财务管理基础课后习题.pdf

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1、Chapter 2Discussion Questions2-1.Discuss some financial variables that affect the price-earnings ratio.The price-earnings ratio will be influenced by the earnings and sales growth ofthe firm,the risk or volatility in performance,the debt-equity structure of thefirm,the dividend payment policy,the qu

2、ality of management,and a number ofother factors.The ratio tends to be future-oriented,and the more positive theoutlook,the higher it will be.2-2.What is the difference between book value per share of common stock andmarket value per share?Why does this disparity occur?Book value per share is arrive

3、d at by taking the cost of the assets andsubtracting out liabilities and preferred stock and dividing by the number ofcommon shares outstanding.It is based on the historical cost of the assets.Market value per share is based on current assessed value of the firm in themarketplace and may bear little

4、 relationship to original cost.Besides thedisparity between book and market value caused by the historical cost approach,other contributing factors are the growth prospects for the firm,the quality ofmanagement,and the industry outlook.To the extent these are quite negative orpositive;market value m

5、ay differ widely from book value.2-3.Explain how depreciation generates actual cash flows for the company.The only way depreciation generates cash flows for the company is by servingas a tax shield against reported income.This non-cash deduction may providecash flow equal to the tax rate times the d

6、epreciation charged.This much intaxes will be saved,while no cash payments occur.2-4.What is the difference between accumulated depreciation and depreciationexpense?How are they related?Accumulated depreciation is the sum of all past and present depreciationcharges,while depreciation expense is the

7、current years charge.They arerelated in that the sum of all prior depreciation expense should be equal toaccumulated depreciation(subject to some differential related to asset writeoffs).The payment of cash dividends falls into the financing activities category.2-5.How is the income statement relate

8、d to the balance sheet?The earnings(less dividends)reported in the income statement is transferred tothe ownership section of the balance sheet as retained earnings.Thus,what weearn in the income statement becomes part of the ownership interest in thebalance sheet.2-6.Comment on why inflation may re

9、strict the usefulness of the balance sheet asnormally presented.The balance sheet is based on historical costs.When prices are rising rapidly,historical cost data may lose much of their meaning-particulariy for plant andequipment and inventory.2-7.Explain why the statement of cash flows provides use

10、ful information that goesbeyond income statement and balance sheet data.The income statement and balance sheet are based on the accrual method ofaccounting,which attempts to match revenues and expenses in the period inwhich they occur.However,accrual accounting does not attempt to properlyassess the

11、 cash flow position of the firm.The statement of cash flows fulfillsthis need.2-8.What are the three primary sections of the statement of cash flows?In whatsection would the payment of a cash dividend be shown?The sections of the statement of cash flows are:Cash flows from operating activitiesCash f

12、lows from investing activitiesCash flows from financing activities2-9.What is free cash flow?Why is it important to leveraged buyouts?Free cash flow is equal to cash flow from operating activities:Minus:Capital expenditures required to maintain the productive capacityof the firm.Minus:Dividends(requ

13、ired to maintain the payout on common stock andto cover any preferred stock obligation).The analyst or banker normally looks at free cash flow to determine whetherthere are sufficient excess funds to pay back the loan associated with theleveraged buy-out.2-10.Why is interest expense said to cost the

14、 firm substantially less than the actualexpense,while dividends cost it 100 percent of the outlay?Interest expense is a tax deductible item to the corporation,while dividendpayments are not.The net cost to the corporation of interest expense is theamount paid multiplied by the difference of one minu

15、s the applicable tax rate.For example,$100 of interest expense costs the company$65 after taxes whenthe corporate tax rate is 35 percent;for example,$1 ()0 x(1-.35)=$65.Chapter 2Problems1.Rockwell Paper Company had earnings after taxes of$580,000 in the year 2007 with400,000 shares of stock outstand

16、ing.On January 1,2008,the firm issued 35,000 newshares.Because of the proceeds from these new shares and other operating improvements,earnings after taxes increased by 25 percent.a.b.Compute earnings per share for the year 2007.Compute earnings per share for the year 2008.2-1.Solution:Rockwell Paper

17、 Companya.Year 2007Earnings per share=EarningsaftertaxesShares outstanding_$580,000 _ i 45_ 400,000-b.Year 2008Earnings after taxesShares outstandingEarnings per share=$580,000 x 1.25=$725,000=$400,000+35,000=$435,000$725,000 41 3=$43500=$1672.Sosa Diet Supplements had earnings after taxes of$800,00

18、0 in the year 2008 with 200,000shares of stock outstanding.On January 1,2009,the firm issued 50,000 new shares.Because of the proceeds from these new shares and other operating improvements,earningsafter taxes increased by 30 percent.a.Compute earnings per share for the year 2008.b.Compute earnings

19、per share for the year 2009.2-2.Solution:Sosa Diet Supplementsa.Year 2008Earnings per share=%mings after/xesShares outstanding二$800,000=$4 0 0200,000b.Year 2009Earnings after taxes=$800,000 x 1.30=$1,040,000Shares outstanding=200,000+50,000=250,000口E arni-ng per suh are=$1,040,000=$=4.16250,0003.a.K

20、evin Bacon and Pork Company had sales of$240,000 and cost of goods sold of$108,000.What is the gross profit margin(ratio of gross profit to sales)?b.If the average firm in the pork industry had a gross profit of 60 percent,how is thefirm doing?2-3.Solution:Kevin Bacon and Port Companya.Sales$240,000

21、Cost of goods sold 180,000Gross profit$132,000Gross profit$132,000 _ 55%Sales 240,000b.With a gross profit 55 percent,the firm is under-performingthe industry average of 60 percent.4.Arrange the following income statement items so they are in the proper order of an incomestatement:TaxesShares outsta

22、ndingGross profit shares outstandingInterest expenseDepreciation expensePreferred stock dividendsOperating profitEarnings per shareEarnings before taxesCost of goods soldEarnings after taxesEarnings available to commonstockholdersSelling and administrative expenseSalesGross profit2-4.Solution:Sales-

23、Cost of goods soldGross profit-Selling and administrative expense-Depreciation expenseOperating profit-Interest expenseEarnings before taxes-TaxesEarnings after taxes-Preferred stock dividendsEarnings available to common stockholdersShares outstandingEarnings per share5.Given the following informati

24、on,prepare,in good form,an income statement for GoodmanSoftware,Inc.Selling and administrative expense.$50,000Depreciation expense.80,000Sales.400,000Interest expense.30,000Cost of goods sold.150,00()Taxes.18,5502-5.Solution:Goodman Software,Inc.Sales.$400,000Cost of goods sold.150,000Gross Profit.2

25、50,000Selling and administrative expense.50,000Depreciation expense.80,000Operating profit.120,000Interest expense.30,000Earnings before taxes.90,000Taxes.18,550Earnings after taxes.$71,4506.Given the following information prepare in good form an income statement for the KidRock and Gravel Company.S

26、elling and administrative expense.$60,000Depreciation expense.70,000Sales.470,000Interest expense.40,000Cost of goods sold.140,00()Taxes.45,0002-6.Solution:Kid Rock and Gravel Co.Income StatementSales.$470,000Cost of goods sold.$140,000Gross profit.$330,000Selling and administrative expense.$60,000D

27、epreciation expense.$70,000Operating profit.$200,000Interest expense.$40,000Earnings before taxes.$160,000Taxes.$45,000Earnings after taxes.$115,0007.Prepare in good form an income statement for Virginia Slim Wear.Take your calculationsall the way to computing earnings per share.Sales.$600,000Shares

28、 outstanding.10(),()(X)Cost of goods sold.200,000Interest expense.30,000Selling and administrative expense.40,000Depreciation expense.20,000Preferred stock dividends.80,000Taxes.10(),()(X)2-7.Solution:Virginia Slim WearIncome StatementSales.$600,000Cost of goods sold.200,000Gross profit.400,000Selli

29、ng and administrative expense.40,000Depreciation expense.20,000Operating profit.340,000Interest expense.30,000Earnings before taxes.310,000Taxes.100,000Earnings after taxes.210,000Preferred stock dividends.80,000Earnings available to common stockholders.130,000Shares outstanding.100,000Earnings per

30、share.$1.308.Prepare in good form an income statement for Franklin Kite Co.,Inc.Take yourcalculations all the way to computing earnings per share.Sales.$900,(X)()Shares outstanding.50,000Cost of goods sold.400,00()Interest expense.40,000Selling and administrative expense.60,000Depreciation expense.2

31、0,000Preferred stock dividends.80,000Taxes.50,0002-8.Solution:Franklin Kite CompanyIncome StatementSales.$900,000Cost of goods sold.400,000Gross profit.500,000Selling and administrative expense.60,000Depreciation expense.20,000Operating profit.$420,000Interest expense.40,000Earnings before taxes.$38

32、0,000Taxes.50,000Earnings after taxes.$330,000Preferred stock dividends.80,000Earnings available to common stockholders.250,000Shares outstanding.50,000Earnings per share.$5.009.Lasar Technology,Inc.,had sales of$500,000,cost of goods sold of$180,000,selling andadministrative expense of$70,000,and o

33、perating profit of$90,000.What was the value ofdepreciation expense?Set this problem up as a partial income statement,and determinedepreciation expenses as the plug figure.2-9.Solution:Lasar Technology,Inc.Sales.$500,000Cost of goods sold.$180,000Gross Profit.$320,000Selling and administrative expen

34、se.70,000Depreciation Expense(plug figure).160,000Operating profit.$90,00010.The Ace Book Company sold 1,50()finance textbooks for$185 each to High TuitionUniversity in 2008.These books cost Ace$145 to produce.Ace spent$10,000(sellingexpense)to convince the university to buy its books.In addition,Ac

35、e borrowed$80,00()onJanuary 1,2008,on which the company paid 10 percent interest.Both interest and principalof the loan were paid on December 31,2008.Aces tax rate is 25 percent.Depreciationexpense for the year was$15,000.Did Ace Book Company make a profit in 2008?Please verify with an incomestateme

36、nt presented in good form.2-10.Solution:Ace Book CompanySales(1,500 books at$185 each).277,500Cost of goods sold(1,500 books at$145 each).217,500Gross Profit.60,000Selling expense.10,000Depreciation expense.15,000Operating profit.35,000Interest expense.8,000Earnings before taxes.27,000Taxes 25%.6,75

37、0Earnings after taxes.20,25011.Carr Auto Wholesalers had sales of$900,000 in 2004 and their cost of goods soldrepresented 65 percent of sales.Selling and administrative expenses were 9 percent of sales.Depreciation expense was$10,000 and interest expense for the year was$8,000.The firmstax rate is 3

38、0 percent.a.Compute earnings after taxes.b.Assume the firm hires Ms.Hood,an efficiency expert,as a consultant.She suggeststhat by increasing selling and administrative expenses to 12 percent of sales,sales canbe increased to$1,000,000.The extra sales effort will also reduce cost of goods soldto 60 p

39、ercent of sales(there will be a larger markup in prices as a result of moreaggressive selling).Depreciation expense will remain at$10,000.However,moreautomobiles will have to be carried in inventory to satisfy customers,and interestexpense will go up to$15,000.The firms tax rate will remain at 30 pe

40、rcent.Computerevised earnings after taxes based on Ms.Hoods suggestions for Carr AutoWholesalers.Will her ideas increase or decrease profitability?2-11.Solution:Carr Auto WholesalersIncome Statementa.Sales.$900,000Cost of goods old(65%of sales).585,000Gros s Profit.$315,000Selling and administrative

41、 expense(9%of sales).81,000Depreciation.10,000Operating profit.224,000Interest expense.8,000Earnings before taxes.216,000Taxes 30%.64,800Earnings after taxes.$151,2002-11.(Continued)b.Sales.$1,000,000Cost of goods sold(60%of sales).600,000Gross profit.400,000Selling and administrative expense.(12%of

42、 sales).120,000Depreciation.10,000Operating profit.270,000Interest expense.15,000Earnings before taxes.255,000Taxes 30%.76,500Earnings after taxes.$178,500Ms.Hoods ideas will increase profits.12.Classify the following balance sheet items as current or noncurrent:Retained earningsAccounts payablePrep

43、aid expensesPlant and equipmentInventoryCommon stockBonds payableAccrued wages payableAccounts receivableCapital in excess of parPreferred stockMarketable securities2-12.Solution:Retained earnings-noncurrentAccounts payable-currentPrepaid expense-currentPlant and equipment-noncurrentInventory-curren

44、tCommon stock-noncurrentBonds payable-noncurrentAccrued wages payable-currentAccounts receivable-currentCapital in excess of par-noncurrentPreferred stock-noncurrentMarketable securities-current13.Fill in the blank spaces with categories 1 through 7:1.Balance sheet(BS)5.Current liabilities(CL)2.Inco

45、me statement(IS)6.Long-term liabilities(LL)3.Current assets(CA)7.Stockholders equity(SE)4.Fixed assets(FA)Indicate WhetherItem Is on BalanceIf on BalanceSheet(BS)orSheet,DesignateIncomeWhichStatement(IS)CategoryItemAccounts receivableRetained earningsIncome tax expenseAccrued expensesCashSelling and

46、 administrative expensesPlant and equipmentOperating expensesMarketable securitiesInterest expenseSalesNotes payable(6 months)Bonds payable,maturity 2009Common stockDepreciation expenseInventoriesCapital in excess of par valueNet income(earnings after taxes)Income tax payable2-13.Solution:1.Balance

47、Sheet(BS)2.Income Statement(IS)3.Current Assets(CA)4.Fixed Assets(FA)5.Current Liabilities(CL)6.Long-Term Liabilities(LL)7.Stockholders Equity(SE)2-13.(Continued)IndicateWhether theitem is onIncomeStatement orBalanceSheetIf the Itemis onBalanceSheet,DesignateWhichCategoryItemBSCAAccounts ReceivableB

48、SSERetained EarningsISIncome Tax ExpenseBSCLAccrued ExpensesBSCACashISSelling and Administrative expensesBSFAPlant&EquipmentISOperating ExpensesBSCAMarketable SecuritiesISInterest ExpenseISSalesBSCLNotes Payable(6 months)BSLLBonds payable(Maturity 2009)BSSECommon StockISDepreciation ExpenseBSCAInven

49、toriesBSSECapital in excess of par valueISNet Income(Earnings after Taxes)BSCLIncome tax payable14.Arrange the following items in proper balance sheet presentation:Accumulated depreciation.$200,000Retained earnings.11(),()(X)Cash.5,000Bonds payable.142,0(X)Accounts receivable.38,000Plant and equipme

50、ntoriginal cost.720,000Accounts payable.35,000Allowance for bad debts.6,000Common stock,$1 par,150,000 shares outstanding.150,000Inventory.66,000Preferred stock,$50 par,1,000 shares outstanding.50,000Marketable securities.15,000Investments.20,000Notes payable.83,000Capital paid in excess of par(comm