Questions and Answers of Fundamentals Of Financial Management 10th

10. When you are considering two different financing plans, does being at the level where earnings per share are equal between the two plans always mean you are indifferent as to which plan is
9. Explain why operating leverage decreases as a company increases sales and shifts away from the break-even point.
8. Explain how combined leverage brings together operating income and earnings per share.
7. How does the interest rate on new debt influence the use of financial leverage?
6. Discuss the limitations of financial leverage.
5. What does risk taking have to do with the use of operating and financial leverage?
4. What role does depreciation play in break-even analysis based on accounting flows? Based on cash flows? Which perspective is longer-term in nature?
3. Explain how the break-even point and operating leverage are affected by the choice of manufacturing facilities (labor intensive versus capital intensive).
2. What factors would cause a difference in the use of financial leverage for a utility company and an automobile company?
1. Discuss the various uses for break-even analysis.
29. The difficult part of solving a problem of this nature is to know what to do with the information contained within a story problem. Therefore, this problem will be easier to complete if you rely
28. Mansfield Corporation had 2007 sales of $100 million. The balance sheet items that vary directly with sales and the profit margin are as follows:The dividend payout rate is 50 percent of
27. Conn Man’s Shops, Inc., a national clothing chain, had sales of $300 million last year. The business has a steady net profit margin of 8 percent and a dividend payout ratio of 25 percent. The
26. The Manning Company has financial statements as shown below and on page 115, which are representative of the company’s historical average.The firm is expecting a 20 percent increase in sales
25. Owen’s Electronics has 9 operating plants in seven southwestern states. Sales for last year were $100 million, and the balance sheet at year-end is similar in percentage of sales to that of
24. Archer Electronics Company’s actual sales and purchases for April and May are shown here along with forecasted sales and purchases for June through September.The company makes 10 percent of its
23. Harry’s Carryout Stores has eight locations. The firm wishes to expand by budget two more stores and needs a bank loan to do this. Mr. Wilson, the banker, will finance construction if the firm
22. Lansing Auto Parts, Inc., has projected sales of $25,000 in October, $35,000 in November, and $30,000 in December. Of the company’s sales, 20 percent are paid for by cash and 80 percent are
21. The Volt Battery Company has forecast its sales in units as follows:Volt Battery always keeps an ending inventory equal to 120 percent of the next month’s expected sales. The ending inventory
20. The Boswell Corporation forecasts its sales in units for the next four months as payments follows:Boswell maintains an ending inventory for each month in the amount of one and one-half times the
19. The Denver Corporation has forecast the following sales for the first seven months of the year:Monthly material purchases are set equal to 30 percent of forecasted sales for the next month. Of
18. Ultravision, Inc., anticipates sales of $240,000 from January through April.Materials will represent 50 percent of sales and because of level production, material purchases will be equal for each
17. Watt’s Lighting Stores made the following sales projection for the next six months. All sales are credit sales.Sales in January and February were $33,000 and $32,000, respectively.Experience
16. Simpson Glove Company has made the following sales projections for the next six months. All sales are credit sales.Sales in January and February were $41,000 and $39,000 respectively. Experience
15. Victoria’s Apparel has forecast credit sales for the fourth quarter of the year as:Experience has shown that 20 percent of sales receipts are collected in the month of sale, 70 percent in the
14. Sprint Shoes, Inc., had a beginning inventory of 9,000 units on January 1, 2007.The costs associated with the inventory were: Material....... Labor Overhead $13.00 per unit 8.00 per unit 6.10 per
13. Assuming that Bradley sold 13,000 units during the last six months of the year at $16 each, what is its gross profit? What is the value of ending inventory?Assume in Problem 12 that the Bradley
12. The Bradley Corporation produces a product with the following costs as of July 1, 2007:Beginning inventory at these costs on July 1 was 3,000 units. From July 1 to December 1, 2007, Bradley
11. At the end of January, Higgins Data Systems had an inventory of 600 units, which cost $16 per unit to produce. During February the company produced 850 units at a cost of $19 per unit. If the
10. On December 31 of last year, Wolfson Corporation had in inventory 400 units of its product, which cost $21 per unit to produce. During January, the company produced 800 units at a cost of $24 per
9. Delsing Plumbing Company has beginning inventory of 14,000 units, will sell 50,000 units for the month, and desires to reduce ending inventory to 40 percent of beginning inventory. How many units
Vitale Hair Spray had sales of 8,000 units in March. A 50 percent increase is expected in April. The company will maintain 5 percent of expected unit sales for April in ending inventory. Beginning
5. Cyber Security Systems had sales of 3,000 units at $50 per unit last year. The marketing manager projects a 20 percent increase in unit volume sales this year with a 10 percent price increase.
4. Bronco Truck Parts expects to sell the following number of units at the prices indicated under three different scenarios in the economy. The probability of each outcome is indicated. What is the
3. 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
2. In Problem 1 if there had been no increase in sales and all other facts were the financing same, what would Philip’s ending cash balance be? What lesson do the examples in Problems 1 and 2
1. Philip Morris is excited because sales for his clothing company are expected financing to double from $500,000 to $1,000,000 next year. Philip notes that net assets(Assets — Liabilities) will
9. Eaton Stores has forecast credit sales for the fourth quarter of the year as:Experience has shown that 30 percent of sales receipts are collected in the month of sale and 60 percent in the
8. At the end of January, Medical Products Corp. had 625 units in inventory, which had cost $15 to produce. During February, the firm produced 550 units at a cost of $20 per unit. [f the firm sold
7. What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?
6. Discuss the advantage and disadvantage of level production schedules in firms with cyclical sales.
5. Rapid corporate growth in sales and profits can cause financing problems.Elaborate on this statement.
4. Explain the relationship between inventory turnover and purchasing needs.
3. With inflation, what are the implications of using LIFO and FIFO inventory methods? How do they affect the cost of goods sold?
2. Explain how the collections and purchases schedules are related to the borrowing needs of the corporation.
1. What are the basic benefits and purposes of developing pro forma statements and a cash budget?
7. Find all the ratios presented in Chapter 3, and compare the last two years of data for improvement or deterioration of the ratios. Note that the category titles may not be exactly the same as
6. Separately find “GAAP net income” and “total stockholders’ equity” for each year and compute the ratio between the two for the five years. Should investors be pleased with the pattern
5. Based on the “Operating Results” for the two years, write a brief summary of the following changes:a. Net revenue.b. GAAP earnings per common share.c. ‘Total assets.d. Long-term debt.
36. Sun Microsystems is a leading supplier of computer related products, including servers, workstations, storage devices, and network switches.In the letter to stockholders as part of the 2001
35. Bob Adkins has recently been approached by his first cousin, Ed Lamar, with a pro-posal to buy a 15 percent interest in Lamar Swimwear. The firm manufactures stylish bathing suits and sunscreen
34. Given the financial statements for Jones Corporation and Smith Corporation shown here:a. To which one would you, as credit manager for a supplier, approve the extension of (short-term) trade
33. Using the financial statements for the Snider Corporation, calculate the 13 basic ratios found in the chapter. Assets Current assets: Cash. SNIDER CORPORATION Balance Sheet December 31, 2007
32. The following information is from Harrelson Inc.’s financial statements. Sales(all credit) were $20 million for 2007. Sales to total assets. Total debt to total assets. Current ratio Inventory
31. Weare given the following information for the Pettit Corporation. Sales (credit) $3,000,000 Cash... 150,000 Inventory... Current liabilities. Asset turnover Current ratio Debt-to-assets ratio
30. The Shannon Corporation has credit sales of $750,000. Given the following ratios, fill in the balance sheet. Total assets turnover Cash to total assets. Accounts receivable turnover 2.5 times 2.0
29. Construct the current assets section of the balance sheet from the following data. (Use cash as a plug figure after computing the other values.) Yearly sales (credit). Inventory turnover Current
28. The Canton Corporation shows the following income statement. The firm uses inventory FIFO inventory accounting.a. Assume in 2008 the same 10,000-unit volume is maintained, but the sales price
27. Omni Technology Holding Company has the following three affiliates: Personal Software Computers Foreign Operations Sales.... $40,000,000 $60,000,000 $100,000,000 Net income (after taxes)...
26. The Global Products Corporation has three subsidiaries.a. Which division has the lowest return on sales?b. Which division has the highest return on assets?c. Compute the return on assets for the
25. Quantum Moving Company has the following data. Industry information also is shown.As an industry analyst comparing the firm to the industry, are you likely to praise or criticize the firm in
24. Jodie Foster Care Homes, Inc., shows the following data:a. Compute the ratio of net income to total assets for each year and comment on the trend.b. Compute the ratio of net income to
23. In January 1998 the Status Quo Company was formed. Total assets were$500,000, of which $300,000 consisted of depreciable fixed assets. Status Quo uses straight-line depreciation of $30,000 per
22. A firm has net income before interest and taxes of $96,000 and interest expense of $24,000.a. What is the times-interest-earned ratio?b. If the firm’s lease payments are $40,000, what is the
21. Using the income statement for J. Lo Wedding Gowns, compute the following ratios:a. The interest coverage.b. The fixed charge coverage.The total assets for this company equal $160,000. Set up the
20. The Lancaster Corporation’s income statement is given on page 78.a. What is the times-interest-earned ratio?b. What would be the fixed-charge-coverage ratio? LANCASTER CORPORATION Sales...
19. The balance sheet for the Bryan Corporation is shown below. Sales for the year were $3,040,000, with 75 percent of sales sold on credit.Compute the following ratios:a. Current ratio.b. Quick
18. Jim Short’s Company makes clothing for schools. Sales in 2007 were$4,000,000. Assets were as follows:a. Compute the following:1. Accounts receivable turnover 2. Inventory turnover 3. Fixed
17. Kamin Corporation has the following financial data for the years 2006 and 2007:a. Compute inventory turnover based on ratio number 6, Sales/Inventory, for each year.b. Compute inventory turnover
16. The Chamberlain Corporation has an accounts receivable turnover equal to 12 times. If accounts receivable are equal to $90,000, what is the value for average daily credit sales?
15. A firm has sales of $1.2 million, and 10 percent of the sales are for cash.The year-end accounts receivable balance is $180,000. What is the average collection period? (Use a 360-day year.)
14. Assume the following data for Cable Corporation and Multi-Media, Inc.a. Compute return on stockholders’ equity for both firms using ratio 3a. Which firm has the higher return?b. Compute the
13. Jerry Rice and Grain Stores has $4,000,000 in yearly sales. The firm earns 3.5 percent on each dollar of sales and turns over its assets 2.5 times per year.It has $100,000 in current liabilities
12. Using the Du Pont method, evaluate the effects of the following relationships for the Lollar Corporation.a. Lollar Corporation has a profit margin of 5 percent and its return on
11. The King Card Company has a return-on-assets (investment) ratio of 12 percent.a. If the debt-to-total-assets ratio is 40 percent, what is the return on equity?b. If the firm had no debt, what
10. Front Beam Lighting Company has the following ratios compared to its industry for 2008.Explain why the return-on-equity ratio is so much less favorable than the return-on-assets ratio compared to
9. AllState Trucking Co. has the following ratios compared to its industry for 2007.Explain why the return-on-assets ratio is so much more favorable than the return-on-sales ratio compared to the
8.a. Alpha Industries had an asset turnover of 1.4 times per year. If the return on total assets (investment) was 8.4 percent, what was Alpha’s profit margin?b. The following year, on the same
7. Network Communications has total assets of $1,400,000 and current assets of$600,000. It turns over its fixed assets 4 times a year. It has $300,000 of debt.Its return on sales is 5 percent. What
6. Neon Light Company has $1,000,000 in assets and $600,000 of debt. It reports net income of $100,000.a. What is the return on the assets?b. What is the return on the stockholders’ equity?c. If
5. Dr. Zhivago Diagnostics Corp. income statement for 2007 is as follows:a. Compute the profit margin for 2007.b. Assume in 2008, sales increase by 10 percent and cost of goods sold increases by 20
4. Billy’s 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 firm’s profit margin(return on sales)?
3. Polly Esther Dress Shops, Inc., can open a new store that will do an annual sales volume of $960,000. It will turn over its assets 2.4 times per year. The profit margin on sales will be 7 percent.
2. Database Systems is considering expansion into a new product line. Assets to support expansion will cost $500,000. It is estimated that Database can generate$1,200,000 in annual sales, with a 6
1. Low Carb Diet Supplement, Inc., has two divisions. Division A has a profit of$100,000 on sales of $2,000,000. Division B is only able to make $25,000 on sales of $300,000. Based on the profit
12. The Gilliam Corp. has the following balance sheet and income statement.Compute the profitability, asset utilization, liquidity, and debt utilization ratios. Assets Current assets: GILLIAM
11. Barnes Appliances has sales of $10,000,000, net income of $450,000, total assets of $4,000,000, and stockholders’ equity of $2,000,000.a. What is the profit margin?b. What is the return on
10. Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?
9. Why might disinflation prove to be favorable to financial assets?
8. What effect will disinflation following a highly inflationary period have on the reported income of the firm?
7. Inflation can have significant effects on income statements and balance sheets, and therefore on the calculation of ratios. Discuss the possible impact of inflation on the following ratios, and
6. Why is trend analysis helpful in analyzing ratios?
5. Is there any validity in rule-of-thumb ratios for all corporations, for example, a current ratio of 2 to 1 or debt to assets of 50 percent?
4. What advantage does the fixed charge coverage ratio offer over simply using times interest earned?
3. If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?
2. Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders’ equity.
1. If we divide users of ratios into short-term lenders, long-term lenders, and stockholders, which ratios would each group be most interested in, and for what reasons?
30. When you have finished, close the window and click on “Ann. Cash Flow” for the latest available period.a. List the net cash flow from operating activities and identify the major item
29. When you are done, close the window and click on “Ann. Balance Sheet.”a. How much long-term debt does ANF have?b. How much preferred stock does ANF have?c. What is the difference between
28. If the market value of a share of common stock is 3.1 times book value for 2007, what is the firm’s P/E ratio for 2007? (Round to the nearest whole number.)

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