Reference no: EM132343072

Question 1

Complete the Balance Sheet of General Aviation Inc. based on the following data: Key Financial Data (2005)
1. Sales totaled $720,000.
2. The gross profit margin was 38.7 percent.
3. Inventory turned 6 times (i.e inventory turnover is 6).
4. There are 360 days in a year.
5. The average collection period was 31 days.
6. The current ratio was 2.35.
7. The total asset turnover was 2.81.
8. The debt ratio was 49.4 percent.
9. Total current assets equal $159,565.

Balance Sheet of General Aviation Inc. As of December 31, 2005
Assets		Liabilities & Shareholders' Equity
Cash	$8,005	Accounts payable	$28,800
Marketable securities	-	Notes payable	-
Accounts receivable	-	Accruals	$18,800
Inventories	-	Total current liabilities	-
Total current assets	-	Long-term debts	-
Gross fixed assets	-	Total liabilities	-
Less: Accumulated depreciation	$50,000	Stockholders' equity
Net fixed assets	-	Preferred stock	$2,451
Total assets	-	Common stock at par	$30,000
		Paid-in capital in excess of par	$6,400
		Retained earnings	$90,800
		Total stockholders' equity	-
		Total liabilities and stockholders' equity	-

Question 2

The credit manager at First National Bank has just received the income statement and balance sheet for Magna Fax, Inc. for the year ended December 31,2010 (See Tables below). The bank requires the firm to report its earnings performance and financial position quarterly as a condition of a loan agreement. The bank's credit manager must prepare two key financial statements based on the information sent by Magna Fax, Inc. This will be passed on to the commercial loan officer assigned to this account, so that he may review the financial conditions of the firm.

Magna Fax, Inc,
Income Statement for the Year ending December 31st, 2010

Sales Revenue	$150,000
Cost of Goods Sold	$117,500
Gross Profits	$32,500
Selling Expenses	$4,500
General and Admin. Expenses	$4,000
Depreciation Expense	$4,000
Operating Profits	$20,000
Interest Expense	$2,500
Net Profit before Taxes	$17,500
Taxes (40%)	$7,000
Net Profit after Taxes	$10,500

Magna Fax, Inc., Balance Sheet
For the Years Ended December 31, 2009 and 2010

	2010	2009
Assets
Cash	$24,000	$21,000
Accounts Receivable	$45,000	$39,000
Inventory	$30,000	$27,000
Gross fixed Assets	$42,000	$40,000
Acc. Depreciation	$22,000	$18,000
Net fixed assets	$20,000	$22,000
Total Assets	$119,000	$109,000

Liabilities and Equity
Accounts Payable	$25,000	$30,000
Notes Payable	$50,000	$40,000
Accruals	$1,000	$2,000
Long-term Debts	$10,000	$8,000
Common Stock at par	$1,000	$1,000
Paid-in Capital in excess of par	$4,000	$4,000
Retained Earnings	$28,000	$24,000
Total Liabilities and Equity	$119,000	$109,000

Please make sure to show your caculcations for all questions below.
a. How much dividends did the company pay in 2010?
b. How much cash did the company generate from its operations?
c. What are the cash flows related to investments? Did the company acquire or dispose of assets in net terms?
d. What was the cash flow from financing?

Question 3

In preparation for the quarterly cash budget, the following revenue and cost information have been compiled. Prepare and briefly evaluate a cash budget for the months of October, November, and December based on the information shown below. What should the company be prepared for: a credit line or marketable securities for short term investments during the planning period?

Month	Sales	Purchases
August (actual)	$3,000,000	$3,500,000
September (actual)	$4,500,000	$2,000,000
October (actual)	$1,000,000	$500,000
November (actual)	$1,500,000	$750,000
December (actual)	$2,000,000	$1,000,000

· The firm collects 60 percent of sales for cash and 40 percent of its sales one month later.
· Interest income of $50,000 on marketable securities will be received in December.
· The firm pays cash for 40 percent of its purchases.
· The firm pays for 60 percent of its purchases the following month.
· Salaries and wages amount to 15 percent of the preceding month's sales.
· Sales commissions amount to 2 percent of the preceding month's sales.
· Lease payments of $100,000 must be made each month.
· A principal and interest payment on an outstanding loan is due in December of $150,000.
· The firm pays dividends of $50,000 at the end of the quarter (March, June, September and December).
· Fixed assets costing $600,000 will be purchased in December (all paid in cash).
· Depreciation expense each month of $45,000.
· The firm has a beginning cash balance in October of $100,000 and maintains a minimum cash balance of $200,000."

Question 4

The following table presents financial information for Boss Stores, Inc., a retail chain store in the U.S. (all numbers are in million USD)

Item	2008	2009	2010	2011
Sales	287.31	339.19	411.78	446.84
Net Income	11.22	16.48	19.7	12.23
Total Assets	268.58	275.3	318.43	451.32
Equity	180.63	191.9	211.03	222.57
Dividends		5.21	0.58	0.69

Use the information from Boss's annual financial statements. What is the difference between the sustainable growth and actual growth rates for 2011?

- 11.40%
- 7.09%
-3.05%
5.47%
13.98%

Question 5

A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and total liabilities of $750,000 has a return on equity of

15 percent.
4 percent.
20 percent.
3 percent.

Question 6

Meric Mining Inc. recently reported $15,000 of sales, $7,500 of operating costs other than depreciation, and $1,200 of depreciation. The company had no amortization charges, it had outstanding $6,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. How much was the firm's net income after taxes? Meric uses the same depreciation expense for tax and stockholder reporting purposes.

A. $3,284.55

B. $3,457.42

C. $3,639.39

D. $3,830.94

E. $4,022.48

Question 7

If a firm finances its assets with only debt and common equity, and if its financial leverage multiplier is 3.0, what should be its Debt to Equity ratio?

2
0.667
0.33
3
1.5

Question 8

Southeast Packaging's ROE last year was only 5 percent, but its management has developed a new operating plan designed to improve things. The new plan calls for a total debt ratio of 60 percent, which will result in interest charges of $8,000 per year. Management projects an EBIT of $26,000 on sales of $240,000, and it expects to have a total assets turnover ratio of 2.0. Under these conditions, the average tax rate will be 40 percent. If the changes are made, what return on equity will Southeast earn?

17.63%
21.55%
22.50%

25.00%
15.64%

Question 9

Which of the following actions might a firm take if its actual sales growth exceeds its sustainable rate of growth?
I. Increase prices
II. Decrease financial leverage
III. Decrease dividends
IV. Prune away marginal products

A) I and II only
B) I and III only
C) I, II, and IV only
D) I, III, and IV only
E) I, II, III, and IV

Question 10

Brown & Sons recently reported sales of $100 million, and net income equal to $5 million. The company has $70 million in total assets. Over the next year, the company is forecasting a 20 percent increase in sales. Since the company is at full capacity, its assets must increase in proportion to sales. The company also estimates that if sales increase 20 percent, spontaneous liabilities will increase by $2 million. If the company's sales increase, its profit margin will remain at its current level. The company's dividend payout ratio is 40 percent. Based on the information given above, how much additional capital must the company raise in order to support the 20 percent increase in sales?

8.2 million
8.4 million
6.25 million
7.34 million
8.35 million

Question 11

Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net operating cash flows increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?

The company made a large investment in a profitable new plant.

The company cut its dividends
The company sold a division and received cash in return The company issued new common stock
The company issued new long term debt

Question 12

Last year, Michelson Manufacturing reported $10,250 of sales, $3,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges, it had $3,500 of bonds outstanding that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $725. By how much will the depreciation change cause the firm's net after-tax income and its net cash flow to change? Note that the company uses the same depreciation calculations for tax and stockholder reporting purposes.

-$447.69; $241.06
-$383.84; $206.68
-$404.04; $217.56
-$425.30; $229.01
-$471.25; $253.75

Question 13

A new firm is developing its business plan. It will require $565,000 of assets, and it projects $452,800 of sales and $354,300 of operating costs for the first year. Management is quite sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)

47.33%
49.82%
52.45%
55.21%
58.11%

Question 14

Last year Swensen Corp. had sales of $303,225, operating costs of $267,500, and year-end assets of $195,000. The debt-to-total-assets ratio was 27%, the interest rate on the debt was 8.2%, and the firm's tax rate was 37%. The new CFO wants to see how the ROE would have been affected if the firm had used a 45% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure?

2.08%
2.32%
2.57%
2.86%
3.14%

Question 15

Muscarella Inc. has the following balance sheet and income statement data:

Cash	$14,000		Accounts payable	$42,000
Receivables	70,000		Other current liabilities	28,000
Inventories	210 000		Total CL	$70,000
Total CA	$294,000		Long-term debt	70,000
Net fixed assets	126,000		Common equity	280.000
Total assets	$420,000		Total liabilities, and equity	$420,000
Sales	$280,000
Net income	$21,000

The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.70, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?

4.28%
4.50%
4.73%
4.96%
5.21%

Question 16

Westcomb, Inc. had equity of $150,000 at the beginning of the year. At the end of the year, the company had total assets of $195,000. During the year, the company sold no new equity. Net income for the year was $72,000 and dividends were $44,640. What is the sustainable growth rate?

15.32%
15.79%
17.78%
18.01%
18.24%

Question 17

ABC is planning its operations for the coming year, and the CEO wants you to forecast the firm's additional funds needed. Data for use in the forecast are shown below. However, the CEO is concerned about the impact of a change in the payout ratio from the 10% that was used in the past to 50%, which the firm's investment bankers have recommended. Based on the percentage of sales method estimate the funding requirement for ABC in the coming year if ABC increased the payout from 10% to the new and higher level? All dollars are in millions.

Last year's sales = So	$300.0		Last year's accounts payable	$50.0
Sales growth rate = g	40%		Last yeff's notes payable (to bank)	$15.0
Last rat's total mils = Ao	$500.0		Last yeds acauals	$20.0
Last yeats pit margii = M	20.0%		ISA papist ratio	10.0%
			New payout ratio	AV%

Hint: Assume only spontaneous liabilities change with sales

$200
$150
$130
$120
$110

Question 18

A start-up firm is making an initial investment in new plant and equipment. Assume that currently its equipment must be depreciated on a straight-line basis over 10 years, but Congress is considering legislation that would require the firm to depreciate the equipment over 7 years. If the legislation becomes law, which of the following would occur in the year following the change?

• The firm's operating income (EBIT) would increase
• The firm's taxable income would increase
• The firm's free cash flow would increase
• The firm's tax payments would increase
• The firm's reported net income would increase