Reference no: EM131221937

Q1. Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth?

Q2. What issue does agency theory examine? Why is it important in a public corporation rather than in a private corporation? Answer in your own words. Do not copy from anywhere.

Q3. Stein Books Inc. sold 1,900 finance textbooks for $250 each to High Tuition University in 20X1. These books cost $210 to produce. Stein Books spent $12,200 (selling expense) to convince the university to buy its books.

Depreciation expense for the year was $15,200. In addition, Stein Books borrowed $104,000 on January 1, 20X1, on which the company paid 12 percent interest. Both the interest and principal of the loan were paid on December 31, 20X1. The publishing firm's tax rate is 30 percent.

Did Stein Books make a profit in 20X1? Please verify with an income statement presented in good form.

Do your own work.  Do not copy from anywhere.

Q4. Botox Facial Care had earnings after taxes of $370,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $31.50. In 20X2, earnings after taxes increased to $436,000 with the same 200,000 shares outstanding. The stock price was $42.00.

a. Compute earnings per share and the P/E ratio for 20X1. (The P/E ratio equals the stock price divided by earnings per share.)

b. Compute earnings per share and the P/E ratio for 20X2.

c. Give a general explanation of why the P/E ratio changed.

Do your own work. Do not copy from anywhere.

Q5. Identify whether each of the following items increases or decreases cash flow:

Increase in accounts receivable                      Decrease in prepaid expenses

Increase in notes payable                                 Increase in inventory

Depreciation expense                                       Dividend payment

Increase in investments                                    Increase in accrued expenses

Decrease in accounts payable

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Q6. Given the financial statements for Jones Corporation and Smith Corporation shown here:

a. To which one would you, as credit manager for a supplier, approve the extension of (short-term) trade credit? Why?

b. In which one would you buy stock? Why?

JONES CORPORATION
Current Assets		Liabilities
Cash	$ 20,000	Accounts payable	$100,000
Accounts receivable	80,000	Bonds payable (long-term)	80,000
Inventory	50,000
Long-Term Assets		Stockholders' Equity
Fixed assets	$500,000	Common stock	$150,000
Less: Accumulated depreciation	(150,000)	Paid-in capital	70,000
Net fixed assets*	350,000	Retained earnings	100,000
Total assets	$500,000	Total liab. and equity	$500,000

 

 

Sales (on credit)	$1,250,000
Cost of goods sold	750,000
Gross profit	500,000
Selling and administrative expense†	257,000
Less: Depreciation expense	50,000
Operating profit	193,000
Interest expense	8,000
Earnings before taxes	185,000
Tax expense	92,500
Net income	$    92,500

*Use net fixed assets in computing fixed asset turnover.

†Includes $7,000 in lease payments.

SMITH CORPORATION
Current Assets		Liabilities
Cash	$ 35,000	Accounts payable	$  75,000
Marketable securities	7,500	Bonds payable (long-term)	210,000
Accounts receivable	70,000
Inventory	75,000
Long-Term Assets		Stockholders' Equity
Fixed assets	$500,000	Common stock	$  75,000
Less: Accum. dep	(250,000)	Paid-in capital	30,000
Net fixed assets*	250,000	Retained earnings	47,500
Total assets	$437,500	Total liab. and equity	$437,500

*Use net fixed assets in computing fixed asset turnover.