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Week 1 Problem Set

Answer the following questions and solve the following problems in the space provided. When you are done, save the file in the format flastname_Week_1_Problem_Set.docx, where flastname is your first initial and you last name, and submit it to the appropriate dropbox.

Chapter 1 (page 19)

1.      What is the most important difference between a corporation and all other organizational forms?

Answer: Main difference between a corporation with all other organizational forms is that a corporation and its owner are separate entity.

 

2.      What does the phrase limited liability mean in a corporate context?

Answer: In limited liability, shareholders or stockholders are not liable or responsible for any situations of the firm. For example, shareholders are not hold to any debt incurred by the firm nor are they required to pay back it back. Also, owners ‘ liability is limited to their investment on the firm.

 

3.      Which organizational forms give their owners limited liability?

Answer: They organizational forms that give their owners limited liability are corporations and limited liability companies. Limited partnership only provides limited liability to its limited partners not to their general partners.

 

4.      What are the main advantages and disadvantages of organizing a firm as a corporation?

Answer: The advantages include infinite life, limited liability and liquidity. The disadvantages include the double taxation on corporation, separation of ownership and control.

 

5.      Explain the difference between an S corporation and a C corporation.

Answer: One of the differences between C corporations and S corporations are C corporations must pay corporate income taxes while S corporations do not have to pay corporate taxes, but must pass through the income to shareholders to whom it is taxable.

Chapter 2

The following is provided for use in answering the next set of questions. You may also find table 2.5 on page 53 of your text and all questions on pages 56–57.

TABLE 2.5 2009–2013 Financial Statement Data and Stock Price Data for Mydeco Corp.

Mydeco Corp. 2009–2013	(All data as of fiscal year end; in $ million)
Income Statement	2009	2010	2011	2012	2013
Revenue Cost of Goods Sold	404.3 (188.3)	363.8 (173.8)	424.6 (206.2)	510.7 (246.8)	604.1 (293.4)
Gross Profit Sales and Marketing Administration Depreciation and Amortization	216.0 (66.7) (60.6) (27.3)	190.0 (66.4) (59.1) (27.0)	218.4 (82.8) (59.4) (34.3)	263.9 (102.1) (66.4) (38.4)	310.7 (120.8) (78.5) (38.6)
EBIT Interest Income (Expense)	61.4 (33.7)	37.5 (32.9)	41.9 (32.2)	57.0 (37.4)	72.8 (39.4)
Pretax Income Income Tax	27.7   (9.7)	4.6 (1.6)	9.7 (3.4)	19.6 (6.9)	33.4 (11.7)
Net Income    Shares outstanding (millions)    Earnings per share	18.0  55.0  $0.33	3.0 55.0 $0.05	6.3 55.0 $0.11	12.7 55.0 $0.23	21.7 55.0 $0.39
Balance Sheet	2009	2010	2011	2012	2013
Assets Cash Accounts Receivable Inventory	48.8 88.6 33.7	68.9 69.8 30.9	86.3 69.8 28.4	77.5 76.9 31.7	85.0 86.1 35.3
Total Current Assets Net Property, Plant, and Equip. Goodwill and Intangibles	171.1 245.3 361.7	169.6 169.6 243.3	184.5 309 361.7	186.1 345.6 361.7	206.4 347.0 361.7
Total Assets Liabilities and Stockholders’ Equity Accounts Payable Accrued Compensation	778.1   18.7  6.7	774.6   17.9 6.4	855.2   22.0 7.0	893.4   26.8 8.1	915.1   31.7 9.7
Total Current Liabilities Long-term Debt	25.4 500.0	24.3 500.0	29.0 575.0	34.9 600.0	41.4 600.0
Total Liabilities Stockholders’ Equity	525.4 252.7	524.3 250.3	604.0 251.2	634.9 258.5	641.4 273.7
Total Liabilities and Stockholders’ Equity	778.1	774.6	855.2	893.4	915.1
Statement of Cash Flows	2009	2010	2011	2012	2013
Net Income Depreciation and Amortization Chg. in Accounts Receivable Chg. in Inventory Chg. in Payables and Accrued Comp.	18.0 27.3 3.9 (2.9) 2.2	3.0 27.0 18.8 2.8 (1.1)	6.3 34.3 (0.0) 2.5 4.7	12.7 38.4 (7.1) (3.3) 5.9	21.7 38.6 (9.2) (3.6) 6.5
Cash from Operations Capital Expenditures	48.5 (25.0)	50.5 (25.0)	47.8 (100.0)	46.6 (75.0)	54.0 (40.0)
Cash from Investing Activities Dividends Paid Sale (or purchase) of stock Debt Issuance (Pay Down)	(25.0) (5.4) — —	(25.0) (5.4) — —	(100.0) (5.4) — 75.0	(75.0) (5.4) — 25.0	(40.0) (6.5) — —
Cash from Financing Activities	(5.4)	(5.4)	69.6	19.6	(6.5)
Change in Cash	18.1	20.1	17.4	(8.8)	7.5
Mydeco Stock Price	$7.92	$3.30	$5.25	$8.71	$10.89

 

29. In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of $17.8 million.

· a. Compare the gross margins for Starbucks and Peet’s.

· b. Compare the net profit margins for Starbucks and Peet’s.

· c. Which firm was more profitable in 2011?

Answer:

a.     Starbucks’ gross margin =6.75/11.70=57.69% ; Peet’s gross margin =72.7/19.54%.

b.   Starbucks’ net margin =1.25/11.70=10.68%; Peet’s net margin =17.8/372=4.78%.

c.   Starbucks was more profitable in 2011.

 

31. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

         a. How did Mydeco’s accounts receivable days change over this period?

         b. How did Mydeco’s inventory days change over this period?

         c. Based on your analysis, has Mydeco improved its management of its working capital during this time period?

Answer: a.      2009 accounts receivable days=88.6/(404.3/365)=80.0.

      2013 accounts receivable days=86.1/(604.1/365).

b.   2009 inventory days=33.7/(188.3/365)=65.3.

      2013 inventory days=35.3/(293.4/365)=43.9.

c.   Between 2009 and 2013, Mydeco improved its working capital management by reducing both accounts receivable days and inventory days.

32. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

         a. Compare Mydeco’s accounts payable days in 2009 and 2013.

         b. Did this change in accounts payable days improve or worsen Mydeco’s cash position in 2013?

Answer: a. 2009 account payable days=18.7/(188.3/365)=36.2

                    2013 account payable days=31.7/(293.4/365)=39.4

 b. Account payable days decreases from 2009 to 2013, which improve the cash                      position of Mydeco

33. See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

 

· a. By how much did Mydeco increase its debt from 2009 to 2013?

· b. What was Mydeco’s EBITDA/Interest coverage ratio in 2009 and 2013? Did its coverage ratio ever fall below 2?

· c. Overall, did Mydeco’s ability to meet its interest payments improve or decline over this period?

Answer: a. Mydeco increase its debt from $500m in 2009 and $600m in 2013 (by $ 100 million)

b. 2009 EBITDA/Interest coverage ratio=(61.4+27.3)/33.7=2.6

     2013 EBITDA/Interest coverage ratio=(72.8+38.6)/39.4=2.8

     Mydeco’s coverage ratio fell below 2 in 2010 wher it was 1.96

c. overall Mydeco’s ability to meets its interest payments improved over this period, although its experienced a  slid dip in 2010.

 

 

42. For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70 billion, net  income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s equity of $4.38 billion.

· a. Calculate the Starbucks’ ROE directly, and using the DuPont Identity.

· b. Comparing with the data for Peet’s in Problem 41, use the DuPont Identity to understand the difference between the two firms’ ROEs.

Answer: a.    Starbucks’ ROE=1.25/4.38=28.54%.

                    Starbucks’ net profit margin= 1.25/11.7-10.68%.

                    Starbucks’ asset turnover= 11.70/7.36=1.59.

                    Starbucks’ equity multiplier= 7.36/4.38=1.68.

Starbucks’s ROE (DuPont) = 10.68% × 1.59 × 1.68 = 28.53%

b.   Starbucks has a superior profit margin and a greater equity multiplier (which could represent higher leverage). However, it has a lower asset turnover. Its greater ROE is driven by its profit margin and its leverage.