(2-11) Income and Cash Flow Analysis:

The Berndt Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be $1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt.

a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow?

b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?

c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected?

d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?

(3-14) Comprehensive Ratio Analysis

The Jimenez Corporations forecasted 2017 financial statements follow, along with some industry average ratios. Calculate Jimenezs 2017 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenezs projected strengths and weaknesses.

Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2017

Assets Cash $ 72,000 Accounts receivable 439,000 Inventories 894,000 Total current assets $ 1,405,000 Fixed assets 431,000 Total assets $ 1,836,000 Liabilities and Equity Accounts payable $ 332,000 Notes payable 100,000 Accruals 170,000 Total current liabilities $ 602,000 Long-term debt 404,290 Common stock 575,000 Retained earnings 254,710 Total liabilities and equity $ 1,836,000

Jimenez Corporation: Forecasted Income Statement for 2017

Sales $4,290,000 Cost of goods sold (excluding depreciation) 3,580,000 Selling, general, and administrative expenses 370,320 Depreciation 159,000 Earnings before taxes (EBT) $ 180,680 Taxes (40%) 72,272 Net income $ 108,408

Jimenez Corporation: Per Share Data for 2017

EPS $ 4.71 Cash dividends per share $ 0.95 P/E ratio 5.0 Market price (average) $23.57 Number of shares outstanding 23,000 Industry Ratios Quick ratio 1.0 Current ratio 2.7 Inventory turnovera 7.0 Days sales outstandingb 32.0 days Fixed assets turnovera 13.0 Total assets turnovera 2.6 Return on assets 9.1% Return on equity 18.2% Profit margin on sales 3.5% Debt-to-assets ratio 21.0% Liabilities-to-assets ratio 50.0% P/E ratio 6.0 Price/Cash flow ratio 3.5 Market/Book ratio 3.5 Notes: a Based on year-end balance sheet figures. b Calculation is based on a 365-day year.

(4-14) Uneven Cash Flow Stream

a. Find the present values of the following cash flow streams. The appropriate interest rate is 8%. (Hint: It is fairly easy to work this problem dealing with the individual cash flows. However, if you have a financial calculator, read the section of the manual that describes how to enter cash flows such as the ones in this problem. This will take a little time, but the investment will pay huge dividends throughout the course. Note that, when working with the calculators cash flow register, you must enter CF₀ =0. Note also that it is quite easy to work the problem with Excel, using procedures described in the file Ch04 Tool Kit.xlsx.)

b. What is the value of each cash flow stream at a 0% interest rate?

Year Cash Stream A Cash Stream B

1 $100 $300

2 400 400

3 400 400

4 400 400

5 300 100