Question 1: In terms of the like for the securities offered, what is the difference between money and capital markets?
Question 2: Micromanagement, Inc., has 8 million shares of stock outstanding and will report earnings of $20 million in the current year. The company is considering the issuance of 2 million additional shares that will net $30 per share to the corporation.
a. What is the immediate dilution potential for this new stock issue?
b. Assume that Micromanagement can earn 12.5 percent on the proceeds of the stock issue in time to include them in the current year’s results. Should the new issue be undertaken based on earnings per share?
Question 3: Arrange the following income statement items so they are in the proper order of an income statement:
Taxes
Shares outstanding
Interest expense
Depreciation expense
Preferred stock dividends
Operating profit
Sales
Gross profit
Earnings per share
Earnings before taxes
Cost of goods sold
Earnings after taxes
Earnings available to common
stockholders
Selling and administrative expense
Question 4: Using the income statement for Paste Management Company on page 74, compute the following ratios:
a. The interest coverage.
b. The fixed charge coverage.
The total assets for this company equal $80,000. Set up the equation for the Du Pont system of ratio analysis, and compute c, d, and e.
c. Profit margin.
d. Total asset turnover.
e. Return on assets (investment).
PASTE MANAGEMENT COMPANY
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $126,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000
Less: Selling and administrative expense . . . . . . . . . . . . . . . . . 11,000
Less: Lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Operating profit* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,000
Less: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Earnings before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
Less: Taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Earnings after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,500
*Equals income before interest and taxes.
Question 5: Pirate Video Company has made the following sales projections for the next six months. All sales are credit sales.
March $24,000 Jun $28,000
April 30,000 July 35,000
May 18,000 August 38,000
Sales in January and February were $27,000 and $26,000, respectively. Experience has shown that of total sales, 10 percent are uncollectible, 30 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected two months after sale. Prepare a monthly cash receipts schedule for the firm for March through August. Of the sales expected to be made during the six months from March through August, how much will still be uncollected at the end of August? How much of this is expected to be collected later?
Question 6: Thompson Wood Products has credit sales of $2,160,000 and accounts receivable of $288,000. Compute the value of the average collection period.
Question 7: Sauer Food Company has decided to buy a new computer system with an expected life of three years. The cost is $150,000. The company can borrow $150,000 for three years at 10 percent annual interest or for one year at 8 percent annual interest. How much would Sauer Food Company save in interest over the three-year life of the computer system if the one-year loan is utilized and the loan is rolled over (reborrowed) each year at the same 8 percent rate? Compare this to the 10 percent three-year loan. What if interest rates on the 8 percent loan go up to 13 percent in year 2 and 18 percent in year 3? What would be the total interest cost compared to the 10 percent, three-year loan?
Question 8: Vroom Motorcycle Company is borrowing $30,000 from First State Bank. The total interest is $9,000. The loan will be paid by making equal monthly payments for the next three years. What is the effective rate of interest on this installment loan?
Question 9: Explain what is operating and financial leverage. How are they used?