Reference no: EM132628564

Golden Cup revenues for the year includes the following: Domestic revenues $160,000. International revenues $80,000. Out of Golden Cup's sales, cost of sales and direct labor is 50% of annual revenues.

• Because of the strong competition that it faces, Golden Cup has a generous marketing plan. Golden Cup signed a contract with the marketing planet Inc. by which the marketing agency will be responsible for Golden Cup marketing for five years period started this year. The contract costs Golden Cup $100,000 that were paid up front, however the company thinks this plan will affect its sales evenly over the five years period. Golden Cup also spends $30,000 in the form of general and administrative expenses per year. Golden Cup depreciable assets historical value is $40,000 and is depreciated on a straight line basis over 10 years.
• Golden Cup pays interest rate of 10% on its Long-term debt outstanding.
• Out of the year's net income, Golden Cup is planning to repay $30,000 to its shareholders in the form of cash dividends. The company currently has 60,000 shares outstanding

Income Statement to help answer the following questions

Income Statement

Particulars Amount

Revenues Domestic+International= (160,000+ 80000) 240000

(-) Cost of goods Sold 50% of 240,000 120000

Gross Margin 120000

(-)Marketing expenses 100,000/5=20000 20000

(-)General and administrative expenses 30000

(-) Depreciation 4000

EBIT 66000

(-)Interest Expenses 4000

EBT 62000

(-)Tax Expenses (21%) 13020

Net Income 48980

Dividends 30000

Additions to Retained Earnings 18980

Ms. Janet McInish works as an elementary school teacher and has a taxable income from her job of $35,000. She inherited 10% of Golden Cup shares outstanding, and recently received her annual dividends.

Question 1- What is the amount of annual dividends received by Ms. McInish?

Question 2- What is Ms. McInish total tax liability if her tax status is married filing together? Tax is 21%

Question 3- Mr. David Lawson, the CFO of Golden Cup plans to increase the company's long-term debt from $40,000 to $80,000 by getting a 5-year loan from bank of America.

a- What type of financial decisions did MR. David take?

b- Will this decision result in Golden Cup to be excessively levered if everything else remains unchanged? Show your calculations, knowing that industry average debt/equity ratio is 1.

C- Mr. David is planning to use half of the long-term loan proceeds to increase Golden Cup inventory holdings, what type of financial decision is this? If nothing else changes, how would this decision affect Golden Cup liquidity?

Question 4- Mr. David decision to increase inventory holdings resulted from the consistent pressure of Golden Cup's Board of Directors to increase amount of inventories. Mr. David's own opinion was that Golden cup is holding enough inventory to keep the business running without costing the company lots of money on inventory carrying costs. On the other hand, BOD believes that in such a dynamic industry, holding more inventory is necessary to keep smooth business operations.

a- How long does it currently take the company to turnover its inventory?

b- Do you agree with Mr. David's opinion? Or, With the BOD? And why? Knowing that industry average inventory turnover is 8.