Complete Chapter 2 problem, 2-8, p.

79

The Wendt Corporation had $10.5 million of taxable income.

a. What is the company’s federal income tax bill for the year?
b. Assume the firm receives an additional $1 million of interest income from some
bonds it owns. What is the tax on this interest income?
c. Now assume that Wendt does not receive the interest income but does receive an
additional $1 million as dividends on some stock it owns. What is the tax on this
dividend income?

2-8

a. Tax = $3,400,000 + ($10,500,000 - $10,000,000)(0.35) = $3,575,000.

b. Tax = $1,000,000(0.35) = $350,000.
c. Tax = ($1,000,000)0.30(0.35) = $105,000.

Complete Chapter 3 problem, 3-6, p. 112

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?

3-6

ROA = 10%; PM = 2%; ROE = 15%; S/TA = ?; A/E = ?

ROA = NI/A; PM = NI/S; ROE = NI/E
ROA = PM × S/TA
NI/A = NI/S × S/TA
10% = 2% × S/TA
S/TA = 5.

ROE = PM × S/TA × TA/E

NI/E = NI/S × S/TA × TA/E
15% = 2% × 5 × TA/E
15% = 10% × TA/E
TA/E = 1.5.

Complete Chapter 3 problem, 3-11, p. 113

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
Day’s sales outstanding: 36.5 days
Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25%
Inventory turnover ratio: 5.0
aCalculation is based on a 365-day year.
Balance Sheet

Cash $27,000 Accounts payable $90,000

Accounts receivable $45,000 Long-term debt $60,000
Inventories $90,000 Common stock $52,500
Fixed assets $138,000 Retained earnings $97,500
Total assets $300,000 Total liabilities and equity $300,000
Sales $450,000 Cost of goods sold $337,500

3-11

1. Debt = (0.50)(Total assets) = (0.50)($300,000) = $150,000.

2. Accounts payable = Debt – Long-term debt = $150,000 - $60,000
= $90,000
3. Common stock =Total liabilitiesand equity - Debt - Retained earnings
= $300,000 - $150,000 - $97,500 = $52,500.
4. Sales = (1.5)(Total assets) = (1.5)($300,000) = $450,000.
5. Inventory = Sales/5 = $450,000/5 = $90,000.
6. Accounts receivable = (Sales/365)(DSO) = ($450,000/365)(36.5)
= $45,000.
7. Cash + Accounts receivable = (0.80)(Accounts payable)
Cash + $45,000 = (0.80)($90,000)
Cash = $72,000 - $45,000 = $27,000.
8. Fixed assets = Total assets - (Cash + Accts rec. + Inventories)
= $300,000 - ($27,000 + $45,000 + $90,000) = $138,000.
9. Cost of goods sold = (Sales)(1 - 0.25) = ($450,000)(0.75)
= $337,500.