Business

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.)

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

BALANCE SHEET
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	$200,000

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:

HARDING COMPANY
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.
BRYAN CORPORATION
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?
LANCASTER CORPORATION
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).