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:

1.

To find the return on assets and return on equity, we need net income. We can calculate the net income using the profit margin. Doing so, we find the net income is:

 

Profit margin	=	Net income / Sales
0.09	=	Net income / $18,100,000
Net income	=	$1,629,000

2.

Now we can calculate the return on assets as:

 

ROA	=	Net income / Total assets
ROA	=	$1,629,000 / $13,100,000
ROA	=	0.1244 or 12.44%

3.

We do not have the equity for the company, but we know that equity must be equal to total assets minus total debt, so the ROE is:

 

ROE	=	Net income / (Total assets – Total debt)
ROE	=	$1,629,000 / ($13,100,000 – 3,900,000)
ROE	=	0.1771 or 17.71%

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:

1.

To find the current assets, we must use the net working capital equation. Doing so, we find:

 

NWC	=	Current assets – Current liabilities
$940	=	Current assets – $6,700
Current assets	=	$7,640

 

Now, use this number to calculate the current ratio and the quick ratio. The current ratio is:

 

Current ratio	=	Current assets / Current liabilities
Current ratio	=	$7,640 / $6,700
Current ratio	=	1.14 times

2.

And the quick ratio is:

 

Quick ratio	=	(Current assets – Inventory) / Current liabilities
Quick ratio	=	($7,640 – 1,110) / $6,700
Quick ratio	=	.97 times

 

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