     Less: Lease expense

13,300  

  Operating profit*

$

59,900  

     Less: Interest expense

8,300  

  Earnings before taxes

$

51,600  

     Less: Taxes (30%)

20,640  

  Earnings after taxes

$

30,960  

  *Equals income before interest and taxes.

(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.)

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  

  Selling and administrative expense

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

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

     Less: Selling and administrative expenses

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.)

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  

     Selling and administrative expense†

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  

     Selling and administrative expense†

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?

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?

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.)

Cyber Security Systems had sales of 4,000 units at $90 per unit last year. The marketing manager projects a 25 percent increase in unit volume sales this year with a 30 percent price increase. Returned merchandise will represent 12 percent of total sales.

What is your net dollar sales projection for this year? (Omit the "$" sign in your response.)

  Net sales

$   

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

$ 

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

$ 

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.)

Eaton Tool Company has fixed costs of $232,400, sells its units for $62, and has variable costs of $34 per unit.

(a)

Compute the break-even point.

  Break-even point

 units  

(b)

Ms. Eaton comes up with a new plan to cut fixed costs to $180,000. However, more labor will now be required, which will increase variable costs per unit to $37. The sales price will remain at $62. What is the new break-even point? (Round your answer to the nearest whole number.)

  New break-even point

 units  

(c)

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

With less operating leverage and a smaller contribution margin, profitability is likely to be less than it would have been at very high volume levels.

Air Purifier, Inc., computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,520,000, but 20 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $54. How many units does the firm need to sell to reach the cash break-even point? (Round your answer to the nearest whole number.)

  Cash break-even point

units  

Mo & Chris's Delicious Burgers, Inc., sells food to Military Cafeterias for $19 a box. The fixed costs of this operation are $98,000, while the variable cost per box is $12.

(a)

What is the break-even point in boxes?

  Break-even point

 boxes  

(b)

Calculate the profit or loss on 13,000 boxes and on 28,000 boxes. (Input all amounts as positive values. Omit the "$" sign in your response.)

Boxes

Profit/Loss

Amount

$  

$   

(c)

What is the degree of operating leverage at 18,000 boxes and at 28,000 boxes? (Enter only numeric value rounded to 2 decimal places.)

Boxes

Degree of operating leverage

(d)

If the firm has an annual interest expense of $10,200, calculate the degree of financial leverage at both 18,000 and 28,000 boxes.(Enter only numeric value rounded to 2 decimal places.)

Boxes

Degree of financial leverage

(e)

What is the degree of combined leverage at both sales levels? (Enter only numeric value rounded to 2 decimal places.)

Boxes

Degree of combined leverage

Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below.

Cain

Able

  Debt @ 8%

$

270,000  

Debt @ 8%

$

540,000  

  Common stock, $10 par

540,000  

Common stock, $10 par

270,000  

    Total

$

810,000  

   Total

$

810,000  

  Common shares

54,000  

Common shares

27,000  

(a)

Compute earnings per share if earnings before interest and taxes are $54,000, $64,800, and $72,000 (assume a 10 percent tax rate). (Round your answers to 2 decimal places. Leave no cells blank - be certain to enter "0" wherever required. Omit the "$" sign in your response.)

Cain

Able

  Earnings per share at $54,000

$   

$   

  Earnings per share at $64,800

$   

$   

  Earnings per share at $72,000

$   

$   

(b)

What is the relationship between earnings per share and the level of EBIT?

  1. Before tax return on assets is less than cost of Debt

  2. Before tax return on assets equals cost of Debt

  3. Before tax return on assets is greater than cost of Debt

(c)

If the cost of debt went up to 10 percent and all other factors remained equal, what would be the break-even level for EBIT? (Omit the "$" sign in your response.)

  Break-even level

$   

Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $146,000.      The separate capital structures for Sterling and Royal are shown below:

Sterling

Royal

  Debt @ 10%

$

876,000  

  Debt @ 10%

$

292,000  

  Common stock, $5 par

584,000  

  Common stock, $5 par

1,168,000  

     Total

$

1,460,000  

     Total

$

1,460,000  

  Common shares

 116,800  

  Common shares

233,600  

(a)

Compute earnings per share for both firms. Assume a 25 percent tax rate. (Round your answers to 2 decimal places. Omit the "$" sign in your response.) 

Earnings per share

  Sterling

$  

  Royal

$ 

(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? (Use rounded Earnings per share.Round your answer to 2 decimal places. Omit the "$" sign in your response.)

  Stock price

(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 24 for the less risky company. What would the stock prices for the two firms be under these assumptions? (Note: Although interest rates also would likely be different based on risk, we will hold them constant for ease of analysis.) (Use rounded Earnings per share. Round your answers to 2 decimal places. Omit the "$" sign in your response.)   

 Stock price

  Sterling

  Royal

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

Capital Structure

Sinclair

Boswell

  Debt @ 11%

$

1,260,000   

0   

  Common stock, $10 per share

840,000   

$

2,100,000   

    Total

$

2,100,000   

$

2,100,000   

  Common shares

84,000   

210,000   

  Operating Plan

  Sales (61,000 units at $20 each)

$

1,220,000   

$

1,220,000   

    Less: Variable costs

976,000   

610,000   

($

16 per unit)  

($

10 per unit)  

    Fixed costs

0   

311,000   

  Earnings before interest and taxes (EBIT)

$

244,000   

$

299,000   

(a)

If you combine Sinclair’s capital structure with Boswell’s operating plan, what is the degree of combined leverage? (Enter only numeric value rounded to 2 decimal places.) 

  Degree of combined leverage

(b)

If you combine Boswell’s capital structure with Sinclair’s operating plan, what is the degree of combined leverage? (Enter only numeric value.)

  Degree of combined leverage

(d)

In part b, if sales double, by what percentage will EPS increase? (Omit the "%" sign in your response.)

  EPS will increase by

 %