Using the money from their recent bond issue, Terrys management has decided to declare an additional $562,500 dividend. The date of declaration is December 30, Year 3. The date of record will be January 15, Year 4, and the date of payment will be January 30, Year 4.

As an additional signal to the market, Terrys management repurchased 205,000 shares of Terrys common stock on December 15, Year 3 for $8.00 a share.

Terrys management would like to know the effect of the sale on the following ratios:

Current Ratio

ROA

1. What do you think Terrys creditors (i.e. bank and bond holder) reaction will be to managements decision to issue a second dividend and to repurchase shares? In other words, based on your changes to the financial statements and the change in the ratios, do you think the creditors will be happy with the decision to pay out so much cash to investors? Why or why not?

2. At the beginning of Year 2, Terrys Board of Directors authorized stock options for the executive team. The team could buy shares from the company at a set price for $10.00/share, then sell them at the current market price to make a bonus. On December 10th, Terrys stock price was only $8.40/share, making these stock options worthless. Based on this information, do you think that the management teams decision to authorize an additional dividend and repurchase shares on December 15th was ethical? Why or why not?

Terry Co. Multi-Step Income Statement For the Year Ended December 31, Year 3 Sales Revenue Less: Sales Discounts $66,600,000 $666,000 Sales Returns $5,827,500 $6,493,500 $60,106,500 Net Sales Revenue Cost of Goods Sold $36,534,013 $23,572,487 Gross Profit erating Activities Selling Expenses Advertising Expense Bad Debt Expense Miscellaneous Selling Expenses Sales Force Salaries Expense Selling Commissions Expense Shipping Expense $1,248,750 $566,100 $324,675 $915,750 $3,330,000 $545.288 Total Selling Expenses Administrative Expenses 6,930,563 Executive Salaries Expense Depreciation & Amortization Expense$1,998,000 Insurance Expense Miscellaneous Admin. Expenses Office Supplies Expense R&D Expense Utilities Expense $2,913,750 $241,425 $32,884 $258,075 $999,000 $499,500 Total Administrative Expenses Income from Operations $6,942,634 $13,873,197 $9,699,290 er Gains an Rent Revenue Interest Expense $208,125 57,054) ($248,929) $9,450,361 ($2,362,590 $7,087,771 Income from Continuing Operations before Taxes Income Tax Expense Net Income EPS 2.66 Terry Co. Balance Sheet As of 12/31Year 3 Year 3 Year 2 Assets Current Assets Cash A/R Allowance for Bad Debts Inventory Prepaid Insurance Prepaid Rent $5,554,969 $3,330,000 $5,994,000 $5,661,000 ($333,000) ($1,665,000) $7,992,000 $9,324,000 $499,500 $999,000 $832,500 $666,000 $20,539,969 $18,315,000 Total Current Assets Long-term Investments Loans to other businesses Expansion Fund $2,664,000 $2,664,000 $2,843,560 $2,843,560 $5,507,560 $5,507,560 Total Long-term Investments PPE Land Building Equipment Accumulated Depreciation $7,326,000 $4,662,000 $5,328,000 $5,328,000 $18,648,000 $8,658,000 ($8,658,000) ($6,660,000) $22,644,000 $11,988,000 Total PPE Intangible Assets Patents, net Total Assets $999,000 $999,000 $49,690,529 $36,809,560 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable Income Tax Payable $3,044,570 $3,996,000 $2,322,880 $666,000 Interest Payable $ 30,000.00 Unearned Revenue Wages Payable Current Portion of Loan Payable $1,198,800 $999,000 $666,000 $832,500 $333,000 $333,000 $7,595,250 $6,826,500 Total Current Liabilities Long-term Debt Loan Payable $3,663,000 $3,996,000 Bonds Payable 1561447 Notes Payable Total Long-term Debt Total Liabilities $9,324,000 $5,328,000 $14,548,447 $9,324,000 $22,143,698 $16,150,500 Stockholders' Equity Common stock $2,660,000 $2,660,000 ($1 par, 4,655,000 authorized, 2,660,000 outstanding) Additional Paid-In capital Retained Earnings Accumulated OCI $1,998,000 $1,998,000 $23,633,803 $16,746,032 $744,972 ($744,972) $27,546,831 $20,659,060 Total Liabilities and Stockholder $49,690,529 $36,809,560 Total Stockholders Equity Terry Co. Statement of Cash Flows For Year Ended 12/31/Year 3 Cash Flow from Operations Net Income Adjustments $7,087,771 Change in A/R Change in Inventory Change in Prepaid Insurance Change in Prepaid Rent Depreciation & Amortization ($1,665,000) $1,332,000 $499,500 ($166,500) $1,998,000 $2,479 ($951,430) $1,656,880 Amortization of Bond Discount Change in A/P Change in Income Tax Payable Change in Interest Payable $ 30,000 $2,769,229 $199,800 $9,857,000 Change in Unearned Revenue Change in Wages Payable $166,500) Net Cash Flow from Operations Cash Flow from Investments Purchase of Land ($2,664,000) ($12,654,000) $9,990,000 Purchase of Equipment Net Cash Flow from Investments Cash Flow from Financing (5333,000) $1,558,969 $3,996,000 200,000 Repayment of Loans Issuance Of Bonds Payable Issuance of Notes Payable Payments of Dividends Net Cash Flow from Financing $5,021,969 Net Increase (Decrease) in Cash Cash, January 1, Year 3 Cash, December 31, Year 3 $2,224,969 $3,330,000 $5.554.969