BUS 311- HW 1

Galway Plumbing Supply has a return on equity of 19.3 percent, a profit margin of 10.1 percent, and total equity of $645,685. What is the net income?

$124,617.21, Net income = .193 × $645,685 = $124,617.21

An auction market:

has a physical trading floor.

A sole proprietorship:

has its profits taxed as personal income.

A common-size balance sheet helps financial managers determine:

if changes are occurring in a firm's mix of assets.

During the past year, Rend Yard Services paid $36,800 in interest along with $2,000 in dividends. The company issued $3,000 of stock and $16,000 of new debt. The company reduced the balance due on its old debt by $18,400. What is the amount of the cash flow to creditors?

$39,200, Cash flow to creditors = $36,800 − 16,000 + 18,400 = $39,200

Di Bacco Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners' equity?

$71,600, Owners' equity = $29,800 + 64,800 − 23,000 = $71,600

De la Cruz Automotive has net working capital of $22,600, current assets of $56,500, equity of $62,700, and long-term debt of $31,900. What is the amount of the net fixed assets?

$72,000, Net fixed assets = $31,900 + 62,700 − 22,600 = $72,000

A firm has total assets of $958,090, current assets of $304,522, current liabilities of $183,012, and total debt of $382,901. What is the debt-equity ratio?

.67, Debt-equity ratio = $382,901/($958,090 − 382,901) = .67

Bed Bug Inn has annual sales of $137,000. Earnings before interest and taxes are equal to 5.8 percent of sales. For the period, the firm paid $4,700 in interest. What is the profit margin if the tax rate is 21 percent?

1.87%, Profit margin = {[(.058 × $137,000) − $4,700] × (1 − .21)}/$137,000 = .0187, or 1.87%

Saki Kale Farms has net income of $96,320, total assets of $975,200, total equity of $555,280, and total sales of $1,141,275. What is the common-size percentage for the net income?

8.44%, Net income common-size percentage = $96,320/$1,141,275 = .0844, or 8.44%

SDJ, Incorporated, has net working capital of $2,630, current liabilities of $5,970, and inventory of $3,860. What is the current ratio? What is the quick ratio?

A.) To find the current assets, we must use the net working capital equation. Doing so, we find: NWC = Current assets − Current liabilities $2,630 = Current assets − $5,970 Current assets = $8,600 Now, use this number to calculate the current ratio and the quick ratio. The current ratio is: Current ratio = Current assets/Current liabilities Current ratio = $8,600/$5,970 Current ratio = 1.44 times B.) And the quick ratio is: Quick ratio = (Current assets − Inventory)/Current liabilities Quick ratio = ($8,600 − 3,860)/$5,970 Quick ratio = .79 times

Which one of the following situations is most apt to create an agency conflict?

Basing management bonuses on the length of employment

Growth can summarize various aspects of a firm's __________ and ___________ policies.

Financial, investment

Whipporwill, Incorporated's, net income for the most recent year was $19,382. The tax rate was 21 percent. The firm paid $3,681 in total interest expense and deducted $4,738 in depreciation expense. What was the company's cash coverage ratio for the year?

Here, we need to work the income statement backward to find the EBIT. Starting at the bottom of the income statement, we know that the taxes are the taxable income times the tax rate. The net income is the taxable income minus taxes. Rearranging this equation, we get: Net income = Taxable income − TC(Taxable income) Net income = (1 − TC)(Taxable income) Using this relationship we find the taxable income is: Net income = (1 − TC)(Taxable income) $19,382 = (1 − .21)(Taxable income) Taxable income = $24,534.18 Now, we can calculate the EBIT as: Taxable income = EBIT − Interest $24,534.18 = EBIT − $3,681 EBIT = $28,215.18 So, the cash coverage ratio is: Cash coverage ratio = (EBIT + Depreciation expense)/Interest Cash coverage ratio = ($28,215.18 + 4,738)/$3,681 Cash coverage ratio = 8.95 times

Which one of the following forms of business organization offers liability protection to some of its owners but not to all of its owners?

Limited partnership

Rottweiler Obedience School's December 31, 2021, balance sheet showed net fixed assets of $2.3 million, and the December 31, 2022, balance sheet showed net fixed assets of $3.1 million. The company's 2022 income statement showed a depreciation expense of $327,000. What was the company's net capital spending for 2022?

Net capital spending is the increase in fixed assets plus depreciation. Using this relationship, we find: Net capital spending = NFAending − NFAbeginning + Depreciation Net capital spending = $3,100,000 − 2,300,000 + 327,000 Net capital spending = $1,127,000

Which one of the following statements correctly applies to a sole proprietorship?

Obtaining additional equity is dependent on the owner's personal finances.

Polska, Incorporated, is obligated to pay its creditors $10,300 during the year. What is the value of the shareholders' equity if assets equal $11,600? What is the value of the shareholders' equity if assets equal $9,400?

Owners' equity is the maximum of total assets minus total liabilities, or zero. Although the book value of owners' equity can be negative, the market value of owners' equity cannot be negative, so: Owners' equity = Max[(TA − TL), 0] If total assets are $11,600, the owners' equity is: Owners' equity = Max[($11,600 − 10,300), 0] Owners' equity = $1,300 If total assets are $9,400, the owners' equity is: Owners' equity = Max[($9,400 − 10,300), 0] Owners' equity = $0

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

Positive cash flow from assets

To generate a coherent plan, goals and objectives will have to be modified, and priorities will have to be established.

True

The December 31, 2021, balance sheet of Chen, Incorporated, showed long-term debt of $1.38 million, $130,000 in the common stock account, and $2.34 million in the additional paid-in surplus account. The December 31, 2022, balance sheet showed long-term debt of $1.52 million, $147,000 in the common stock account, and $2.65 million in the additional paid-in surplus account. The 2022 income statement showed an interest expense of $104,500 and the company paid out $168,500 in cash dividends during 2022. The firm's net capital spending for 2022 was $750,000 and the firm reduced its net working capital investment by $94,300. What was the firm's 2022 operating cash flow, or OCF?

The cash flow to creditors is the interest paid, minus any net new borrowing, so: Cash flow to creditors = Interest paid − Net new borrowing Cash flow to creditors = Interest paid − (LTDending − LTDbeginning) Cash flow to creditors = $104,500 − ($1,520,000 − 1,380,000) Cash flow to creditors = −$35,500 The cash flow to stockholders is the dividends paid minus any new equity raised. So, the cash flow to stockholders is: (Note that APIS is the additional paid-in surplus.) Cash flow to stockholders = Dividends paid − Net new equity Cash flow to stockholders = Dividends paid − [(Commonending + APISending) − (Commonbeginning + APISbeginning)] Cash flow to stockholders = $168,500 − [($147,000 + 2,650,000) − ($130,000 + 2,340,000)] Cash flow to stockholders = −$158,500 We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is: Cash flow to stockholders = Dividends paid − Net new equity Cash flow to stockholders = Dividends paid − [(Commonending + APISending) − (Commonbeginning + APISbeginning)] Cash flow to stockholders = $168,500 − [($147,000 + 2,650,000) − ($130,000 + 2,340,000)] Cash flow to stockholders = −$158,500 We know that cash flow from assets is equal to cash flow to creditors plus cash flow to stockholders. So, cash flow from assets is: Cash flow from assets = Cash flow to creditors + Cash flow to stockholders Cash flow from assets = −$35,500 − 158,500 Cash flow from assets = −$194,000 We also know that cash flow from assets is equal to the operating cash flow minus the change in net working capital and the net capital spending. We can use this relationship to find the operating cash flow. Doing so, we find: Cash flow from assets = OCF − Change in NWC − Net capital spending −$194,000 = OCF − (−$94,300) − (750,000) OCF = −$194,000 − 94,300 + 750,000 OCF = $461,700

The December 31, 2021, balance sheet of Chen, Incorporated, showed $130,000 in the common stock account and $2.34 million in the additional paid-in surplus account. The December 31, 2022, balance sheet showed $147,000 and $2.65 million in the same two accounts, respectively. The company paid out $168,500 in cash dividends during 2022. What was the cash flow to stockholders for the year?

The cash flow to stockholders is the dividends paid minus any new equity raised. So, the cash flow to stockholders is: (Note that APIS is the additional paid-in surplus.) Cash flow to stockholders = Dividends paid − Net new equity Cash flow to stockholders = Dividends paid − [(Commonending + APISending) − (Commonbeginning + APISbeginning)] Cash flow to stockholders = $168,500 − [($147,000 + 2,650,000) − ($130,000 + 2,340,000)] Cash flow to stockholders = −$158,500

When evaluating financial planning steps, we must consider all of the following, except:

The project horizon for the next 30 to 90 days.

During the year, Belyk Paving Company had sales of $1,745,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $880,000, $470,000, and $385,000, respectively. In addition, the company had an interest expense of $195,000 and a tax rate of 21 percent. Ignore any tax loss carryforward provision and assume interest expense is fully deductible. The company paid out $370,000 in cash dividends. Assume net capital spending was zero, no new investments were made in net working capital, and no new stock was issued during the year. Calculate the firm's new long-term debt added during the year.

The taxes are zero since we are ignoring any carryback or carryforward provisions. The operating cash flow for the year was: OCF = EBIT + Depreciation − Taxes OCF = $10,000 + 385,000 − 0 OCF = $395,000 Net income was negative because of the tax deductibility of depreciation and interest expense. However, the actual cash flow from operations was positive because depreciation is a noncash expense and interest is a financing, not an operating, expense. A firm can still pay out dividends if net income is negative; it just has to be sure there is sufficient cash flow to make the dividend payments. The assumptions made in the question are: Change in NWC = Net capital spending = Net new equity = 0 To find the new long-term debt, we first need to find the cash flow from assets. The cash flow from assets is: Cash flow from assets = OCF − Change in NWC − Net capital spending Cash flow from assets = $395,000 − 0 − 0 Cash flow from assets = $395,000 We can also find the cash flow to stockholders, which is: Cash flow to stockholders = Dividends − Net new equity Cash flow to stockholders = $370,000 − 0 Cash flow to stockholders = $370,000 Now we can use the cash flow from assets equation to find the cash flow to creditors. Doing so, we get: Cash flow from assets = Cash flow to creditors + Cash flow to stockholders $395,000 = Cash flow to creditors + $370,000 Cash flow to creditors = $25,000 Now we can use the cash flow to creditors equation to find: Cash flow to creditors = Interest − Net new long-term debt $25,000 = $195,000 − Net new long-term debt Net new long-term debt = $170,000

Kaleb's Karate Supply had a profit margin of 6.4 percent, sales of $10.5 million, and total assets of $6.4 million. what is total asset turnover? If a goal was set increasing Total Asset turnover to 2.10 times what would be new sales figure?

The total asset turnover is: Total asset turnover = Sales/Total assets Total asset turnover = $10,500,000/$6,400,000 Total asset turnover = 1.64 times If the target total asset turnover is 2.10 times, we can use the total asset turnover equation to solve for the necessary sales level. The new sales level will be: Total asset turnover = Sales/Total assets 2.10 = Sales/$6,400,000 Sales = $13,440,000

Based on the following information, calculate the sustainable growth rate for Hendrix Guitars, Inc.: Profit margin=5.9% Total asset turnover=1.15 Total debt ratio=.45 Payout ratio=40%

To calculate the sustainable growth rate, we need to calculate the return on equity. We can use the DuPont identity to calculate the return on equity once we find the equity multiplier. Using the total debt ratio, we can find the debt-equity ratio is: Total debt ratio = Total debt/Total assets .45 = Total debt/Total assets 1/.45 = Total assets/Total debt 1/.45 = (Total debt + Total equity)/Total debt 1/.45 = 1 + Total equity/Total debt Total equity/Total debt = (1/.45) − 1 Total debt/Total equity = 1/[(1/.45) − 1] Total debt/Total equity = .82 Debt-equity ratio = .82 So, the equity multiplier is: Equity multiplier = 1 + Debt-equity ratio Equity multiplier = 1 + .82 Equity multiplier = 1.82 times Using the DuPont identity, the ROE is: ROE = (Profit margin)(Total asset turnover)(Equity multiplier) ROE = (.059)(1.15)(1.82) ROE = .1234, or 12.34% To calculate the sustainable growth rate, we also need the retention ratio. The retention ratio is: b = 1 − .40 b = .60 Now we can calculate the sustainable growth rate as: Sustainable growth rate = [(ROE)(b)]/[1 − (ROE)(b)] Sustainable growth rate = [.1234(.60)]/[1 − .1234(.60)] Sustainable growth rate = .0799, or 7.99%

PXG Company has total assets of $6.45 million and a total asset turnover of 1.8 times. If the return on assets is 7.9 percent, what is its profit margin?

To find the profit margin, we need the net income and sales. We can use the total asset turnover to find the sales and the return on assets to find the net income. Beginning with the total asset turnover, we find sales are: Total asset turnover = Sales/Total assets 1.80 = Sales/$6,450,000 Sales = $11,610,000 And the net income is: ROA = Net income/Total assets .0790 = Net income/$6,450,000 Net income = $509,550 Now we can find the profit margin which is: Profit margin = Net income/Sales Profit margin = $509,550/$11,610,000 Profit margin = .0439, or 4.39%

An income statement prepared according to GAAP:

records expenses based on the matching principle.

In a general partnership, each partner is personally liable for:

the total debts of the partnership, even if he or she was unaware of those debts.

Raleigh BBQ has $48,000 in current assets and $39,000 in current liabilities. Decisions related to these accounts are referred to as:

working capital management.