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Homework Topics: Balance Sheet, Income and Cash Flow Analysis, Free Cash Flows Problems: 2-4, 2-11, 2-12 Chapter 3: Topics: DuPont Analysis, Balance Sheet Analysis, Comprehensive Ratio Analysis Problems: 3-1, 3-6, 3-7, 3-8, 3-12, 3-13, 3-14 General Instructions: Use the Topic 2 Excel Resource (if needed). Please show all work for each problem. P2-4 Interest versus dividend income During the year just ended, Shering Distributors, Inc., had pretax earnings from operations of $490,000. In addition, during the year it received $20,000 in income from interest on bonds it held in Zig Manufacturing and received $20,000 in income from dividends on its 5% common stock holding in Tank Industries, Inc. Shering is in the 40% tax bracket and is eligible for a 70% dividend exclusion on its Tank Industries stock. a. Calculate the firm's tax on its operating earnings only. b. Find the tax and the after-tax amount attributable to the interest income from Zig Manufacturing bonds. c. Find the tax and the after-tax amount attributable to the dividend income from the Tank Industries, Inc., common stock. d. Compare, contrast, and discuss the after-tax amounts resulting from the interest income and dividend income calculated in parts b and c. e. What is the firm's total tax liability for the year P3-1 Reviewing basic financial statements The income statement for the year ended December 31, 2015, the balance sheets for December 31, 2015 and 2014, and the statement of retained earnings for the year ended December 31, 2015, for Technica, Inc., are given below and on the following page. Briefly discuss the form and informational content of each of these statements. Sales revenue $600,000 Less: Cost of goods sold 460,000 Gross profits $140,000 Less: Operating expenses General and administrative expenses $ 30,000 Depreciation expense 30,000 Total operating expense $ 60,000 Operating profits $ 80,000 Less: Interest expense 10,000 Net profits before taxes $ 70,000 Less: Taxes 27,100 Earnings available for common stockholders $ 42,900 Earnings per share (EPS) $2.15 Technica, Inc., Income Statement for the Year Ended December 31, 2015 P3-6 Balance sheet preparation Use the appropriate items from the following list to prepare in good form Mellark's Baked Goods balance sheet at December 31, 2015. Value ($000) at Value ($000) at Item December 31, 2015 Item December 31, 2015 Accounts payable $ 220 Inventories $ 375 Accounts receivable 450 Land 100 Accruals 55 Long-term debts 420 Accumulated depreciation 265 Machinery 420 Buildings 225 Marketable securities 75 Cash 215 Notes payable 475 Common stock (at par) 90 Paid-in capital in excess Cost of goods sold 2,500 of par 360 Depreciation expense 45 Preferred stock 100 Equipment 140 Retained earnings 210 Furniture and fixtures 170 Sales revenue 3,600 General expense 320 Vehicles 25 Inventories $ 375 Land 100 Long term debt 420 Machinery 420 Marketable securities 75 Notes payable 475 Paid in capital in excess of par 360 Preferred Stock 100 Retained earnings 210 Sales revenue 3600 Vehicles 25 P3-7 Balance sheet preparation Adam and Arin Adams have collected their personal asset and liability information and have asked you to put together a balance sheet as of December 31, 2015. The following information is received from the Adams family. Cash $ 300 Retirement funds, IRA $ 2,000 Checking 3,000 2014 Sebring 15,000 Savings 1,200 2010 Jeep 8,000 IBM stock 2,000 Money market funds 1,200 Auto loan 8,000 Jewelry and artwork 3,000 Mortgage 100,000 Net worth 76,500 Medical bills payable 250 Household furnishings 4,200 Utility bills payable 150 Credit card balance 2,000 Real estate 150,000 Personal loan 3,000 a. Create a personal balance sheet as of December 31, 2015. It should be similar to a corporate balance sheet. b. What must the total assets of the Adams family be equal to by December 31, 2015? c. What was their net working capital (NWC) for the year? (Hint: NWC is the difference between total liquid assets and total current liabilities.) P3-8 Effect of net income on a firm's balance sheet Conrad Air, Inc., reported net income of $1,365,000 for the year ended December 31, 2016. Show how Conrad's balance sheet would change from 2015 to 2016 depending on how Conrad \"spent\" those earnings as described in the scenarios that appear below. Assets Liabilities and Stockholders' Equity Cash $ 120,000 Accounts payable $ 170,000 Marketable securities 35,000 Short-term notes $ 55,000 Accounts receivable 45,000 Current liabilities $ 125,000 Inventories $ 130,000 Long-term debt $2,700,000 Current assets $ 330,000 Total liabilities $2,825,000 Equipment $2,970,000 Common stock $ 5,00,000 Buildings $1,600,000 Retained earnings $1,575,000 Fixed assets $4,570,000 Stockholders' equity $2,075,000 Total assets $4,900,000 Total liabilities and equity $4,900,000 Conrad Air, Inc., Balance Sheet as of December 31, 2015 a. Conrad paid no dividends during the year and invested the funds in marketable securities. b. Conrad paid dividends totaling $500,000 and used the balance of the net income to retire (pay off) long-term debt. c. Conrad paid dividends totaling $500,000 and invested the balance of the net income in building a new hangar. d. Conrad paid out all $1,365,000 as dividends to its stockholders P3-12 Ratio comparisons Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to one another. Some of his ratios are listed below. Ratio Island Electric Utility Burger Heaven Fink Software Roland Motors Current ratio 1.10 1.3 6.8 4.5 Quick ratio 0.90 0.82 5.2 3.7 Debt ratio 0.68 0.46 0.0 0.35 Net profit margin 6.2% 14.3% 28.5% 8.4% Item 2012 2013 2014 2015 Total current assets $16,950 $21,900 $22,500 $27,000 Total current liabilities 9,000 12,600 12,600 17,400 Inventory 6,000 6,900 6,900 7,200 Inventory turnover 2012 2013 2014 2015 Bauman Company 6.3 6.8 7.0 6.4 Industry average 10.6 11.2 10.8 11.0 Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out. a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies? c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? d. Why wouldn't investors invest all their money in software companies instead of in less profitable companies? (Focus on risk and return.) P3-13 Liquidity management Bauman Company's total current assets, total current liabilities, and inventory for each of the past 4 years follow: a. Calculate the firm's current and quick ratios for each year. Compare the resulting time series for these measures of liquidity. b. Comment on the firm's liquidity over the 2012-2013 period. c. If you were told that Bauman Company's inventory turnover for each year in the 2012-2015 period and the industry averages were as follows, would this information support or conflict with your evaluation in part b? Why? Personal Finance Problem P3-14 Liquidity ratio Josh Smith has compiled some of his personal financial data to determine his liquidity position. The data are as follows. Month of origin Accounts receivable July $ 3,875 August 2,000 September 34,025 October 15,100 November 52,000 December 193,000 Year-end accounts receivable $300,000 Account Amount Cash $3,200 Marketable securities 1,000 Checking account 800 Credit card payables 1,200 Short-term notes payable 900 Quarter Inventory 1 $ 400,000 2 800,000 3 1,200,000 4 200,000 a. Calculate Josh's liquidity ratio. b. Several of Josh's friends have told him that they have liquidity ratios of about 1.8. How would you analyze Josh's liquidity relative to his friends