Busi 320 Dev Shell – 2012 Fall B
Foundations of Financial Management ( Block , 14th ed.)
assignment: Homework 1
1.Problem 2-1 Income statement [LO1]
Frantic Fast Foods had earnings after taxes of $1,200,000 in the year 2009 with 322,000 shares outstanding. On January 1, 2010, the firm issued 30,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 24 percent.
(a)
Compute earnings per share for the year 2009. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Earnings per share
(b)
Compute earnings per share for the year 2010. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Earnings per share
2.Problem 2-3 Gross profit [LO1]
Hillary Swank Clothiers had sales of $428,000 and cost of goods sold of $260,000.
(a)
What is the gross profit margin (ratio of gross profit to sales)? (Round your answer to the nearest whole percentage. Omit the “%” sign in your response.)
Gross profit margin
(b)
If the average firm in the clothing industry had a gross profit of 35 percent, how is the firm doing?
The firm is .
3.Problem 2-4 Operating profit [LO1]
A-Rod Fishing Supplies had sales of $2,160,000 and cost of goods sold of $1,550,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 6 percent of the total assets of $4,450,000.
What was the firms operating profit? (Omit the “$” sign in your response.)
Operating profit
4.Problem 2-6 Income statement [LO1]
Given the following information, prepare an income statement for the Dental Drilling Company. (Input all amounts as positive values. Omit the “$” sign in your response.)
Selling and administrative expense
$
72,000
Depreciation expense
71,000
Sales
536,000
Interest expense
45,000
Cost of goods sold
179,000
Taxes
53,000
5.Problem 2-7 Income statement [LO1]
Given the following information, prepare an income statement for Jonas Brothers Cough Drops. (Input all amounts as positive values. Omit the “$” sign in your response.)
Selling and administrative expense
$
326,000
Depreciation expense
196,000
Sales
1,600,000
Interest expense
124,000
Cost of goods sold
551,000
Taxes
167,000
6.Problem 2-11 Depreciation and earnings [LO1]
Stein Books, Inc., sold 2,300 finance textbooks for $200 each to High Tuition University in 2010. These books cost $170 to produce. Stein Books spent $12,300 (selling expense) to convince the university to buy its books.
Depreciation expense for the year was $15,500. In addition, Stein Books borrowed $102,000 on January 1, 2010, on which the company paid 17 percent interest. Both the interest and principal of the loan were paid on December 31, 2010. The publishing firms tax rate is 30 percent.
Prepare an income statement for Stein Books. (Input all amounts as positive values. Omit the “$” sign in your response.)
7.Problem 2-15 Development of balance sheet [LO3]
Arrange the following items in proper balance sheet presentation (Be sure to list the assets in order of their liquidity. Input all amounts as positive values. Omit the “$” sign in your response):
Accumulated depreciation
$
347,000
Retained earnings
46,000
Cash
14,000
Bonds payable
137,000
Accounts receivable
51,000
Plant and equipmentoriginal cost
668,000
Accounts payable
38,000
Allowance for bad debts
6,000
Common stock, $1 par, 100,000 shares outstanding
100,000
Inventory
71,000
Preferred stock, $52 par, 1,000 shares outstanding
52,000
Marketable securities
28,000
Investments
24,000
Notes payable
39,000
Capital paid in excess of par (common stock)
91,000
8.Problem 2-16 Earnings per share and retained earnings [LO1, 3]
Okra Snack Delights, Inc., has an operating profit of $241,000. Interest expense for the year was $35,800; preferred dividends paid were $34,100; and common dividends paid were $39,600. The tax was $61,400. The firm has 23,700 shares of common stock outstanding.
(a)
Calculate the earnings per share and the common dividends per share. (Round your answers to 2 decimal places. Omit the “$” sign in your response.)
Earnings per share
Common dividends per share
(b)
What was the increase in retained earnings for the year? (Omit the “$” sign in your response.)
Increase in retained earnings
9.Problem 2-17 Earnings per share and retained earnings [LO1, 3]
Quantum Technology had $644,000 of retained earnings on December 31, 2010. The company paid common dividends of $30,100 in 2010 and had retained earnings of $524,000 on December 31, 2009.
(a)
How much did Quantum Technology earn during 2010? (Omit the “$” sign in your response.)
Earnings available to common stockholders
(b)
What would earnings per share be if 42,700 shares of common stock were outstanding? (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Earnings per share
10.Problem 2-18 Price-earnings ratio [LO2]
Botox Facial Care had earnings after taxes of $325,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $95.60. In 2010, earnings after taxes increased to $407,000 with the same 200,000 shares outstanding. The stock price was $104.00.
(a)
Compute earnings per share and the P/E ratio for 2009. The P/E ratio equals the stock price divided by earnings per share. (Enter only numeric values.Round your intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.)
Earnings per share
P/E ratio
(b)
Compute earnings per share and the P/E ratio for 2010. (Enter only numeric values.Round your intermediate calculations and final answers to 2 decimal places. Omit the “$” sign in your response.)
Earnings per share
P/E ratio
(c)
Why the P/E ratio changed? (Round your intermediate calculations and final answers to 2 decimal places. Omit the “%” sign in your response.)
The stock price % while EPS only
11.Problem 2-21 Depreciation and cash flow [LO5]
The Jupiter Corporation has a gross profit of $726,000 and $337,000 in depreciation expense. The Saturn Corporation also has $726,000 in gross profit, with $48,300 in depreciation expense. Selling and administrative expense is $220,000 for each company.
(a)
Given that the tax rate is 40 percent, compute the cash flow for both companies. (Omit the “$” sign in your response.)
Jupiter
Saturn
Cash flow
(b)
What is the difference in cash flow between the two firms? (Omit the “$” sign in your response.)
Difference in cash flow
12.Problem 2-22 Free cash flow [LO4]
Coastal Pipeline, Inc., anticipated cash flow from operating activities of $9 million in 2010. It will need to spend $6.0 million on capital investments in order to remain competitive within the industry. Common stock dividends are projected at $1.20 million and preferred stock dividends at $.65 million.
(a)
What is the firms projected free cash flow for the year 2010? (Enter your answer in millions of dollars rounded to 2 decimal places. Omit the “$” sign in your response.)
Free cash flow
$ million
(b)
What does the concept of free cash flow represent?
13.Problem 2-24 Book value and market value [LO2, 3]
The Rockford Corporation has assets of $418,000, current liabilities of $126,000, and long-term liabilities of $131,000. There is $38,700 in preferred stock outstanding; 20,000 shares of common stock have been issued.
(a)
Compute book value (net worth) per share. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Book value per share
$
(b)
If there is $32,300 in earnings available to common stockholders and Rockfords stock has a P/E of 21 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Current price
$
(c)
What is the ratio of market value per share to book value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Ratio
14.Problem 2-25 Book value and market value [LO2, 3]
Amigo Software, Inc., has total assets of $820,000, current liabilities of $181,000, and long-term liabilities of $210,000. There is $90,000 in preferred stock outstanding. Thirty thousand shares of common stock have been issued.
(a)
Compute book value (net worth) per share. (Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Book value per share
$
(b)
If there is $52,800 in earnings available to common stockholders and the firms stock has a P/E of 26 times earnings per share, what is the current price of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “$” sign in your response.)
Current price
$
(c)
What is the ratio of market value per share to book value per share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Ratio
15.Problem 2-27 Construction of income statement and balance sheet [LO1, 3]
On December 31, 2009, the balance sheet of Baxter Corporation was as follows:
Current Assets
Liabilities
Cash
$
13,000
Accounts payable
$
15,000
Accounts receivable
18,000
Notes payable
23,000
Inventory
28,000
Bonds payable
53,000
Prepaid expenses
12,300
Fixed Assets
Stockholders Equity
Plant and equipment (gross)
$
253,000
Preferred stock
$
23,000
Less: Accumulated depreciation
50,600
Common stock
58,000
Paid-in capital
28,000
Net plant and equipment
202,400
Retained earnings
73,700
Total assets
$
273,700
Total liabilities and stockholders equity
$
273,700
Sales for 2010 were $235,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $23,500. Depreciation expense was 11 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 9 percent, while the interest rate on the bonds payable was 15 percent. This interest expense is based on December 31, 2009, balances. The tax rate averaged 20 percent.
$2,300 in preferred stock dividends were paid and $9,560 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.
During 2010, the cash balance and prepaid expenses balances were unchanged. Accounts receivable and inventory increased by 9 percent. A new machine was purchased on December 31, 2010, at a cost of $38,000.
Accounts payable increased by 35 percent. Notes payable increased $6,300 and bonds payable decreased $11,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.
(a)
Prepare an income statement for 2010. (Round EPS answer to 2 decimal places. Input all amounts as positive values. Omit the “$” sign in your response.)
(b)
Prepare a statement of retained earnings for 2010. (Input all amounts as positive values. Omit the “$” sign in your response.)
(c)
Prepare a balance sheet as of December 31, 2010. (Be sure to list the assets and liabilities in order of their liquidity. Input all amounts as positive values. Omit the “$” sign in your response.)
16.Problem 2-28 Statement of cash flows [LO4]
Given is the Income Statement for the year ended December 31, 2010, Statement of Retained Earnings for the year ended December 31, 2010 and Comparative Balance Sheets for 2009 and 2010 of Jeter Corporation:
JETER CORPORATION
Income Statement
For the Year Ended December 31, 2010
Sales
$
4,240,000
Cost of goods sold
2,810,000
Gross profits
1,430,000
Selling and administrative expense
738,000
Depreciation expense
236,000
Operating income
456,000
Interest expense
88,000
Earnings before taxes
368,000
Taxes
173,000
Earnings after taxes
195,000
Preferred stock dividends
10,000
Earnings available to common stockholders
$
185,000
Shares outstanding
150,000
Earnings per share
$
1.23
Statement of Retained Earnings
For the Year Ended December 31, 2010
Retained earnings, balance, January 1, 2010
$
320,500
Add: Earnings available to common stockholders, 2010
185,000
Deduct: Cash dividends declared and paid in 2010
181,000
Retained earnings, balance, December 31, 2010
$
324,500
Comparative Balance Sheets
For 2009 and 2010
Year-End
2009
Year-End
2010
Assets
Current assets:
Cash
$
113,000
$
481,600
Accounts receivable (net)
563,000
607,000
Inventory
602,000
664,000
Prepaid expenses
60,900
30,900
Total current assets
1,338,900
1,783,500
Investments (long-term securities)
91,600
89,600
Plant and equipment
2,520,000
2,640,000
Less: Accumulated depreciation
1,940,000
2,176,000
Net plant and equipment
580,000
464,000
Total assets
$
2,010,500
$
2,337,100
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable
$
342,000
$
581,000
Notes payable
548,000
548,000
Accrued expenses
75,000
51,600
Total current liabilities
965,000
1,180,600
Long-term liabilities:
Bonds payable, 2015
135,000
242,000
Total liabilities
1,100,000
1,422,600
Stockholders equity:
Preferred stock, $100 par value
90,000
90,000
Common stock, $1 par value
150,000
150,000
Capital paid in excess of par
350,000
350,000
Retained earnings
320,500
324,500
Total stockholders equity
910,500
914,500
Total liabilities and stockholders equity
$
2,010,500
$
2,337,100
Prepare a statement of cash flows for the Jeter Corporation. (Amounts to be deducted should be indicated with a minus sign. Omit the “$” sign in your response.)
17.Problem 2-32 P/E ratio [LO2]
Given is the Income Statement for the year ended December 31, 2010, Statement of Retained Earnings for the year ended December 31, 2010 and Comparative Balance Sheets for 2009 and 2010 of Jeter Corporation:
JETER CORPORATION
Income Statement
For the Year Ended December 31, 2010
Sales
$
4,190,000
Cost of goods sold
2,820,000
Gross profits
1,370,000
Selling and administrative expense
685,000
Depreciation expense
319,000
Operating income
366,000
Interest expense
89,300
Earnings before taxes
276,700
Taxes
227,000
Earnings after taxes
49,700
Preferred stock dividends
10,000
Earnings available to common stockholders
$
39,700
Shares outstanding
150,000
Earnings per share
$
.26
Statement of Retained Earnings
For the Year Ended December 31, 2010
Retained earnings, balance, January 1, 2010
$
45,900
Add: Earnings available to common stockholders, 2010
39,700
Deduct: Cash dividends declared and paid in 2010
25,000
Retained earnings, balance, December 31, 2010
$
60,600
Comparative Balance Sheets
For 2009 and 2010
Year-End
2009
Year-End
2010
Assets
Current assets:
Cash
$
173,000
$
60,000
Accounts receivable (net)
549,000
573,000
Inventory
645,000
686,000
Prepaid expenses
61,600
37,800
Total current assets
1,428,600
1,356,800
Investments (long-term securities)
90,100
84,700
Plant and equipment
2,240,000
2,930,000
Less: Accumulated depreciation
1,990,000
2,309,000
Net plant and equipment
250,000
621,000
Total assets
$
1,768,700
$
2,062,500
Liabilities and Stockholders Equity
Current liabilities:
Accounts payable
$
307,000
$
555,000
Notes payable
558,000
558,000
Accrued expenses
72,800
50,900
Total current liabilities
937,800
1,163,900
Long-term liabilities:
Bonds payable, 2015
195,000
248,000
Total liabilities
1,132,800
1,411,900
Stockholders equity:
Preferred stock, $100 par value
90,000
90,000
Common stock, $1 par value
150,000
150,000
Capital paid in excess of par
350,000
350,000
Retained earnings
45,900
60,600
Total stockholders equity
635,900
650,600
Total liabilities and stockholders equity
$
1,768,700
$
2,062,500
If the market value of a share of common stock is 3.2 times book value for 2010, what is the firms P/E ratio for 2010? (Round your intermediate calculations to 2 decimal places. Enter only numeric value rounded to the nearest whole number.)
P/E ratio
18.Problem 3-14 Du Pont system of analysis [LO3]
The King Card Company has a return-on-assets (investment) ratio of 19 percent.
(a)
If the debt-to-total-assets ratio is 60 percent, what is the return on equity? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)
Return on equity
(b)
If the firm had no debt, what would the return-on-equity ratio be? (Omit the “%” sign in your response.)
Return on equity
19.Problem 3-15 Du Pont system of analysis [LO3]
Using the Du Pont method, evaluate the effects of the following relationships for the Lollar Corporation.
(a)
Lollar Corporation has a profit margin of 5.5 percent and its return on assets (investment) is 8.75 percent. What is its assets turnover ratio?(Enter only numeric value rounded to 2 decimal places.)
Assets turnover ratio
(b)
If the Lollar Corporation has a debt-to-total-assets ratio of 65 percent, what would the firms return on equity be? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)
Return on equity
(c)
What would happen to return on equity if the debt-to-total-assets ratio decreased to 60 percent? (Round your answer to 2 decimal places. Omit the “%” sign in your response.)
Return on equity
20.Problem 3-16 Du Pont system of analysis [LO3]
Jerry Rice and Grain Stores has $4,670,000 in yearly sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 3.5 times per year. It has $193,000 in current liabilities and $374,000 in long-term liabilities.
(a)
What is its return on stockholders equity? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “%” sign in your response.)
Return on stockholders’ equity
(b)
If the asset base remains the same as computed in part a, but total asset turnover goes up to 4.00, what will be the new return on stockholders equity? Assume that the profit margin stays the same as do current and long-term liabilities. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the “%” sign in your response.)
New return on stock holders’ equity
