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(Review of financial statements) Prepare a balance sheet and income statement as of December 31, 2003, for the sharpe Mfg.Co. from the following information. Accounts receivable $ 120,000 Machinery and equipment $700,000 Accumulated Depreciation $236,000 Notes payable $100,000 Net sales $800,00 Inventory $110,000 Accounts payable $90,000 Long-term debt $160,000 Cost of goods sold $500,000 Operating expenses $28,000 Common Stock $320,000 Cash $96,000 Retained earning – Prior year ? Retained earnings – current year ? (b) 2-3 A. (Corporate income Tax) Delaney, Inc. sells minicomputers. During the past year, the company’s sales $4 million. The cost of its merchandise sold came to $2 million, cash operating expenses were $ 400,000, Depreciation expense was $100,000, and the firm paid $150,000 in interest on bank loans. Also the corporation paid $25,000 in the form of dividends to its own common stockholders. Calculate the corporation’s tax liability. Q.No.03 (Measuring cash flows) Calculate the free cash flows for T.P. Jarmon, Inc., for the year ended December 31, 2003, both from an asset and a financing perspective. Interpret your results. T.P. Jarmon, Inc. Balance Sheet at 12/31/02 and 12/31/03 ASSETS 2002 2003 Cash Marketable securities Accounts receivable Inventory Prepaid rent Total current assets Net plant and equipment Total assets $15,000 6,000 42,000 51,000 1,200 115,200 286,000 $401,200 $14,000 6,200 33,000 84,000 1,600 138,300 270,000 $408,300 LIABILITIES AND OWNERS’ EQUITY 2002 2003 Accounts receivable Notes payable Accruals Total current liabilities Long-term debt Common stockholders’ equity Total liabilities and owners’ equity $48,000 15,000 6,000 69,000 160,000 172,200 401,200 $57,000 13,000 5,000 75,000 150,000 183,300 408,300 T.P. Jarmon, Inc. Income Statement for year ending 12/31/03 Sales Less: cost of goods sold Gross profit Less: expenses General and administrative $30,000 Interest 10,000 Depreciation 30,000 Total operating expenses Earnings before taxes Less: taxes Net income Less: cash dividents To retained earnings $600,000 460,000 $140,000 70,000 70,000 27,100 42,900 31,800 11,100 Q.No.04 (Ratio analysis) the balance sheet and income statement for the simsboro paper company are as follow Balance sheet ($000) Income Statement ($000) Cash $1,000 Net sales (all credit) $7,500 Accounts receivable 1,500 Cost of good sold (3,000) Inventories 1,000 Gross profit $4,500 Current assets $3,500 Operating expenses (3,000) Net fixed assets 4,500 Operating income (EPIT) $ 1,500 Total Assets $8,000 Interest expense (367) Account Payable $1,000 Earnings before taxes $1,133 Accrued payable 600 Income taxes (40%) (453) Short term notes payable 200 Net income $680 Current liabilities $1,800 Long term debt 2,100 Owner equity 4,100 Total liabilities and owner equity $8,000 Includes depreciation expense of $ 500 for the year Q.No.05 (Financial forecasting) Zapatera Enterprises is evaluating its financing requirements for the coming year. The firm has only been in business for one year, but its Chief Financial Officer predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales. Last year Zapatera had $12 million in sales with net income of $1.2 million. The firm anticipates that next year’s sales will reach $15 million with net income rising to $2 million. Given its present high rate of growth, the firm retains all of its earnings to help defray the cost of new investments. The firm’s balance sheet for the year just ended is as follows: Zapatera Enterprises, Inc. BALANCE SHEET 12/31/03 % OF SALES Current assets $3,000,000 25% Net fixed assets 6,000,000 50% Total $9,000,000 L I A B I L I T I E S A N D OWNERS’ EQUITY Accounts payable $3,000,000 25% Long-term debt 2,000,000 NAa Total liabilities $5,000,000 Common stock 1,000,000 NA* Paid-in capital 1,800,000 NA* Retained earnings 1,200,000 Common equity 4,000,000 Total $9,000,000 Not- applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year’s forecast of financing requirements. Estimate Zapatera’s total financing requirements (i.e., total assets) for 2004 and its net funding requirements (discretionary financing needed). Q.No.06 (IRR Calculation) Determine the internal rate of return to the nearest percent on the following projects: a. An initial outlay of $10,000 resulting in a free cash flow of $2,000 at the end of year 1, $5,000 at the end of year 2, and $8,000 at the end of year 3. b. An initial outlay of $10,000 resulting in a free cash flow of $8,000 at the end of year 1, $5,000 at the end of year 2, and $2,000 at the end of year 3. c. An initial outlay of $10,000 resulting in a free cash flow of $2,000 at the end of years 1 through 5, and $5,000 at the end of year 6. Q.No.07 Payback Period Calculations) You are considering three independent projects, project A, project B, and project C. The required rate of return is 10% on each. Given the following free cash floh information, calculate the payback period and discounted payback period for each. Year Project A Project B Project C 0 -$ 1,000 -$10,000 -$ 5,000 1 600 5,000 1,000 2 300 3,000 1,000 3 200 3,000 2,000 4 100 3,000 2,000 5 500 3,000 2,000 If required a three year payback for both the traditional and discounted payback period method before an investment can be accepted, which project would be accepted under each criterion? Q.No.08 10-1A. (Capital gains tax) The J. Harris Corporation is considering selling one of its old assembly machines. The machine, purchased for $30,000 five years ago, had an expected life of 10 years and an expected salvage value of zero. Assume Harris uses simplified straight-line depreciation, creating depreciation of $3,000 per year, and could sell this old machine for $35,000. Also assume a 34 percent marginal tax rate. a. What would be the taxes associated with this sale? b. If the old machine were sold for $25,000, what would be the taxes associated with this sale? c. If the old machine were sold for $15,000, what would be the taxes associated with this sale? d. If the old machine were sold for $12,000, what would be the taxes associated with this sale? Q.No.09 (a) 18-5 A (Cost of trade credit) calculate the effective cost of the following trade credit terms where payment is made on the net due date, using the annual percentage rate (APR) formula. a. 1/10, net 30 b. 3/15, net 45 c. 3/15, net 30 d. 2/15, net 60 (b) 18-7A (Cost of short-term financing) The R. Morin Construction Company needs to borrow $100,000 to help finance a new $150,000 hydraulic crane used in the firms commercial construction business. The crane will pay for itself in one year. The firm is considering the following alternatives for financing its purchase. Alternative A- The firm’s bank has agreed to land the $ 100,000 at a rate of 14%. Interest would be discounted, and a 15 % compensating balance would be required. However, the compensating balance requirement would not be binding on R. Morin because the firm normally maintains a minimum demand deposit (checking account) balance of $25,000 in the bank. Alternative B- The equipment dealer has agreed to finance the equipment with a one year loan. The $100,000 loan would require payment of principal and interest totaling $116,300 at year end. a. Which alternative should R.Morin select? b. If the bank compensating balance requirement were to necessitate idle demand deposit equal to 15% of the loan, what effect would this have on the cost of the bank loan alternative? Q.No.10 (a) 20-6A (Marginal analysis) The Bandwagonesque Corporation is considering relaxing its current credit policy. Currently, the firm has annual sales (all credit) of $5 million and an average collection period of 60 days assume a 360 day year). Under the prop osed change, the trade credit term would be changed from net 60 to net 90 days and credit would be extended to a risk class of customer. It is assumed that bad debt losses on current customers will at their current level. Under this change, it is expected that sales will increase to $6 million. Given the following information, should the firm adopt the new policy? New sales level (all credit) $ 6,000,000 Original sales level (all credit) $ 5,000,000 Contribution margin 20% Percentage bad debt losses on new sales 8% New average collection period 90 days Original average collection period 60 days Additional investment in inventory $ 50,000 Pre-tax required rate of return 15% (b) 20-11A (EOQ calculation) Swank Products is involved in the production of camera parts and has the following inventory, carrying, and storage costs. 1. Order must be placed in round lots of 200 units 2. Annual unit usage is 500,000 (assume a 50 week year in your calculation) 3. The carrying cost is 20 % of the purchase price 4. The purchaser price is $ 2 per unit 5. The ordering cost is $90 per order 6. The desired safety stock is 15,000 units. (This does not include delivery time stock) 7. The delivery time is one week Given the preceding information a. Determine the optional EOQ level b. How many order will be placed annually c. What is the inventory order point? ( That is at what level of inventory should a new order be placed) d. What is the average inventory level?

(Review of financial statements) Prepare a balance sheet and income statement as of December 31, 2003, for the sharpe Mfg.Co. from the following information.

Accounts receivable $ 120,000
Machinery and equipment $700,000
Accumulated Depreciation $236,000
Notes payable $100,000
Net sales $800,00
Inventory $110,000
Accounts payable $90,000
Long-term debt $160,000
Cost of goods sold $500,000
Operating expenses $28,000
Common Stock $320,000
Cash $96,000
Retained earning – Prior year ?
Retained earnings – current year ?

(b) 2-3 A. (Corporate income Tax) Delaney, Inc. sells minicomputers. During the past year, the company’s sales $4 million. The cost of its merchandise sold came to $2 million, cash operating expenses were $ 400,000, Depreciation expense was $100,000, and the firm paid $150,000 in interest on bank loans. Also the corporation paid $25,000 in the form of dividends to its own common stockholders. Calculate the corporation’s tax liability.

Q.No.03 (Measuring cash flows) Calculate the free cash flows for T.P. Jarmon, Inc., for the year ended December 31, 2003, both from an asset and a financing perspective. Interpret your results.
T.P. Jarmon, Inc. Balance Sheet at 12/31/02 and 12/31/03
ASSETS
2002 2003
Cash
Marketable securities
Accounts receivable
Inventory
Prepaid rent
Total current assets
Net plant and equipment
Total assets $15,000
6,000
42,000
51,000
1,200
115,200
286,000
$401,200 $14,000
6,200
33,000
84,000
1,600
138,300
270,000
$408,300

LIABILITIES AND OWNERS’ EQUITY
2002 2003
Accounts receivable
Notes payable
Accruals
Total current liabilities
Long-term debt
Common stockholders’ equity
Total liabilities and owners’ equity $48,000
15,000
6,000
69,000
160,000
172,200
401,200 $57,000
13,000
5,000
75,000
150,000
183,300
408,300

T.P. Jarmon, Inc. Income Statement for year ending 12/31/03
Sales
Less: cost of goods sold
Gross profit
Less: expenses
General and administrative $30,000
Interest 10,000
Depreciation 30,000
Total operating expenses
Earnings before taxes
Less: taxes
Net income
Less: cash dividents
To retained earnings $600,000
460,000
$140,000

70,000
70,000
27,100
42,900
31,800
11,100

Q.No.04 (Ratio analysis) the balance sheet and income statement for the simsboro paper company are as follow
Balance sheet ($000) Income Statement ($000)
Cash $1,000 Net sales (all credit) $7,500
Accounts receivable 1,500 Cost of good sold (3,000)
Inventories 1,000 Gross profit $4,500
Current assets $3,500 Operating expenses (3,000)
Net fixed assets 4,500 Operating income (EPIT) $ 1,500
Total Assets $8,000 Interest expense (367)
Account Payable $1,000 Earnings before taxes $1,133
Accrued payable 600 Income taxes (40%) (453)
Short term notes payable 200 Net income $680
Current liabilities $1,800
Long term debt 2,100
Owner equity 4,100
Total liabilities and owner equity $8,000
Includes depreciation expense of $ 500 for the year
Q.No.05 (Financial forecasting) Zapatera Enterprises is evaluating its financing requirements for the coming year. The firm has only been in business for one year, but its Chief Financial Officer predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.
Last year Zapatera had $12 million in sales with net income of $1.2 million. The firm anticipates that next year’s sales will reach $15 million with net income rising to $2 million. Given its present high rate of growth, the firm retains all of its earnings to help defray the cost of new investments.
The firm’s balance sheet for the year just ended is as follows:
Zapatera Enterprises, Inc.

BALANCE SHEET
12/31/03 % OF SALES
Current assets $3,000,000 25%
Net fixed assets 6,000,000 50%
Total $9,000,000
L I A B I L I T I E S A N D OWNERS’ EQUITY
Accounts payable $3,000,000 25%
Long-term debt 2,000,000 NAa
Total liabilities $5,000,000
Common stock 1,000,000 NA*
Paid-in capital 1,800,000 NA*
Retained earnings 1,200,000
Common equity 4,000,000
Total $9,000,000
Not- applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year’s forecast of financing requirements.
Estimate Zapatera’s total financing requirements (i.e., total assets) for 2004 and its net funding requirements (discretionary financing needed).

Q.No.06 (IRR Calculation) Determine the internal rate of return to the nearest percent on the following projects:
a. An initial outlay of $10,000 resulting in a free cash flow of $2,000 at the end of year 1, $5,000 at the end of year 2, and $8,000 at the end of year 3.
b. An initial outlay of $10,000 resulting in a free cash flow of $8,000 at the end of year 1, $5,000 at the end of year 2, and $2,000 at the end of year 3.
c. An initial outlay of $10,000 resulting in a free cash flow of $2,000 at the end of years 1 through 5, and $5,000 at the end of year 6.
Q.No.07 Payback Period Calculations) You are considering three independent projects, project A, project B, and project C. The required rate of return is 10% on each. Given the following free cash floh information, calculate the payback period and discounted payback period for each.
Year Project A Project B Project C
0 -$ 1,000 -$10,000 -$ 5,000
1 600 5,000 1,000
2 300 3,000 1,000
3 200 3,000 2,000
4 100 3,000 2,000
5 500 3,000 2,000
If required a three year payback for both the traditional and discounted payback period method before an investment can be accepted, which project would be accepted under each criterion?
Q.No.08 10-1A. (Capital gains tax) The J. Harris Corporation is considering selling one of its old assembly machines. The machine, purchased for $30,000 five years ago, had an expected life of 10 years and an expected salvage value of zero. Assume Harris uses simplified straight-line depreciation, creating depreciation of $3,000 per year, and could sell this old machine for $35,000. Also assume a 34 percent marginal tax rate.
a. What would be the taxes associated with this sale?
b. If the old machine were sold for $25,000, what would be the taxes associated with this sale?
c. If the old machine were sold for $15,000, what would be the taxes associated with this sale?
d. If the old machine were sold for $12,000, what would be the taxes associated with this sale?
Q.No.09 (a) 18-5 A (Cost of trade credit) calculate the effective cost of the following trade credit terms where payment is made on the net due date, using the annual percentage rate (APR) formula.
a. 1/10, net 30 b. 3/15, net 45
c. 3/15, net 30 d. 2/15, net 60
(b) 18-7A (Cost of short-term financing) The R. Morin Construction Company needs to borrow $100,000 to help finance a new $150,000 hydraulic crane used in the firms commercial construction business. The crane will pay for itself in one year. The firm is considering the following alternatives for financing its purchase.
Alternative A- The firm’s bank has agreed to land the $ 100,000 at a rate of 14%. Interest would be discounted, and a 15 % compensating balance would be required. However, the compensating balance requirement would not be binding on R. Morin because the firm normally maintains a minimum demand deposit (checking account) balance of $25,000 in the bank.
Alternative B- The equipment dealer has agreed to finance the equipment with a one year loan. The $100,000 loan would require payment of principal and interest totaling $116,300 at year end.
a. Which alternative should R.Morin select?
b. If the bank compensating balance requirement were to necessitate idle demand deposit equal to 15% of the loan, what effect would this have on the cost of the bank loan alternative?
Q.No.10 (a) 20-6A (Marginal analysis) The Bandwagonesque Corporation is considering relaxing its current credit policy. Currently, the firm has annual sales (all credit) of $5 million and an average collection period of 60 days assume a 360 day year). Under the proposed change, the trade credit term would be changed from net 60 to net 90 days and credit would be extended to a risk class of customer. It is assumed that bad debt losses on current customers will at their current level. Under this change, it is expected that sales will increase to $6 million. Given the following information, should the firm adopt the new policy?
New sales level (all credit) $ 6,000,000
Original sales level (all credit) $ 5,000,000
Contribution margin 20%
Percentage bad debt losses on new sales 8%
New average collection period 90 days
Original average collection period 60 days
Additional investment in inventory $ 50,000
Pre-tax required rate of return 15%
(b) 20-11A (EOQ calculation) Swank Products is involved in the production of camera parts and has the following inventory, carrying, and storage costs.
1. Order must be placed in round lots of 200 units
2. Annual unit usage is 500,000 (assume a 50 week year in your calculation)
3. The carrying cost is 20 % of the purchase price
4. The purchaser price is $ 2 per unit
5. The ordering cost is $90 per order
6. The desired safety stock is 15,000 units. (This does not include delivery time stock)
7. The delivery time is one week
Given the preceding information
a. Determine the optional EOQ level
b. How many order will be placed annually
c. What is the inventory order point? ( That is at what level of inventory should a new order be placed)
d. What is the average inventory level?

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