Janelle Thompson 5/29/13Dr. Joseph Riotto Busi 607 8205 Corporate Financial Management Chapter 1: D1, D2, D3, D7, D8 pg. 22; Chapter 2: P1, P4 pg. 46; P6, P7 pp. 46-47Chapter 3: P4, P6 pg. 76; P21 pp.79-80

Chapter 1 Discussion Questions:

1. How did the recession of 20072009 compare with other recessions since the Great Depression in terms of length? (LO3). The recession of 2007-2009 was the longest recession since the Great Depression.

2. What effect did the recession of 20072009 have on government regulation? (LO3). Congress started working on new regulations for financial institutions and creating new organizations to oversee.

3. What advantages does a sole proprietorship offer? What is a major drawback of this type of organization? (LO2)The advantages of a sole proprietorship offers are simplicity of decision-making and low organizational & operational costs. A major drawback is unlimited liability to the owner, in which he can lose his personal assets as well capital.

7. What issue does agency theory examine? Why is it important in a public corporation rather than in a private corporation? (LO4) Agency theory examines the relationship between principle and agent or owner and employee. It is more important in a public corporation because management is not the likely the owner like in a private company and the management now serves as the agent and his decisions should be in the interest of the shareholders. These interests can conflict with the agent, or managements financial decisions.

8. Why are institutional investors important in todays business world? (LO4)Institutional investors own large percentages in U.S. companies such as pension and mutual funds, in which they have more say in the management of publicly owned companies. These investors hold voting power since they vote in groups and have a large say in choosing the board of directors for efficient management.

Chapter 2 Problem Questions:

1. Frantic Fast Foods had earnings after taxes of $390,000 in the year 2009 with 300,000 shares outstanding. On January 1, 2010, the firm issued 25,000 new shares. Because of the proceeds from these new shares and other operating improvements, earnings after taxes increased by 20 percent. Income statement (LO1)

a . Compute earnings per share for the year 2009.

b . Compute earnings per share for the year 2010.

4. A-Rod Fishing Supplies had sales of $2,000,000 and cost of goods sold of $1,250,000. Selling and administrative expenses represented 8 percent of sales. Depreciation was 5 percent of the total assets of $4,000,000. What was the firms operating profit? Operating Profit (LO1)

Sales$2,000,000

Cost of goods sold 1,250,000

Gross Profit 750,000

Selling & administrative expense8% x $2,000,000 = $160,000 160,000

Depreciation expense5% x $4,000,000 = $200,000 200,000

Operating profit$ 390,000

6. Given the following information prepare in good form an income statement for the Dental Drilling Company.

Selling and administrative expense ............................................................ $ 60,000 Depreciation expense ........................................................................................ 70,000 Sales .......................................................................................................................... 470,000 Interest expense .................................................................................................. 40,000 Cost of goods sold ........................................................................................... 140,000 Taxes ..................................................................................................................... 45,000

Sales$470,000

Cost of goods sold 140,000

Gross Profit 330,000

Selling & administrative expense 60,000

Depreciation expense 70,000

Operating profit 200,000

Interest Expense 40,000

Earnings before taxes 160,000

Taxes 45,000

Earnings after taxes 115,000

7. Given the following information, prepare in good form an income statement for Jonas Brothers Cough Drops. Selling and administrative expense ............................................................ $ 250,000 Depreciation expense ........................................................................................ 190,000 Sales .......................................................................................................................... 1,600,000 Interest expense .................................................................................................. 120,000 Cost of goods sold ............................................................................................... 480,000 Taxes ........................................................................................................................ 165,000

Sales$1,600,000

Cost of goods sold 480,000

Gross Profit 1,120,000

Selling & administrative expense 250,000

Depreciation expense 190,000

Operating profit 680,000

Interest Expense 120,000

Earnings before taxes 560,000

Taxes 165,000

Earnings after taxes 395,000

Chapter 3 Problem Question:

4. Billys Chrystal Stores, Inc., has assets of $5,000,000 and turns over its assets 1.2 times per year. Return on assets is 8 percent. What is the firms profit margin (return on sales)? Profitability ratios (LO2)

6. Dr. Zhivago Diagnostics Corp. income statement for 2010 is as follows: Profitability ratios (LO2)

Sales .................................................................................................... $2,000,000 Cost of goods sold ......................................................................... 1,400,000 Gross profit ...................................................................................... 600,000 Selling and administrative expense ...................................... 300,000 Operating profit ............................................................................. 300,000 Interest expense ............................................................................ 50,000 Income before taxes .................................................................... 250,000 Taxes (30%) .................................................................................... 75,000 Income after taxes ........................................................................ $ 175,000

a . Compute the profit margin for 2010.

b . Assume in 2011, sales increase by 10 percent and cost of goods sold increases by 20 percent. The firm is able to keep all other expenses the same. Once again, assume a tax rate of 30 percent on income before taxes. What are income after taxes and the profit margin for 2011?

Sales ................................................................................................ $2,200,000 (2,000,000 x 1.10) Cost of goods sold ..................................................................... 1,400,000 (1,400,000 x 1.20)Gross profit .................................................................................. 520,000 Selling and administrative expense .................................. 300,000 Operating profit ......................................................................... 220,000 Interest expense ........................................................................ 50,000 Income before taxes ................................................................ 170,000 Taxes (30%) ................................................................................ 51,000 Income after taxes .................................................................... $ 119,000

21. Jim Shorts Company makes clothing for schools. Sales in 2010 were $4,000,000. Assets were as follows: Turnover ratios (LO2)

Cash ................................................................................. $ 100,000 Accounts receivable ................................................. 800,000 Inventory ...................................................................... 400,000 Net plant and equipment ....................................... 500,000 Total assets ......................................................... $1,800,000

a . Compute the following:

1. Accounts receivable turnover

2. Inventory turnover

3. Fixed asset turnover

4. Total asset turnover

b . In 2011, sales increased to $5,000,000 and the assets for that year were as follows:

Cash ................................................................................. $ 100,000 Accounts receivable ................................................. 900,000 Inventory ...................................................................... 975,000 Net plant and equipment ....................................... 500,000 Total assets .................................................... $2,475,000

Once again, compute the four ratios. 1. Accounts receivable turnover

2. Inventory turnover

3. Fixed asset turnover

4. Total asset turnover

c. Indicate if there is an improvement or decline in total asset turnover, and based on the other ratios, indicate why this development has taken place.Total asset turnover decreased. In 2010 it was 2.22 times and declined to 2.02 in 2011. Accounts receivable turnover and fixed asset turnover both increased from 2010 to 2011, but inventory turnover decreased from 10 to 5.13 times which would account for the decline in total asset turnover.