Question 1

1. Below is the income statement for South Western corporation, this income statement covers the first year of its operation:

Net Sales $300,000

Cost of Goods Sold -180,000

Gross Profit 120,000

General & Administrative expense -60,000

Marketing expenses -60,000

Depreciation -20,000

EBIT -20,000

Interest expenses -10,000

Earnings before taxes -30,000

Income taxes -0

Net earnings (loss) $-30,000

Costs of goods sold are expected to vary with sales and be a constant percentage of sales. The general and administrative employees have been hired and are expected to remain a fixed cost. Marketing expenses are also expected to remain fixed since the current sales staff members are expected to remain on fixed salaries and no new hires are planned. The effective tax rate is expected to be 30 percent for a profitable firm.

1. Estimate the survival or EBDAT breakeven amount in terms of survival revenues necessary for the South Western Corporation to breakeven next year.

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2. Assume that the product-selling price is $100 per unit. Calculate the EBDAT breakeven point in terms of the number of units that will have to be sold next year.

3. Draw a chart that shows the EBDAT Breakeven for South Western corporation

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4. Explain how the EBDAT will be affected if the CFC increased by 10%

Question 2

Alkaramah Company has the following financial information for its first year in business:

cash of $242, accounts receivable of $850, inventory of $820, net fixed assets of $3,408, accounts payable of $700, short-term notes payable of $740, long-term liabilities of $1,100, common stock of $1,160, retained earnings of $1,620, net sales of $2,768, cost of goods sold of $1,210, depreciation of $360, interest expense of $160, taxes of $312, addition to retained earnings of $508, and dividends paid of $218.

Based on the above information, answer the following questions:

Note: You need to show your calculations.

1. What is the return on equity?

2. What is the return on total assets?

3. What is the net profit margin?

4. What is the operating profit margin?

5. What is the sales to total asset ratio?

6. What is the current ratio?

7. What is the total-debt-total-asset ratio?

8. What is the interest coverage ratio?

9. What will be the return on Equity if the Net sales increased to $3000? Interpret your results