The following are financial statements of Creek Enterprise for the year 2012. Based on the information: Creek Enterprises Income Statement for the Year Ended December 31, 2012 $30,000,000 21,000,000 $ 9,000,000 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Lease expense Depreciation expense Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders $ 3,000,000 1,800,000 200,000 1,000,000 $ 6,000,000 $ 3,000,000 1,000,000 $ 2,000,000 800,000 $ 1,200,000 100,000 $ 1,100,000 Creek Enterprises Balance Sheet December 31, 2012 Assets Liabilities and Stockholders' Equity Cash Marketable securities Accounts receivable Inventories Total current assets Land and buildings Machinery and equipment Furniture and fixtures Gross fixed assets (at cost)" Less: Accumulated depreciation Net fixed assets Total assets $ 1,000,000 3,000,000 12,000,000 7,500,000 $23,500,000 $11,000,000 20,500,000 8,000,000 $39,500,000 13,000,000 $26,500,000 $50,000,000 Accounts payable $ 8,000,000 Notes payable 8,000,000 Accruals 500,000 Total current liabilities $16,500,000 Long-term debt (includes financial leases) $20,000,000 Preferred stock (25,000 shares, $4 dividend) $ 2,500,000 Common stock (1 million shares at $5 par) 5,000,000 Paid-in capital in excess of par value 4,000,000 Retained earnings 2,000,000 Total stockholders' equity $13,500,000 Total liabilities and stockholders' equity $50,000,000 "The firm has a 4-year financial lease requiring annual beginning-of-year payments of $200,000. Three years of the lease have yet to run. "Required annual principal payments are $800,000. 4. Suppose you are one the key decision makers among the board of directors of Creek Enterprise and. also the chairperson of the compensation committee. What factors would you consider while designing the salary packages of your top executives? One of the members in the committee suggested you should align quarterly profit targets with their salaries. To what extent to do you agree or disagree to this proposal? Discuss your viewpoint with clear and strong arguments. (5 Marks) 5. Samuel Johnson, Creek Enterprise's financial manager, believes that the company has idle cash and cash equivalents which are not needed for the time being. Therefore, Samuel decides to invest in common stocks and bonds. Do you think this is a right decision? Explain. (2 Marks) The following are financial statements of Creek Enterprise for the year 2012. Based on the information: Creek Enterprises Income Statement for the Year Ended December 31, 2012 $30,000,000 21,000,000 $ 9,000,000 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Lease expense Depreciation expense Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders $ 3,000,000 1,800,000 200,000 1,000,000 $ 6,000,000 $ 3,000,000 1,000,000 $ 2,000,000 800,000 $ 1,200,000 100,000 $ 1,100,000 Creek Enterprises Balance Sheet December 31, 2012 Assets Liabilities and Stockholders' Equity Cash Marketable securities Accounts receivable Inventories Total current assets Land and buildings Machinery and equipment Furniture and fixtures Gross fixed assets (at cost)" Less: Accumulated depreciation Net fixed assets Total assets $ 1,000,000 3,000,000 12,000,000 7,500,000 $23,500,000 $11,000,000 20,500,000 8,000,000 $39,500,000 13,000,000 $26,500,000 $50,000,000 Accounts payable $ 8,000,000 Notes payable 8,000,000 Accruals 500,000 Total current liabilities $16,500,000 Long-term debt (includes financial leases) $20,000,000 Preferred stock (25,000 shares, $4 dividend) $ 2,500,000 Common stock (1 million shares at $5 par) 5,000,000 Paid-in capital in excess of par value 4,000,000 Retained earnings 2,000,000 Total stockholders' equity $13,500,000 Total liabilities and stockholders' equity $50,000,000 "The firm has a 4-year financial lease requiring annual beginning-of-year payments of $200,000. Three years of the lease have yet to run. "Required annual principal payments are $800,000. 4. Suppose you are one the key decision makers among the board of directors of Creek Enterprise and. also the chairperson of the compensation committee. What factors would you consider while designing the salary packages of your top executives? One of the members in the committee suggested you should align quarterly profit targets with their salaries. To what extent to do you agree or disagree to this proposal? Discuss your viewpoint with clear and strong arguments. (5 Marks) 5. Samuel Johnson, Creek Enterprise's financial manager, believes that the company has idle cash and cash equivalents which are not needed for the time being. Therefore, Samuel decides to invest in common stocks and bonds. Do you think this is a right decision? Explain. (2 Marks)
