Financial Management Issues - Essay Example

Question 1.

Break-even in units = Fixed Cost / (Unit Price – Variable Unit Cost)

                                     = ($112,000 + $1,200) / ($8 – ($1.50 + $0.70))

                                     = $113,200 / ($8 - $2.70)

                                     = $113,200 /$5.3

                                     = 21358.49 units

Question 2.

Income Statement

Sales                                                                                               $2,000,000

Cost of Goods Sold                                                                     $1,100,000                       

Gross Margin                                                                                   $900,000

Depreciation Expense                                                                    $100,000

Interest Expense                                                                              $43,800

               Notes Payable (9%)                       $10,800

               Bonds Payable (11%)                     $33,000

Selling and Administrative                                                          $200,000                                                      

Income Before Taxes                                                                  $556,200

Taxes (40%)                                                                                    $222,480

Net Income                                                                                    $333,720

Question 3.

1. Sales

Profit Margin = Net Income/Sales = 12%

Net Income = $90,000

Sales = Net Income / 12%

Sales =  $750,000

1. Total Assets

Return on Assets = Net Income/Total Assets = 20%

Net Income = $90,000

Total Assets = Net Income/20%

Total Assets = $450,000

1. Total Asset Turnover

Total Asset Turnover = Sales / Total Assets

Total Asset Turnover = $750,000 / $450,000

Total Asset Turnover = 1.66

1. Total Debt

Debt to Assets Ratio = Total Debt/Total Assets = 55%

Total Debt = Total Assets X 55%

Total Debt = $247,500

1. Stockholder’s Equity

Total Assets = Total Debt + Stockholder’s Equity

Stockholder’s Equity = Total Assets – Total Debt

Stockholder’s Equity = $450,000 - $247,500

Stockholder’s Equity = $202,500

1. Return on Equity

Return on Equity = Net Income / Stockholder’s Equity

Return on Equity = $90,000/$202,500

Return on Equity = 44%

Stockholders will be interested in shareholder ratios like return on equity, earnings per share, and dividend yield. These ratios became the sole measure of the profitability of the stock. Stockholders also look at the company's leverage through its debt to assets and debt to equity ratios. Companies that are highly dependent on debt face higher risks. Question 5. a. Monthly Schedule of Cash ReceiptsCash Receipts for AprilFrom Sales (10%) $7,500Collection March (60%) $42,000 February (30%) $18,000Total $67,500Cash Receipts for MayFrom Sales (10%) $9,500Collection April (60%) $45,000 March (30%) $21,000Total $75,500Cash Receipts for JuneFrom Sales (10%) $11,000Collection May (60%) $57,000 April (30%) $22,500Total $90,500 b.

Accounts Receivables at end of JuneMay (30%) $28,500 June (60%) $66,000 Total $94,500Question 6.A Company (LIFO)Value of Cost of Goods Sold100 units @ $12 each $1,200200 units @ $11.50 each $2,300100 units at $10.50 each $1,050Total $4,550Value of Ending Inventory100 units @ $10 each $1000100 units @ $10.50 each $1050Total $2050Z Company (FIFO)Value of Cost of Goods Sold100 units @ $10 each $1000200 units @ $10.50 each $2100100 units @ $11.50 each $1150Total $4250Value of Ending Inventory100 units @ $11.

50 each $1150 100 units @ $12 each $1200Total $2350Question 7.Tall TreePercentage of Sales Table$300,000 SalesAssets LiabilitiesCash 5% Accounts Payable (90) 30% Accounts Receivable 30% Notes Payable (30) 10% Inventory 20% Accrued Expenses (7.5) 2.5%Currents Assets 55% Current Liabilities 42.5%Equipments 25% Common Stock (127.5) 42.5%Total 

Cash Receipts for May

From Sales (10%)                           $9,500

Collection

   April (60%)                                    $45,000

   March (30%)                                $21,000

Total                                                 $75,500

Cash Receipts for June

From Sales (10%)                           $11,000

Collection

   May (60%)                                    $57,000

   April (30%)                                   $22,500

Total                                                 $90,500

1. Accounts Receivables at end of June

May (30%)                                       $28,500

               June (60%)                                       $66,000

               Total                                                  $94,500

Question 6.

A Company (LIFO)

Value of Cost of Goods Sold

100 units @ $12 each                                  $1,200

200 units @ $11.50 each                            $2,300

100 units at $10.50 each                            $1,050

Total                                                                $4,550

Value of Ending Inventory

100 units @ $10 each                                  $1000

100 units @ $10.50 each                            $1050

Total                                                                $2050

Z Company (FIFO)

Value of Cost of Goods Sold

100 units @ $10 each                                  $1000

200 units @ $10.50 each                            $2100

100 units @ $11.50 each                            $1150

Total                                                                $4250

Value of Ending Inventory

100 units @ $11.50 each                            $1150

100 units @ $12 each                                 $1200

Total                                                                $2350

Question 7.

Tall Tree

Percentage of Sales Table

$300,000 Sales

Assets                                                                                            Liabilities

Cash                                                   5%                                      Accounts Payable (90)                  30%      

Accounts Receivable                     30%                                     Notes Payable (30)                        10%      

Inventory                                          20%                                     Accrued Expenses (7.5)                2.5%

Currents Assets                                             55%                                     Current Liabilities                           42.5%

Equipments                                      25%                                     Common Stock (127.5)                 42.5%

Total Assets                                     75%                                     Retained Earnings (75)                 25%

                                                                                                       Total Liabilities and Equity         75%      

New Debt Required : A/S (ΔS) – L/S (ΔS) – PS (1-D)

                                             = (60%) ($60,000) – (42.5%) ($60,000) – (8%)($360,000) (1-70%)

                                            = $36,000 - $25,500 – $864

                                            = $9,636

Question 8.

1. Break-even point in rings

Break even         = Fixed Cost / (Unit Price – Unit Variable Cost)

                             = $50,000 / ($75 - $35)

                             = $50,000 / ($40)

                             = 1250 rings

1. Profit or Loss at 8,000 rings

Profit = Quantity (Unit Price – Unit Cost)

               = 8,000 ($40)

               = $320,000

Question 9.

Probability                         Profit                                  Weighted Amount

45%                                     $50,000                              $22,500

25%                                     $20,000                              $5,000

20%                                     $10,000                              $2,000

10%                                     $300,000                           $30,000

Total                                                                               $4,500

Conclusion: Outdoor Sports Company should not open the branch office.

Question 10.

1. Effective rate of bank loan

$5,500/$300,000 = 1.83%

1. The company will pay $300,000 which is 100% of the original price.
2. Cash Discount = 2% of $300,000 = $6,000

Interest = $5, 500

Yes. Since the interest is less than the cash discount, it is wise for the company to borrow in order to take advantage of the cash discount.

1. Compensating Balance = 20% of $300,000 = $60,000

The company should borrow $360,000.