## Thursday, 9 August 2012

### Here and Gone, Inc., has sales of \$18.1 million, total assets of \$13.1 million, and total debt of \$3.9

Here and Gone, Inc., has sales of \$18.1 million, total assets of \$13.1 million, and total debt of \$3.9 million. Assume the profit margin is 9 percent.

 Requirement 1: What is net income? (Do not include the dollar sign (\$). Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).)

 Net income \$

 Requirement 2: What is ROA? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

 ROA %

 Requirement 3: What is ROE? (Do not include the percent sign (%). Round your answer to 2 decimal places (e.g., 32.16).)

 ROE %

Explanation:

### SDJ, Inc., has net working capital of \$940, current liabilities of \$6,700, and inventory of \$1,110.

SDJ, Inc., has net working capital of \$940, current liabilities of \$6,700, and inventory of \$1,110.

 Requirement 1: What is the current ratio? (Round your answer to 2 decimal places (e.g., 3.16).)

 Current ratio times

 Requirement 2: What is the quick ratio? (Round your answer to 2 decimal places (e.g., 3.16).)

 Quick ratio times

Explanation:

### Prepare a balance sheet given the following information for Alaskan Orange Corp. as of December 31, 2010:

 Prepare a balance sheet given the following information for Alaskan Orange Corp. as of December 31, 2010: cash = \$195,000; patents and copyrights = \$849,000; accounts payable = \$294,000; accounts receivable = \$255,000; tangible net fixed assets = \$5,120,000; inventory = \$540,000; notes payable = \$187,000; accumulated retained earnings = \$4,606,000; long-term debt = \$1,230,000. (Do not include the dollar signs (\$).)

 Balance Sheet Cash \$ 195,000 Accounts payable \$ 294,000 Accounts receivable 255,000 Notes payable 187,000 Inventory 540,000 Current liabilities \$ 481,000 Current assets \$ 990,000 Long-term debt 1,230,000 Total liabilities \$ 1,711,000 Tangible net fixed assets \$ 5,120,000 Intangible net fixed assets 849,000 Common stock 642,000 Accumulated retained earnings 4,606,000 Total assets \$ 6,959,000 Total liabilities & owners’ equity \$ 6,959,000
Explanation:
 Owners’ equity has to be total liabilities & equity minus accumulated retained earnings and total liabilities, so:

 Owner’s equity = Total liabilities & equity – Accumulated retained earnings – Total liabilities Owners’ equity = \$6,959,000 – 4,606,000 – 1,711,000 Owners’ equity = \$642,000

### You are given the following information for Sookie’s Cookies Co.: sales = \$52,100; costs = \$38,700;

You are given the following information for Sookie’s Cookies Co.: sales = \$52,100; costs = \$38,700; addition to retained earnings = \$2,975; dividends paid = \$980; interest expense = \$1,470; tax rate = 30 percent.

 Required: Calculate the depreciation expense. (Do not include the dollar sign (\$).)

 Depreciation expense \$

Explanation:
 Here we need to work the income statement backward. Starting with net income, we know that net income is:

 Net income = Dividends + Addition to retained earnings Net income = \$980 + 2,975 Net income = \$3,955

 Net income is also the taxable income, minus the taxable income times the tax rate, or:

 Net income = Taxable income – (Taxable income)(Tax rate) Net income = Taxable income(1 – Tax rate)

 We can rearrange this equation and solve for the taxable income as:

 Taxable income = Net income / (1 – Tax rate) Taxable income = \$3,955 / (1 – 0.30) Taxable income = \$5,650

 EBIT minus interest equals taxable income, so rearranging this relationship, we find:

 EBIT = Taxable income + Interest EBIT = \$5,650 + 1,470 EBIT = \$7,120

 Now that we have the EBIT, we know that sales minus costs minus depreciation equals EBIT. Solving this equation for EBIT, we find:

 EBIT = Sales – Costs – Depreciation \$7,120 = \$52,100 – 38,700 – Depreciation Depreciation = \$6,280

### Hammett, Inc., has sales of \$19,630, costs of \$9,400, depreciation expense of \$2,070, and interest

Hammett, Inc., has sales of \$19,630, costs of \$9,400, depreciation expense of \$2,070, and interest expense of \$1,560. Assume the tax rate is 30 percent.
 Required: What is the operating cash flow? (Do not include the dollar sign (\$).)

 Operating cash flow \$

Explanation:
 To calculate the OCF, we first need to construct an income statement. The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:

 Income statement Sales \$ 19,630 Costs 9,400 Depreciation 2,070 EBIT \$ 8,160 Interest 1,560 Taxable income \$ 6,600 Taxes (30%) 1,980 Net income \$ 4,620

 Now we can calculate the OCF, which is:

 OCF = EBIT + Depreciation – Taxes OCF = \$8,160 + 2,070 – 1,980 OCF = \$8,250

### Lifeline, Inc., has sales of \$590,000, costs of \$268,000, depreciation expense of \$68,500, interest

Lifeline, Inc., has sales of \$590,000, costs of \$268,000, depreciation expense of \$68,500, interest expense of \$35,500, and a tax rate of 40 percent.

 Required: What is the net income for this firm? (Do not include the dollar sign (\$).)

 Net income \$

Explanation:
 The income statement starts with revenues and subtracts costs to arrive at EBIT. We then subtract out interest to get taxable income, and then subtract taxes to arrive at net income. Doing so, we get:

 Income statement Sales \$ 590,000 Costs 268,000 Depreciation 68,500 EBIT \$ 253,500 Interest 35,500 Taxable income \$ 218,000 Taxes 87,200 Net income \$ 130,800

### Arredondo, Inc., has current assets of \$2,360, net fixed assets of \$11,200, current liabilities of \$1,445,

Arredondo, Inc., has current assets of \$2,360, net fixed assets of \$11,200, current liabilities of \$1,445, and long-term debt of \$4,170.

 Requirement 1: What is the value of the shareholders’ equity account for this firm? (Do not include the dollar sign (\$).)

 Shareholder's equity \$

 Requirement 2: How much is net working capital? (Do not include the dollar sign (\$).)

 Net working capital \$

Explanation:
 The balance sheet for the company will look like this:

 Balance sheet Current assets \$ 2,360 Current liabilities \$ 1,445 Net fixed assets 11,200 Long-term debt 4,170 Owner's equity 7,945 Total assets \$ 13,560 Total liabilities & Equity \$ 13,560

 The owner's equity is a plug variable. We know that total assets must equal total liabilities & owner's equity. Total liabilities and equity is the sum of all debt and equity, so if we subtract debt from total liabilities and owner's equity, the remainder must be the equity balance, so:

 Owner’s equity = Total liabilities & equity – Current liabilities – Long-term debt Owner’s equity = \$13,560 – 1,445 – 4,170 Owner’s equity = \$7,945

 Net working capital is current assets minus current liabilities, so:

 NWC = Current assets – Current liabilities NWC = \$2,360 – 1,445 NWC = \$915

### What goal should always motivate the actions of the firm’s financial manager?

 What goal should always motivate the actions of the firm’s financial manager? Current market value (share price) of the equity

### Who owns a corporation? Describe the process whereby the owners control the firm’s management.

Who owns a corporation? Describe the process whereby the owners control the firm’s management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise?

In the corporate form of ownership, the shareholders  are the owners of the firm. The shareholders  elect the directors  of the corporation, who in turn appoint the firm's management . This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else's best interests, rather than those of the shareholders . If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.

### You’ve probably noticed coverage in the financial press of an initial public offering (IPO) of a

 You’ve probably noticed coverage in the financial press of an initial public offering (IPO) of a company’s securities. Web search company Google is a relatively recent example. Is an IPO a primary market transaction or a secondary-market transaction? A primary market transaction

### What is the primary disadvantage of the corporate form of organization?

 Requirement 1: What is the primary disadvantage of the corporate form of organization? The double taxation to shareholders of distributed earnings and dividends

 Requirement 2: What are some of the advantages of corporate organization? Limited liability Ease of transferability Ability to raise capital Unlimited life

### What benefits are there to these types of business organization as opposed to the corporate form?

What benefits are there to these types of business organization as opposed to the corporate form?

 Simpler Less regulation The owners are also the managers Sometimes Personal tax rates are better than corporate tax rates

### What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization?

What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization?

 Unlimited liability Limited life Difficulty in transferring ownership Hard to raise capital funds

### What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization?

What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization?

 Unlimited liability Limited life Difficulty in transferring ownership Hard to raise capital funds

### Below are examples of business transactions. Choose the type of financial management decision that is relevant to each.

Below are examples of business transactions. Choose the type of financial management decision that is relevant to each.

 Deciding whether to expand a manufacturing plant Capital budgeting Deciding whether to issue new equity and use the proceeds   to retire outstanding debt Capital structure Modifying the firm's credit collection policy with its customers Working capital management