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3 Warm Up Exercises
MBA 504: Financial Management
E3.1 You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your manager, who graduated from your alma mater 2 years ago, gives you the following list of accounts and asks you to prepare a simple income statement using those accounts. Accounts Depreciation General and administrative expense Sales Sales expecting Cost of goods sold Lease expense Interest expense ($000,000) 25 22 345 18 255 4 3
a. Arrange the accounts into well-labeled income statement. Make sure you label and solve for gross profit, operating profit, and net profit before taxes. Ans. Statement of income statement Sales Less: Cost of goods sold Gross profit Less: operating expenses Depreciation General and administrative expensive Interest expenses Operating profit Lease expenses Net profit before taxes 25 22 3 40 4 36 ($000,000) 345 255 90
b. Using a 35% tax rate, calculate taxes paid and net profits after taxes.
Elizabeth Patrick ($000,000) Ans. Net profit before taxes Less: tax @ 35 % Net profit after taxes 36.0 12.6 23.4
MBA 504: Financial Management
c. Assuming a dividend of $1.10 per share with a 4.25 million shares outstanding, calculate EPS and additions to its retained earnings. Ans. EPS Net profit after taxes No. of shares outstanding ($000,000) 23.4 4.25 million
EPS = (Net profit after taxes/ No. of shares outstanding) = $ 5.506 Additions to retained earnings = Net profit after taxes - dividend paid = 23.4 – 4.675 = $18.725 E3-2 Explain why the income statement can be called a “profit and loss statement” What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves? Ans. The income statement is also called profit and loss statement because from the income statement one can assess the profit or loss earned by the business. In other words, it’s the income statement which shows the profit earned or the loss suffered by an entity. Balance in the balance sheet means that the balance sheet should match or tally exactly. Both the sides that is the asset side and the liability side should balance i.e. be equal or exactly same.
E3-3 Cooper Industtry began 2012 with retained earnings of $25.32 million. During the year it paid four quarterly dividens of $.35 cents a share to $2.75 million common stockholders. Preferred stockholders holding 500,000. Were paid two semi-annual dividends of $0.75 per share. The firm has a net profit after taxes of $5.15 million. Prepare the statement of retained earnings for the year ended Dec.31, 2012. Ans. Statement of retained earnings for the year ended Dec.31, 2012 Net profit after tax Less: Preference dividend (note 1) Less: Equity dividend (note 2) 25,320,000 750,000 385,000
Elizabeth Patrick Retained earnings Note:1) Preference dividend = 500,000 x 0.75 x 2 = 750,000 2) Equity dividend = 2,750,000 x 0.35 x 4 = 385,000
MBA 504: Financial Management 24,185,000
E3-4 Bluetsone metals is a fabrication firm that manufacturers pre-fabricated metal parts for customers in a variety of industries. The firm’s motto is “If you need it, we make it.” The CEO of Bluestone recently held a board meeting during which he extolled the virtues of the corporation. The company, he stated confidently, had the capability to build any product and could do so using a lean manufacturing model. The firm would be profitable claimed the CEO, because the company used state of the art technology to build a variety of products while keeping inventory levels low. As a business press reporter, you have calculated some ratios to analyze the financial health of the firm. Bluestone’s current ratios and quick of ratios for the past 6 years are in the table below: 2007 2008 Current ratio 1.2 1.4 Quick ratio 1.1 1.3 Ans. Plz check if the question is complete?? 2009 1.3 1.2 2010 1.6 0.8 2011 1.8 0.6 2012 2.2 0.4
E3-5 If we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.43, what is the (ROE)? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders dividends by common stock equity? Ans. ROE (DuPont) = profit margin x asset turnover ratio x financial multiplier = 0.045 x 0.72 x 1.43 = 0.0463 or 4.63 %