Question 1: (Income and Cash Flow Analysis)
The Berndt Corporation expects to have sales of $ 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be $ 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal- plus- state tax rate is 40%. Berndt has no debt.
a. Set up an income statement. What is Berndts expected net cash flow?
b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?
c. Now suppose that Congress, instead of doubling Berndts depreciation, reduced it by 50%. How would profit and net cash flow be affected?
d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?
Question 2: (Cash Income Flows)
The Moore Corporation has operating income (EBIT) of $ 750,000. The company’s depreciation expense is $ 200,000. Moore is 100% equity financed, and it faces a 40% tax rate. What is the company’s net income? What is its net cash flow?
Question 3: (Days Sales Outstanding) and (Debt Ratio)
A) Greene Sisters has a DSO of 20 days. The company’s average daily sales are $ 20,000. What is the level of its accounts receivable? Assume there are 365 days in a year.
B) Vigo Vacations has an equity multiplier of 2.5. The company’s assets are financed with some combination of long- term debt and common equity. What is the company’s debt ratio?
Question 4: (Du Pont Analysis)
Donaldson & Son has an ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. What is the company’s total assets turnover? What is the firm’s equity multiplier?
Question 5: (Times- Interest- Earned Ratio) and (Balance Sheet Analysis)
The Manor Corporation has $ 500,000 of debt outstanding, and it pays an interest rate of 10% annually: Manors annual sales are $ 2 million, its average tax rate is 30%, and its net profit margin on sales is 5%. If the company does not maintain a TIE ratio of at least 5 times, its bank will refuse to renew the loan, and bankruptcy will result. What is Manors TIE ratio?
Question 6: Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial data:
Debt ratio: 50%
Quick ratio: 0.80
Total assets turnover: 1.5
Days sales outstanding: 36.5 days
Gross profit margin on sales: (Sales Cost of goods sold)/ Sales 25%
Inventory turnover ratio: 5
Calculation is based on a 365- day year.
Balance Sheet Cash _________ Accounts payable _______
Accounts receivable _________ Long- term debt 60,000
Inventories _________ Common stock _______
Fixed assets _________ Retained earnings 97,500
Total assets $ 300,000 Total liabilities and equity
Sales _________ Cost of goods sold _______