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
Depreciation expense   70,000
Sales   470,000
Interest expense   40,000
Cost of goods sold   140,000
Taxes   45,00

2.8. Prepare in good form an income statement for ATM Cards, Inc. Take your calculations all the way to computing earnings per share.

Sales   $800,000
Shares outstanding   100,000
Cost of goods sold   300,000
Interest expense   20,000
Selling and administrative expense   40,000
Depreciation expense   30,000
Preferred stock dividends   80,000
Taxes   110,000

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.)

Sales   $200,000
Expenses   158,000
Earnings before interest and taxes   $42,000
Interest   7,000
Earnings before taxes   $35,000
Taxes   15,000
Earnings after taxes   $20,000
Dividends   $6,000
Assets Liabilities and Stockholders’ Equity
Cash   $5,000 Accounts payable $25,000
Accounts receivable   40,000 Accrued wages 1,000
Inventory   75,000 Accrued taxes 2,000
   Current assets   $120,000      Current liabilities $28,000
Fixed assets   80,000 Notes payable 7,000
      Long-term debt 15,000
      Common stock 120,000
      Retained earnings 30,000
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:

Income Statement
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
Fixed costs     150,000
Earnings before interest and taxes (EBIT)     150,000
Interest expense     60,000
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)

Problem 3.22

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
Cash   $50,000 Accounts payable $220,000
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
      Paid-in-capital 150,000
      Retained earnings 282,000
      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.          

Problem 3.23

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?      
Sales     $200,000    
Cost of goods sold     116,000    
Gross profit     84,000    
Fixed charges (other than interest)   24,000    
Income before interest and taxes   60,000    
Interest     12,000    
Income before taxes     48,000    
Taxes (35%)     16,800    
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

page 59.

c. Return on assets (investment).

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