ACCOUNTING

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 $ 300,000
  Expenses   246,800
 
  Earnings before interest and taxes $ 53,200
  Interest   9,100
 
  Earnings before taxes $ 44,100
  Taxes   17,100
 
  Earnings after taxes $ 27,000
  Dividends $ 5,400

 

Balance Sheet
Assets Liabilities and Stockholders’ Equity
  Cash $ 9,000   Accounts payable $ 29,000
  Accounts receivable   56,000   Accrued wages   2,250
  Inventory   70,000   Accrued taxes   4,750
   
   Current assets $ 135,000     Current liabilities $ 36,000
  Fixed assets 86,000   Notes payable 9,100
    Long-term debt 25,500
        Common stock   125,000
      Retained earnings 25,400
     
  Total assets $ 221,000   Total liabilities and     stockholders’ equity $ 221,000
   

 

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.)

 

  The firm  $  in .

rev: 09_10_2011

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16.

value: 1.00 points

 

Problem 5-8 Cash break-even analysis [LO2]

Air Purifier, Inc., computes its break-even point strictly on the basis of cash expenditures related to fixed costs. Its total fixed costs are $2,410,000, but 10 percent of this value is represented by depreciation. Its contribution margin (price minus variable cost) for each unit is $32. 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

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23.

value: 2.00 points

 

Problem 5-20 Combining operating and financial leverage [LO5]

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  %

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24.

value: 3.00 points

 

Problem 5-23 Leverage and sensitivity analysis [LO6]

Dickinson Company has $11,840,000 in assets. Currently half of these assets are financed with long-term debt at 9.2 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 9.2 percent. The tax rate is 45 percent.

 

     Under Plan D, a $2,960,000 long-term bond would be sold at an interest rate of 11.2 percent and 370,000 shares of stock would be purchased in the market at $8 per share and retired.

 

     Under Plan E, 370,000 shares of stock would be sold at $8 per share and the $2,960,000 in proceeds would be used to reduce long-term debt.

 

(a)   Compute the earnings per share for the current plan and the two new plans. (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

 

  Current Plan Plan D Plan E
  Earnings per share $ $ $

 

(b-1) Compute the earnings per share if return on assets fell to 4.60 percent. (Round your answers to 2 decimal places. Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign. Omit the “$” sign in your response.)

 

  Current Plan Plan D Plan E
  Earnings per share $ $ $

 

(b-2) Which plan would be most favorable if return on assets fell to 4.60 percent? Consider the current plan and the two new plans.
   
 
Plan D
Current Plan
Plan E

 

(b-3) Compute the earnings per share if return on assets increased to 14.2 percent. (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

 

  Current Plan Plan D Plan E
  Earnings per share $ $ $

 

(b-4) Which plan would be most favorable if return on assets increased to 14.2 percent? Consider the current plan and the two new plans.
   
 
Plan D
Plan E
Current Plan

 

(c-1) If the market price for common stock rose to $10 before the restructuring, compute the earnings per share. Continue to assume that $2,960,000 in debt will be used to retire stock in Plan D and $2,960,000 of new equity will be sold to retire debt in Plan E. Also assume that return on assets is 9.2 percent. (Round your answers to 2 decimal places. Omit the “$” sign in your response.)

 

  Current Plan Plan D Plan E
  Earnings per share $ $ $

 

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

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