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Janelle Thompson 5/29/13

Dr. Joseph Riotto Busi 607 8205 Corporate Financial Management


Chapter 1: D1, D2, D3, D7, D8 pg. 22; Chapter 2: P1, P4 pg. 46; P6, P7 pp. 46-47
Chapter 3: P4, P6 pg. 76; P21 pp.79-80
Chapter 1 Discussion Questions:
1. How did the recession of 20072009 compare with other recessions since the
Great Depression in terms of length? (LO3).
The recession of 2007-2009 was the longest recession since the Great Depression.
2. What effect did the recession of 20072009 have on government regulation?
(LO3).
Congress started working on new regulations for financial institutions and creating
new organizations to oversee.
3. What advantages does a sole proprietorship offer? What is a major drawback of
this type of organization? (LO2)
The advantages of a sole proprietorship offers are simplicity of decision-making and
low organizational & operational costs. A major drawback is unlimited liability to
the owner, in which he can lose his personal assets as well capital.
7. What issue does agency theory examine? Why is it important in a public
corporation rather than in a private corporation? (LO4)
Agency theory examines the relationship between principle and agent or owner and
employee. It is more important in a public corporation because management is not
the likely the owner like in a private company and the management now serves as
the agent and his decisions should be in the interest of the shareholders. These
interests can conflict with the agent, or managements financial decisions.
8. Why are institutional investors important in todays business world? (LO4)
Institutional investors own large percentages in U.S. companies such as pension and
mutual funds, in which they have more say in the management of publicly owned
companies. These investors hold voting power since they vote in groups and have a
large say in choosing the board of directors for efficient management.
Chapter 2 Problem Questions:
1. Frantic Fast Foods had earnings after taxes of $390,000 in the year 2009 with
300,000 shares outstanding. On January 1, 2010, the firm issued 25,000 new
shares. Because of the proceeds from these new shares and other operating
improvements, earnings after taxes increased by 20 percent.
Income statement (LO1)
a . Compute earnings per share for the year 2009.

b . Compute earnings per share for the year 2010.

4. A-Rod Fishing Supplies had sales of $2,000,000 and cost of goods sold of
$1,250,000. Selling and administrative expenses represented 8 percent of sales.
Depreciation was 5 percent of the total assets of $4,000,000. What was the firms
operating profit? Operating Profit (LO1)
Sales
Cost of goods sold
Gross Profit
Selling & administrative expense
8% x $2,000,000 = $160,000
Depreciation expense
5% x $4,000,000 = $200,000
Operating profit

$2,000,000
1,250,000
750,000
160,000
200,000
$ 390,000

6. Given the following information prepare in good form an income statement for
the Dental Drilling Company.
Selling and administrative expense ............................................................ $ 60,000
Depreciation expense ........................................................................................
70,000
Sales .......................................................................................................................... 470,000
Interest expense ..................................................................................................
40,000
Cost of goods sold ........................................................................................... 140,000
Taxes .....................................................................................................................
45,000
Sales
Cost of goods sold
Gross Profit
Selling & administrative expense
Depreciation expense
Operating profit
Interest Expense
Earnings before taxes
Taxes

$470,000
140,000
330,000
60,000
70,000
200,000
40,000
160,000
45,000

Earnings after taxes

115,000

7. Given the following information, prepare in good form an income statement for
Jonas Brothers Cough Drops.
Selling and administrative expense ............................................................ $ 250,000
Depreciation expense ........................................................................................ 190,000
Sales .......................................................................................................................... 1,600,000
Interest expense .................................................................................................. 120,000
Cost of goods sold ............................................................................................... 480,000
Taxes ........................................................................................................................ 165,000
Sales
Cost of goods sold
Gross Profit
Selling & administrative expense
Depreciation expense
Operating profit
Interest Expense
Earnings before taxes
Taxes
Earnings after taxes

$1,600,000
480,000
1,120,000
250,000
190,000
680,000
120,000
560,000
165,000
395,000

Chapter 3 Problem Question:


4. Billys Chrystal Stores, Inc., has assets of $5,000,000 and turns over its assets 1.2
times per year. Return on assets is 8 percent. What is the firms profit margin
(return on sales)? Profitability ratios (LO2)

6. Dr. Zhivago Diagnostics Corp. income statement for 2010 is as follows:


Profitability ratios (LO2)

Sales .................................................................................................... $2,000,000


Cost of goods sold ......................................................................... 1,400,000
Gross profit ......................................................................................
600,000
Selling and administrative expense ......................................
300,000
Operating profit .............................................................................
300,000
Interest expense ............................................................................
50,000
Income before taxes ....................................................................
250,000
Taxes (30%) ....................................................................................
75,000
Income after taxes ........................................................................ $ 175,000
a . Compute the profit margin for 2010.

b . Assume in 2011, sales increase by 10 percent and cost of goods sold increases
by 20 percent. The firm is able to keep all other expenses the same. Once again,
assume a tax rate of 30 percent on income before taxes. What are income after taxes
and the profit margin for 2011?
Sales ................................................................................................ $2,200,000 (2,000,000 x 1.10)
Cost of goods sold ..................................................................... 1,400,000 (1,400,000 x 1.20)
Gross profit ..................................................................................
520,000
Selling and administrative expense ..................................
300,000
Operating profit .........................................................................
220,000
Interest expense ........................................................................
50,000
Income before taxes ................................................................
170,000
Taxes (30%) ................................................................................
51,000
Income after taxes .................................................................... $ 119,000

21. Jim Shorts Company makes clothing for schools. Sales in 2010 were
$4,000,000. Assets were as follows: Turnover ratios (LO2)
Cash ................................................................................. $ 100,000
Accounts receivable .................................................
800,000
Inventory ......................................................................
400,000
Net plant and equipment .......................................
500,000
Total assets ......................................................... $1,800,000
a . Compute the following:

1. Accounts receivable turnover

2. Inventory turnover

3. Fixed asset turnover

4. Total asset turnover

b . In 2011, sales increased to $5,000,000 and the assets for that year were as
follows:
Cash ................................................................................. $ 100,000
Accounts receivable .................................................
900,000
Inventory ......................................................................
975,000
Net plant and equipment .......................................
500,000
Total assets ....................................................
$2,475,000
Once again, compute the four ratios.
1. Accounts receivable turnover

2. Inventory turnover

3. Fixed asset turnover

4. Total asset turnover

c. Indicate if there is an improvement or decline in total asset turnover, and


based on the other ratios, indicate why this development has taken place.
Total asset turnover decreased. In 2010 it was 2.22 times and declined to 2.02 in
2011. Accounts receivable turnover and fixed asset turnover both increased from
2010 to 2011, but inventory turnover decreased from 10 to 5.13 times which would
account for the decline in total asset turnover.

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