Questions -
Q1. Frantic Fast Foods had earnings after taxes of $430,000 in the year 2009 with 345,000 shares outstanding. On January 1, 2010, the firm issued 34,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 23 percent.
(a) Compute earnings per share for the year 2009.
(b) Compute earnings per share for the year 2010.
Q2. Quantum Technology had $669,000 of retained earnings on December 31, 2010. The company paid common dividends of $35,500 in 2010 and had retained earnings of $576,000 on December 31, 2009.
(a) How much did Quantum Technology earn during 2010?
(b) What would earnings per share be if 47,400 shares of common stock were outstanding?
Q3. Botox Facial Care had earnings after taxes of $347,000 in 2009 with 200,000 shares of stock outstanding. The stock price was $43.80. In 2010, earnings after taxes increased to $368,000 with the same 200,000 shares outstanding. The stock price was $55.00.
(a) Compute earnings per share and the P/E ratio for 2009. The P/E ratio equals the stock price divided by earnings per share.
(b) Compute earnings per share and the P/E ratio for 2010.
(c) Why the P/E ratio changed?
Q4. The Jupiter Corporation has a gross profit of $707,000 and $329,000 in depreciation expense. The Saturn Corporation also has $707,000 in gross profit, with $44,800 in depreciation expense. Selling and administrative expense is $176,000 for each company.
(a) Given that the tax rate is 40 percent, compute the cash flow for both companies.
(b) What is the difference in cash flow between the two firms?
Q5. A-Rod Fishing Supplies had sales of $2,680,000 and cost of goods sold of $2,080,000. Selling and administrative expenses represented 10 percent of sales. Depreciation was 5 percent of the total assets of $4,530,000.
What was the firm's operating profit?
Q6. The balance sheet for the Bryan Corporation is shown below. Sales for the year were $3,680,000, with 75 percent of sales sold on credit.
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BRYAN CORPORATION Balance Sheet 201X
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Assets
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Liabilities and Stockholders' Equity
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|
Cash
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$21,000
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Accounts payable
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$222,000
|
|
Accounts receivable
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324,000
|
Accrued taxes
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93,000
|
|
Inventory
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244,000
|
Bonds payable (long-term)
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194,000
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|
Plant and equipment
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461,000
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Common stock
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100,000
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| |
|
|
|
| |
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Paid-in capital
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150,000
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| |
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Retained earnings
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291,000
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Total assets
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$1,050,000
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Total liabilities and
stockholders' equity
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$1,050,000
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Compute the following ratios
(a) Current ratio
(b) Quick ratio
(c) Debt-to-total-assets ratio
(d) Asset turnover
(e) Average collection period
Q7. Jerry Rice and Grain Stores has $4,920,000 in yearly sales. The firm earns 4.5 percent on each dollar of sales and turns over its assets 2.5 times per year. It has $127,000 in current liabilities and $327,000 in long-term liabilities.
(a) What is its return on stockholders' equity?
(b) If the asset base remains the same as computed in part a, but total asset turnover goes up to 3.00, what will be the new return on stockholders' equity? Assume that the profit margin stays the same as do current and long-term liabilities.
Q8. Using the income statement for J. Lo Wedding Gowns, compute the following ratios:
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J. LO WEDDING GOWNS Income Statement
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Sales
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$244,000
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Less: Cost of goods sold
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135,000
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Gross profit
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109,000
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Less: Selling and administrative expense
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47,900
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Less: Lease expense
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18,200
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Operating profit*
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$42,900
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Less: Interest expense
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8,300
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Earnings before taxes
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$34,600
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Less: Taxes (30%)
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13,840
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Earnings after taxes
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$20,760
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*Equals income before interest and taxes.
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(a) Compute the interest coverage ratio.
(b) Compute the fixed charge coverage ratio.
(c) The total assets for this company equal $240,000. Compute the return on assets (investment).
Q9. The Alliance Corp. expects to sell the following number of units of copper cables at the prices indicated, under three different scenarios in the economy. The probability of each outcome is indicated.
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Outcome
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Probability
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Units
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Price
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|
A
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.20
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230
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$21
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B
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.40
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380
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36
|
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C
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.40
|
530
|
46
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What is the expected value of the total sales projection?
Q10. The Bradley Corporation produces a product with the following costs as of July 1, 2011:
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Material
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$ 4 per unit
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Labor
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2 per unit
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Overhead
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2 per unit
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Beginning inventory at these costs on July 1 was 4,150 units. From July 1 to December 1, 2011, Bradley produced 14,300 units. These units had a material cost of $5, labor of $4, and overhead of $5 per unit. Bradley uses FIFO inventory accounting.
(a) Assuming that Bradley sold 15,300 units during the last six months of the year at $19 each, what would gross profit be?
(b) What is the value of ending inventory?
Q11. At the end of January, Mineral Labs had an inventory of 865 units, which cost $9 per unit to produce. During February the company produced 1,350 units at a cost of $13 per unit.
(a) If the firm sold 1,750 units in February, what was the cost of goods sold? (Assume LIFO inventory accounting.)
(b) If the firm sold 1,750 units in February, what was the cost of goods sold? (Assume FIFO inventory accounting.)
Q12. Philip Morris is excited because sales for his clothing company are expected to double from $720,000 to $1,440,000 next year. Philip notes that net assets (Assets - Liabilities) will remain at 40 percent of Sales. His clothing firm will enjoy a 9 percent return on total sales. He will start the year with $320,000 in the bank and is already bragging about the two Mercedes he will buy and the European vacation he will take.
(a) Compute his likely cash balance or deficit for the end of the year. Start with beginning cash and subtract the asset buildup (equal to 40 percent of the sales increase) and add in profit.
(b) Does his optimistic outlook for his cash position appear to be correct?
Q13. The Bradley Corporation produces a product with the following costs as of July 1, 2011:
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Material
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$ 3 per unit
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Labor
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3 per unit
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|
Overhead
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1 per unit
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Beginning inventory at these costs on July 1 was 3,100 units. From July 1 to December 1, 2011, Bradley produced 12,200 units. These units had a material cost of $2, labor of $3, and overhead of $4 per unit. Bradley uses LIFO inventory accounting.
(a) Assuming that Bradley sold 13,400 units during the last six months of the year at $14 each, what would gross profit be?
(b) What is the value of ending inventory?
Q14. Sterling Optical and Royal Optical both make glass frames and each is able to generate earnings before interest and taxes of $113,600.
The separate capital structures for Sterling and Royal are shown below:
|
Sterling
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Royal
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|
Debt @ 8%
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$852,000
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Debt @ 8%
|
$284,000
|
|
Common stock, $5 par
|
568,000
|
Common stock, $5 par
|
1,136,000
|
|
Total
|
$1,420,000
|
Total
|
$1,420,000
|
|
Common shares
|
113,600
|
Common shares
|
227,200
|
(a) Compute earnings per share for both firms. Assume a 30 percent tax rate.
(b) In part a, you should have gotten the same answer for both companies' earnings per share. Assuming a P/E ratio of 24 for each company, what would its stock price be?
(c) Now as part of your analysis, assume the P/E ratio would be 18 for the riskier company in terms of heavy debt utilization in the capital structure and 22 for the less risky company. What would the stock prices for the two firms be under these assumptions? (Note: Although interest rates also would likely be different based on risk, we will hold them constant for ease of analysis.)
Q15. Cain Auto Supplies and Able Auto Parts are competitors in the aftermarket for auto supplies. The separate capital structures for Cain and Able are presented below.
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Cain
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Able
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Debt @ 8%
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$60,000
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Debt @ 8%
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$120,000
|
|
Common stock, $10 par
|
120,000
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Common stock, $10 par
|
60,000
|
|
Total
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$180,000
|
Total
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$180,000
|
|
Common shares
|
12,000
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Common shares
|
6,000
|
(a) Compute earnings per share if earnings before interest and taxes are $12,000, $14,400, and $51,000 (assume a 10 percent tax rate).
(b) What is the relationship between earnings per share and the level of EBIT?
(c) If the cost of debt went up to 10 percent and all other factors remained equal, what would be the break-even level for EBIT?