Finance 350
The Hartnett Corporation manufactures baseball bats with Pudge Rodriguez's autograph stamped on them. Each bat sells for $35 and has a variable cost of $22. There are $97,500 in fixed costs involved in the production process. Compute the break-even point in units. Find the sales (in units) needed to earn a profit of $262,500.
Break Even = Fixed Costs / Contribution Margin Contribution Margin = Price - Variable Costs BE = 97,500 / (35-22) = 7,500 units Variable Costs = $22 per unit Fixed Costs = 97,500 Operating Income = 262,500 is goal 262,500 + 97,500 = 360,000 - 97,500 = 262,500 for variable costs 262,500 / 22 = 11,932 units to earn profit of 262,500
At the end of January, Mineral Labs had an inventory of 775 units, which cost $12 per unit to produce. During February the company produced 900 units at a cost of $16 per unit. If the firm sold 1,500 units in February, what was the cost of goods sold? Assume LIFO Assume FIFO
COGS 775 x 12 = 9,300 900 x 16 = 14,400 LIFO 900 x 16 = 14,400 600 x 12 = 7,200 14,400 + 7,200 = 21,600 FIFO 775 x 12 = 9,300 725 x 16 = 11,600 9,300 + 11,600 = 20,900
Cash Flows from Investing Activities
Cash inflows and outflows related to the purchase or sale of long-lived productive assets. Increase in Investments + Increase in plant & Equipment = Net Cash Flow
Liquid Ratio Classification
Current ratio Quick ratio
The Sterling Tire Company's income statement for 20X1 is as follows: STERLING TIRE COMPANY Income Statement For the Year Ended December 31, 20X1 Sales (20,000 tires at $60 each) $1,200,000 Less: Variable costs (20,000 tires at $30) 600,000 Fixed costs 400,000 Earnings before interest and taxes (EBIT) $200,000 Interest expense 50,000 Earnings before taxes (EBT) $150,000 Income tax expense (30%) 45,000 Earnings after taxes (EAT) $105,000 Compute: DOL, DFL, DCL, BE
DOL = Contribution Margin/Net Operating Income Quantity x (price - Variable Cost per Unit) / Quantity x (price - Variable Cost per Unit) - Fixed Costs Sales - Variable Costs / Profits 20,000 x (60-30) / 20,000 x (60-30) -400,000 = 3.00 or 300% DFL = EBIT/EBT (200,000 / 150,000) = 1.33 DCL = DOL x DFL = 3.00 x 1.33 = 4 BE = FC / (C - VC) = 400,000 / 60-30 = 13,333.33
United Snack Company sells 50-pound bags of peanuts to university dormitories for $20 a bag. The fixed costs of this operation are $176,250, while the variable costs of peanuts are $0.15 per pound. What is the DOL at 19,000 bags and at 24,000 bags? With an annual interest expense of $15,000, find DFL at both 19,000 and 24,000 bags. Find DCL
DOL = Quantity x (price - Variable Cost per Unit) / Quantity x (price - Variable Cost per Unit) - Fixed Costs 19,000 x (20-.15)/19,000 x (20-.15) - 176,250 = 377,150 / 200,900 = 1.88 24,000 x (20-.15)/24,000 x (20-.15) - 176,250 = 476,400 / 300,150 = 1.59 DFL = EBIT/EBT 19,000 = 200,900 / 185,900 = 1.08 24,000 = 300,150 / 285,150 = 1.05 DCL = DOL x DFL 1.88 x 1.08 = 2.03 1.59 x 1.05 = 1.67
Debt Utilization Ratio Classification
Debt to total assets times interest earned fixed charge coverage
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.
EPS = Earnings after taxes / shares outstanding P/E Ratio = market price of shares / EPS a) 370,000 / 200,000 = 1.85 P/E Ratio 31.50 / 1.85 = 17.027 = 17.03 b) 436,000 / 200,000 = 2.18 P/E Ratio = 42.00 / 2.18 = 19.27 c) stock price increased 33% while EPS only increased 17.84%
profitability ratios
Measures of the operating success of a company for a given period of time.
Liquidity Ratios
Measures of the short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cash.
United Snack Company sells 50-pound bags of peanuts to university dormitories for $20 a bag. The fixed costs of this operation are $176,250, while the variable costs of peanuts are $0.15 per pound. What is the break-even point in bags? Calculate the profit or loss on 7,000 bags and on 20,000 bags
NOTE: .15 per pound. Each bag is 50 pounds .15 x 50 = 7.5 BE = FC/(C-VC) = 176,250/(20- (50 x 7.5)) = 14,100 (7,000) FC = 176,250 Sales = (20 x 7,000) 140,000 VC = (7.5 x 7,000) = 52,500 140,000 - 52,500 - 176,250 = -88,750 (loss) (20,000) FC = 176,250 Sales = (20,000 x 20) 400,000 VC = (7.5 x 20,000) 150,000 400,000 - 150,000 - 176,250 = 73,750 (profit)
Cash Flows from Operating Activities
Net Income + Depreciation - Increase in Current Assets + Decrease in Current Assets + Increase in Current Liabilities - Decrease in Current Liabilities = Net Cash Flow
return on assets
Net Income/Total Assets
return on equity
Net Income/Total Equity
Profitability Ratio Classification
Profit Margin Return on Assets Return on Equity
asset utilization ratios
Ratios that measure how efficiently a company performs day-to-day tasks, such as the collection of receivables and management of inventory.
Asset Utilization Ratio Classification
Receivables Turnover Average Collection Period Inventory Turnover Fixed Asset Turnover Total Asset Turnover
AllState Trucking Co. has the following ratios compared to its industry for last year: AllState Industry Return on sales 3% 8% Return on assets 15% 10% Explain why the return-on-assets ratio is so much more favorable than the return-on-sales ratio compared to the industry.
Return on Assets = Profit Margin x Asset Turnover There is a more rapid turnover of assets with AllState over the general industry
Du Pont Formula
Return on Assets = asset turnover x operating profit margin
Billy's Crystal Stores Inc. has assets of $5,960,000 and turns over its assets 1.9 times per year. Return on assets is 8 percent. What is the firm's profit margin (return on sales)?
Sales = Assets x Total Asset Turnover; 5,960,000 x 1.9 = 11,324,000 Net Income = Assets x Return on Assets; 5,960,000 x .08 = 476,800 Profit Margin = Net Income / Net Sales; 476,800 / 11,324,000 = .0421 = 4.21%
Given the following information, prepare an income statement for the Dental Drilling Company. Selling and administrative expense $112,000 Depreciation expense 73,000 Sales 489,000 Interest expense 45,000 Cost of goods sold 156,000 Taxes 47,000
Sales..........................................................................................489,000 COGS.........................................................................(-)156,000 Gross Profit.......................................................................... 333,000 Selling and Administrative Expenses..(-)112,000 Depreciation Expense.................................(-)73,000 Operating Profit...................................................................148,000 Interest Expense...............................................(-)45,000 Earnings before Taxes......................................................103,000 Taxes..........................................................................(-)47,000 Earnings After Taxes............................................................56,000
market value
The amount you could realistically sell an asset for today
Cash Flows from Financing Activities
The section of the statement of cash flows that reports cash flows from transactions affecting the equity and debt of the business. Increase in bond payable - preferred stock dividends paid - common stock dividends paid = Net Cash Flow
Du Pont Analysis
a financial statement analysis tool that decomposes return on equity into three components: profit margin, total asset turnover, and equity multiplier
Income Statement
a financial statement that gives operating results for a specific period
a. Swank Clothiers had sales of $383,000 and cost of goods sold of $260,000. What is the gross profit margin (ratio of gross profit to sales)? b. If the average firm in the clothing industry had a gross profit of 25 percent, how is the firm doing?
a) 383,000 - 260,000 = 123,000 / 383,000 (GPM = Sales - COGS / Sales) = 32.11% b) Outperforming (the higher the number, the better)
Frantic Fast Foods had earnings after taxes of $420,000 in 20X1 with 309,000 shares outstanding. On January 1, 20X2, the firm issued 20,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 30 percent. a. Compute earnings per share for the year 20X1. b. Compute earnings per share for the year 20X2.
a) 420,000 / 309,000 = $1.359 = $1.36 b) 420,000 x .3 =126,000 + 420,000 = 546,000 / (309,000 + 20,000) = $1.659 = $1.66
The balance sheet for Stud Clothiers is shown below. Sales for the year were $2,400,000, with 90 percent of sales sold on credit. STUD CLOTHIERS: Balance Sheet 20X1 Cash $ 60,000 Accounts receivable 240,000 Inventory 350,000 Plant and equipment 410,000 Accounts payable $ 220,000 Accrued taxes 30,000 Bonds payable (long-term) 150,000 Common stock 80,000 Paid-in capital 200,000 Retained earnings 380,000 Find: a. Current ratio b. Quick ratio c. Debt-to-total-assets ratio d. Asset turnover e. Average collection period
a) Cash + AR + Inv. = 60,000 + 240,000 + 350,000 = 650,000 / 220,000 + 30,000 = 2.6 times b) 650,000 - 350,000 = 300,000 / 220,000 + 30,000 = 1.2 times c) 400,000 / 1,060,000 = .37736 or 37.74% d) 2,400,000 / 1,060,000 = 2.26 times e) 2,400,000 x .10 = 2,160,000 / 360 = 6,000 240,000 / 6,000 = 40 days
Dr. Zhivàgo Diagnostics Corp.'s income statement for 20X1 is as follows: Sales $ 2,790,000 Cost of goods sold 1,790,000 Gross profit $ 1,000,000 Selling and administrative expense 302,000 Operating profit $ 698,000 Interest expense 54,800 Income before taxes $ 643,200 Taxes(30%) 192,960 Income after taxes $ 450,240 a. Compute the profit margin for 20X1. b. Assume that in 20X2, 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. Assume a tax rate of 30 percent on income before taxes. What is income after taxes and the profit margin for 20X2?
a) Net Income / Net Sales = Profit Margin 450,240 / 2,790,000 = .16137 or 16.14% b) Sales x .10 = 2,790,000 x .1 = 279,000 + 2,790,000 = 3,069,000 COGS x .2 = 1,790,000 x .2 = 358,000 + 1,790,000 = 2,148,000 3,069,000 - 2,148,000 - 302,000 - 54,800 = 564,200 x .3 = 169,260 564,200 - 169,260 = 294,940 = Income after Taxes 294,940 / 3,069,000 = .09610 or 9.61%
Free Cash Flow
cash flow from operating activities - dividends - capital expenditures Looked at to determine there will be sufficient excess funds to pay back loans
Price Earnings Ratio
market price per share/earnings per share
Earnings per share
net income or profit divided by the number of stock shares outstanding
profit margin
net income/net sales
Gross profit
net sales - cost of goods sold
debt utilization ratios
ratios that measure how much debt an organization is using relative to other sources of capital, such as owners' equity
Book Value
the difference between the cost of a depreciable asset and its related accumulated depreciation
Net worth
total assets minus total liabilities
Vitale Hair Spray had sales of 13,000 units in March. A 70 percent increase is expected in April. The company will maintain 30 percent of expected unit sales for April in ending inventory. Beginning inventory for April was 650 units. How many units should the company produce in April?
13,000 x 1.70 = 22,100 (projected units sold in April) 22,100 x .3 = 6,630 (30% expected inventory) 22,100 + 6,630 - 650(beginning April inv.) = 28,080 units to produce in April
Ms. Eaton comes up with a new plan to cut fixed costs to $200,000. However, more labor will now be required, which will increase variable costs per unit to $39. The sales price will remain at $66. What is the new break-even point? Under the new plan, what is likely to happen to profitability at very high volume levels (compared to the old plan)?
200,000 / 66-39 = 7,407.41 Contribution Margin Ratio = (Contribution/Sales) x 100 Old Plan: 30/66 = .45 x 100 = 45% New Plan: 27/66 = .41 x 100 = 41% The profitability would be better at the old plan than at the new plan. Once break even point is reached, under the new plan, profits would only be at 41% versus 45% on the old plan.
A firm has sales of $3 million, and 10 percent of the sales are for cash. The year-end accounts receivable balance is $285,000. What is the average collection period? (Use a 360-day year.)
3,000,000 x .1(for cash) = 300,000; 3,000,000 - 300,00 = 2,700,000 / 360 = 7,500 285,000 / 7,500 = 38 days
Fondren Machine Tools has total assets of $3,310,000 and current assets of $879,000. It turns over its fixed assets 3.6 times per year. Its return on sales is 4.8 percent. It has $1,750,000 of debt. What is its return on stockholders' equity?
3,310,000 - 879,000 = 2,431,000 (fixed assets) 2,431,000 x 3.6 = 8,751,600 (Turnover Rate) 8,751,600 x .048 = 420,076.80 (Net Income) Total Assets - Total Debt = 3,310,000 - 1,750,000 = 1,560,000 = Stockholders' equity Return on Stockholders' Equity = Net Income / Stockholders' Equity 420,076.80 / 1,560,000 = .26928 or 26.93%
Cyber Security Systems had sales of 3,500 units at $75 per unit last year. The marketing manager projects a 30 percent increase in unit volume sales this year with a 40 percent price increase. Returned merchandise will represent 8 percent of total sales. What is your net dollar sales projection for this year?
3,500 x $75 = 262,500; 262,500 x .08 = 21,000; 262,500 - 21,000 = 241,500 (present net sales revenue) 3,500 x 1.3 = 4,550; $75 x 1.40 = $105 4,550 x 105 = 477,750; 477,750 x .08 = 38,220; 477,750 - 38,220 = 439,530 (projected net sales revenue)
Sprint Shoes Inc. had a beginning inventory of 9,250 units on January 1, 20X1. Here were the costs associated with the inventory: Material $15.00 per unit Labor 8.00 per unit Overhead 7.10 per unit During 20X1, the firm produced 43,000 units with the following costs: Material $17.50 per unit Labor 8.80 per unit Overhead 10.30 per unit Sales for the year were 47,350 units at $44.60 each. Sprint Shoes uses LIFO accounting. What was the gross profit? What was the value of ending inventory?
47,350 - 43,000 = 4,350 units from ending inventory 47,350 x $44.60 = 2,111,810 43,000 x (17.50 + 8.80 + 10.30) = 1,573,800 (costs) 4,350 x (15 + 8 + 7.10) = 130,935 (costs) 2,111,810 - 1,573,800 - 130,935 = 407,075 Value of ending inventory: 9,250 - 4,350 = 4,900 4,900 x (15 + 8 + 7.10) = 147,490
Philip Morris expects the sales for his clothing company to be $550,000 next year. Philip notes that net assets (Assets − Liabilities) will remain unchanged. His clothing firm will enjoy a 12 percent return on total sales. He will start the year with $150,000 in the bank. What will Philip's ending cash balance be?
550,000 x .12(%) = 66,000; 66,000 + 150,000 = 216,000
Balance Sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Pro Forma Income Statement
A projection of anticipated sales, expenses, and income.
The Holtzman Corporation has assets of $400,000, current liabilities of $50,000, and long-term liabilities of $100,000. There is $40,000 in preferred stock outstanding; 20,000 shares of common stock have been issued. a. Compute book value (net worth) per share. b. If there is $22,000 in earnings available to common stockholders and Holtzman's stock has a P/E of 18 times earnings per share, what is the current price of the stock? c. What is the ratio of market value per share to book value per share?
Assets - Liabilities - preferred stock outstanding = Net Worth / Common shares outstanding = Book Value a) 400,000 - 50,000 - 100,000 - 40,000 = 210,000 / 20,000 = $10.50 (book value per share) b) 22,000 / 20,000 = $1.1 (EPS) 1.1 x 18 = $19.80 (market value per share) c) 19.80 / 10.50 = 1.88 times
Eaton Tool Company has fixed costs of $255,000, sells its units for $66, and has variable costs of $36 per unit. Compute the break-even point.
BE = FC / Cost - VC 255,000 / 66-36 = 8,500 units to break even
