Foundations of Financial Management
Block, Hirt and Danielsen
Problem 2.6, 2.8, 2.21, 3.22, 3.23, 3.24, 4.24, 4.28, 5.11
2.6 Given the following information prepare in good form an income statement for the Dental Drilling Company
|Selling and administrative expense||$60,000|
|Cost of goods sold||140,000|
2.8. Prepare in good form an income statement for ATM Cards, Inc. Take your calculations all the way to computing earnings per share.
|Cost of goods sold||300,000|
|Selling and administrative expense||40,000|
|Preferred stock dividends||80,000|
2.21 The Jupiter Corporation has a gross profit $700,000 and $240,000 in depreciation expense. The Saturn Corporation also has $700,000 in gross profit, with $40,000 in depreciation expense. Selling and administrative expense is $160,000 for each company.
Given that the tax rate is 40 percent, compute the cash flow for both companies.Explain the difference in cash flow between the two firms.
4.24 Lansing Auto Parts, Inc., has projected sales of $25,000 in October, $35,000 in November, and $30,000 in December. Of the company’s sales, 20 percent are paid for by cash and 80 percent are sold on credit. The credit sales are collected one month after sale. Determine collections for November and December. Also assume the company’s cash payments for November and December are $30,400 and $29,800, respectively.The beginning cash balance in November is $6,000, which is the desired minimum balance. Prepare a cash budget with borrowing needed or repayments for November and December. (You will need to prepare a cash receipts schedule first).
Enter cell references, data, and formulas to complete the cash receipts schedule and the cash budget.
4.28 The Manning Company has financial statements, which are representative of the company’s historical average. The firm is expecting a 20 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.)
|Earnings before interest and taxes||$42,000|
|Earnings before taxes||$35,000|
|Earnings after taxes||$20,000|
|Assets||Liabilities and Stockholders’ Equity|
|Accounts receivable||40,000||Accrued wages||1,000|
|Current assets||$120,000||Current liabilities||$28,000|
|Fixed assets||80,000||Notes payable||7,000|
|Total assets||$200,000||Total liabilities and stockholders’ equity
Using cell references and formulas, calculate the financial items below to ultimately determine the external funds that will be needed.
5.11 The Harding Company manufactures skates. The company’s income statement for 2010 is as follows:
|For the Year Ended December 31, 2010|
|Sales (10,000 skates @ $50 each)||$500,000|
|Less: Variable costs (10,000 skates at $20)||200,000|
|Earnings before interest and taxes (EBIT)||150,000|
|Earnings before taxes (EBT)||90,000|
|Income tax expense (40%)||36,000|
|Earnings after taxes (EAT)||$54,000|
Given this income statement, compute the following:
a. Degree of operating leverage.
b. Degree of financial leverage
c. Degree of combined leverage.
d. Break-even point in units (number of skates)
|The balance sheet for Bryan Corporation is shown below. Sales for the year were $3,040,000, with 75 percent of|
|sales sold on credit.|
|Balance Sheet 200X|
|Assets||Liabilities and Stockholders’ Equity|
|Accounts receivable||280,000||Accrued taxes||80,000|
|Inventory||240,000||Bonds payable (long term)||118,000|
|Plant and equipment||380,000||Common stock||100,000|
|Total liabilities and|
|Total assets||$950,000||stockholders’ equity||$950,000|
|Compute the following ratios:|
|a. Current ratio.|
|b. Quick ratio.|
|c. Debt-to-total-assets ratio.|
|d. Asset turnover.|
|e. Average collection period.|
|The Lancaster Corporation’s income statement is given below.|
|a. What is the times-interest-earned ratio?|
|b. What would be the fixed-charge-coverage ratio?|
|Cost of goods sold||116,000|
|Fixed charges (other than interest)||24,000|
|Income before interest and taxes||60,000|
|Income before taxes||48,000|
|Income after taxes||$31,200|
Enter formulas to calculate the following ratios. If possible, use cell references to the income statement.
|a. Times interest earned|
|b. Fixed charge coverage|
Problem 3.24 Debt utilization and Du Pont system of analysis (LO3) Using the income statement for J. Lo Wedding Gowns, compute the following ratios:
a. The interest coverage.
b. The fixed charge coverage.
The total assets for this company equal $160,000. Set up the equation for the Du Pont
system of ratio analysis, and compute the answer to part c below using ratio 2 b on
c. Return on assets (investment).