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Accounting Principles 11th Edition Jerry Weygandt, Paul Kimmel, Donald Kieso - Solutions

A firm should always purchase inventory and supplies on credit rather than paying cash. Correct?
A reduction in the advertising expense ratio increases return on common equity and share value. Correct?
A firm states that one of its goals is to earn a return on common equity of 17-20 percent. What is wrong with setting a goal in terms of return on common equity?
Why might operating losses increase after-tax borrowing cost?
Some retail analysts use a measure called “inventory yield,” calculated as gross profit-to-inventory. What does this measure tell you?
Return on total assets (ROA) is a common measure of profitability. The historical average is about 7.0 percent. The historical yield on corporate bonds is about 6.6 percent. Why is the ROA so low? Would not investors expect more than a 0.4 percent higher return on risky operations?
Low profit margins always imply low return on net operating assets. True or false?
The following information is from reformulated financial statements (in millions of dollars):a. (1) Calculate the dividends, net of capital contributions, for 2008.(2) Calculate ROCE for 2008; use average book value in the denominator.(3) Calculate RNOA for 2008; use the average net operating
A firm whose shares traded at three times their book value on December 31, 2008, had the accompanying financial statements. Amounts are in millions of dollars. The firm's marginal tax rate is 33 percent. There are no dirty-surplus income items in the balance sheet.a. The firm paid no dividends and
The exercise continues Exercise 9.5 in Chapter 9. The following financial statement were reported for a firm for fiscal year 2009 (in millions of dollars):The firm's income tax rate is 35%. The firm reported $15 million in interest income and $98 million in interest expense for 2009. Sales revenue
a. A firm has a return on common equity of 13.4 percent, a net after-tax borrowing cost of 4.5 percent, and a return of 11.2 percent on net operating assets of $405 million. What is the firm's financial leverage?b. The same firm has a short-term borrowing rate of 4.0 percent after tax and a return
A firm earns a profit margin of 3.8 percent on sales of $436 million and employs net operating assets of $150 million to do so. It considers adding another product line that will earn a 4.8 percent profit margin with an asset turnover of 2.3.What would be the effect on the firm’s return on net
Below are summary numbers from reformulated balance sheets for 2007 and 2006 for Kimberly-Clark Corporation, the products company, along with numbers from the reformulated income statement for 2007 (in millions).(a) Calculate the following for 2007 and 2006:(1) Net operating assets(2) Net financial
Here is a reformulated income statement for the Coca-Cola Company for 2007 (in millions):Sales .................... $ 28,857Cost of sales ................ 10,406Gross margin ............... 18,451Advertising expenses ............. 2,800General and administrative expenses ....... 8,145Other expenses
In the late 1990s, many grocery supermarkets shifted from regular storewide sales to issuing membership in discount and points programs, much like frequent flyer programs run by airlines.A supermarket chain with $120 million in annual sales and an asset turnover of 6.0 ponders whether to institute
Refer to the financial statements for Starbucks, the coffee vendor, in Exercise E9.9 in Chapter 9. Be sure to read the notes under the financial statements.a. Prepare a reformulated income statement for fiscal year 2007 and reformulated balance sheets for 2007 and 2006 in a way that distinguishes
Comparative balance sheets and income statements for fiscal year ended 2005 are given below for the warehouse retailer Home Depot. Amounts are in millions, except per-share data.a. Reformulate the 2005 and 2004 income statements and the 2005, 2004, and 2003 balance sheets. In addition to net
Financial statements for the Procter & Gamble Co. are presented in Exhibit 9.15 in Chapter 9. If you worked Mini case 9.1, you will have reformulated the statements in preparation for financial statement analysis. If not, do so now.Proceed to carry out a comprehensive profitability analysis for
What is a growth firms?
In analysis growth, should the analyst focus on residual earnings, abnormal earnings growth, or both?
What measure tells you that a firm is a no-growth firm?
Why would an analyst wish to distinguish the part of earnings that is sustainable?
Why would an analyst wish to distinguish the part of earnings that is sustainable? Discuss.
What are transitory earnings? Give some examples.
Are unrealized gains and losses on financial assets persistent or transitory income?
Distinguish operating leverage from operating liabilities leverage.
The higher a firm’s contribution margin ratio, the more leverage it gets from increasing sales. Correct?
Would you see s high profit margin of, say, 6 percent for a grocery retailer as sustainable?
What determines growth in equity investment in a firm?
A firm can have a high trailing P/E ratio, yet have an expected cum-dividend earnings growth rate after the forward year that is less than the required rate. Is this so?
For a firm with a normal trailing P/E ratio, expected future residual earnings must be the same as current residual earnings. Correct?
Can a firm have a high P/E ratio yet a low P/B ratio? How would you characterize the growth expectation for this firm?
Firms with high unsustainable earnings should have low (trailing) P/E ratio. Is this correct?
The following numbers were calculated from the financial statements for a firm for 2009 and 2008:Calculate core return of net operating assets (core RNOA) and show how much of its change from 2008 to 2009 is due to the change in profit margin and the change in asset turnover. Box 12.8 will helpyou.
The following numbers were calculated from the financial statements for a firm for 2009 and 2008:Explain how much of the change in ROCE from 2008 to 2009 is due to operating activities and how much is due to financing activities. Box 12.9 will helpyou.
The following numbers were calculated from the financial statements for a firm for 2009 and 2008:Explain to what extent the change in common equity from 2008 to 2009 is due to sales growth, net assets required to support sales, and borrowing. Box 12.10 will helpyou.
A firm reports operating income before tax in its income statement of $73.4 million on sales of $667.3 million. After net interest expense of $20.5 million and taxes of $18.3 million, its net income is $34.6 million. The following items are included as part of operating income:Start-up costs for
Consider the following information:Prepare a succinct analysis that explain the changes in ROCE from 2008 to 2009. The marginal tax rate is 34 percent, and dividends paid on preferred stock cannot be deducted for taxpurposes.
An analyst summarizes the following information for a firm (dollar amounts in millions);Analyze the growth of average common shareholders' equity in2009.
A student in your study group prepared the following reformulated income statement for the Coca-Cola Company for 2007 (in millions):Sales ................... $28,857Cost of sales ............... 10,406Gross margin ................ 18,451Advertising expenses ............ 2,800General and
The consolidated statement of earnings for Starbucks Corporation for 2007 is given in Exercise E9.9 in Chapter 9. The firm’s statutory tax rate is a 38.4 percent. Note 4 on “net interest and other income,” under the statements, identifies some components of earnings. For the 2007 fiscal year,
Comparative income statements and balance sheets for the warehouse retailer Home Depot are given in Exercise E11.10 in Chapter 11 for fiscal year 2005. Reformulate those statements and explain what determined the change in operating profitability (RNOA) from 2004 to 2005.The tax rate for 2005 is
US Airways Group the holding company for US Airways reported the following income statements for 1997 and 1998 (in millions of dollars):a. Reported operating income before interest and taxes increased by 73.6 percent in 1998 over 1997 while revenues increased by only 2.0 percent. Why?b. Despite the
Refer to the 1998 income statement for US Airways Group in Exercise E12.10 above. Of the total $7,674 million in operating expenses, suppose the following are fixed costs (in millions):Personnel ........... $2,040Aircraft rent ........... 400Other rent ........... 350Depreciation and amortization .
This case continues the financial statement analysis of Procter& Gamble Co. begun in Mini case 9.1 and developed further in Mini case 11.1. This final installment covers issues in dealing with core income.Financial statements for Procter & Gamble are presented in Exhibit 9.15 in Chapter 9. If you
By 2005, Microsoft Corporation, the premier software firm of the computer age, had matured into an established firm. Maturity, however, often brings slower growth and many observers claimed that Microsoft was beginning to show such symptoms. Outside its core business centered around the Windows
International Business Machines Corporation (IBM) was once the dominant computer manufacturer in the world and, from 1960 to 1980, the leading growth company. Indeed, in those years IBM became the very personification of a growth company. However, with the advent of decentralized computing and the
Tom Wells claims the formula for the cash payback technique is the same as the formula for the annual rate of return technique. Is Tom correct? What is the formula for the cash payback technique?
Discuss the factors that determine the appropriate discount rate to use when calculating the net present value.
What simplifying assumptions were made in the chapter regarding calculation of net present value?
What are some examples of potential intangible benefits of investment proposals? Why do these intangible benefits complicate the capital budgeting evaluation process? What might happen if intangible benefits are ignored in a capital budgeting decision?
What steps can be taken to incorporate intangible benefits into the capital budget evaluation process?
What advantages does the profitability index provide over direct comparison of net present value when comparing two projects?
What is a post-audit? What are the potential benefits of a post-audit?
Identify the steps required in using the internal rate of return method when the net annual cash flows are equal.
El Cajon Company uses the internal rate of return method. What is the decision rule for this method?
What are the strengths of the annual rate of return approach? What are its weaknesses?
Your classmate, Mike Dawson, is confused about the factors that are included in the annual rate of return technique. What is the formula for this technique?
Sveta Pace is trying to understand the term “cost of capital.” Define the term and indicate its relevance to the decision rule under the internal rate of return technique.
Bella Company is considering purchasing new equipment for $450,000. It is expected that the equipment will produce net annual cash flows of $50,000 over its 10-year useful life. Annual depreciation will be $45,000. Compute the cash payback period.
Hsung Company accumulates the following data concerning a proposed capital investment: cash cost $215,000, net annual cash flows $40,000, present value factor of cash inflows for 10 years 5.65 (rounded). Determine the net present value, and indicate whether the investment should be made.
Magic Corporation, an amusement park, is considering a capital investment in a new exhibit. The exhibit would cost $136,000 and have an estimated useful life of 5 years. It will be sold for $65,000 at that time. (Amusement parks need to rotate exhibits to keep people interested.) It is expected to
Caine Bottling Corporation is considering the purchase of a new bottling machine. The machine would cost $200,000 and has an estimated useful life of 8 years with zero salvage value. Management estimates that the new bottling machine will provide net annual cash flows of $34,000. Management also
Beacon Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $400,000, has an expected useful life of 10 years, a salvage value of zero, and is expected to increase net annual cash flows by $70,000. Project B will cost $280,000, has an expected
Quillen Company is performing a post-audit of a project completed one year ago. The initial estimates were that the project would cost $250,000, would have a useful life of 9 years, zero salvage value, and would result in net annual cash flows of $46,000 per year. Now that the investment has been
Horowitz Company is evaluating the purchase of a rebuilt spot-welding machine to be used in the manufacture of a new product. The machine will cost $176,000, has an estimated useful life of 7 years, a salvage value of zero, and will increase net annual cash flows by $33,740. What is its approximate
Viera Corporation is considering investing in a new facility. The estimated cost of the facility is $2,045,000. It will be used for 12 years, then sold for $716,000. The facility will generate annual cash inflows of $400,000 and will need new annual cash outflows of $150,000. The company has a
Mecha Oil Company is considering investing in a new oil well. It is expected that the oil well will increase annual revenues by $130,000 and will increase annual expenses by $70,000 including depreciation. The oil well will cost $470,000 and will have a $10,000 salvage value at the end of its
Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,000, and annual cash outflows would increase by $40,000. Compute the cash
Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,000, and annual cash outflows would increase by $40,000. The company’s
Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual cash inflows would increase by $80,000, and annual cash outflows would increase by $40,000. The company
Wallowa Company is considering a long-term investment project called ZIP. ZIP will require an investment of $120,000. It will have a useful life of 4 years and no salvage value. Annual revenues would increase by $80,000, and annual expenses (excluding depreciation) would increase by $40,000.
Palo Alto Corporation is considering purchasing a new delivery truck. The truck has many advantages over the company’s current truck (not the least of which is that it runs). The new truck would cost $56,000. Because of the increased capacity, reduced maintenance costs, and increased fuel
Doug's Custom Construction Company is considering three new projects, each requiring an equipment investment of $22,000. Each project will last for 3 years and produce the following net annual cash flows.The equipment's salvage value is zero, and Doug uses straight-line depreciation. Doug will not
Hiland Inc. manufactures snowsuits. Hiland is considering purchasing a new sewing machine at a cost of $2.45 million. Its existing machine was purchased five years ago at a price of $1.8 million; six months ago, Hiland spent $55,000 to keep it operational. The existing sewing machine can be sold
BAK Corp. is considering purchasing one of two new diagnostic machines. Either machine would make it possible for the company to bid on jobs that it currently isn€™t equipped to do. Estimates regarding each machine are provided below.InstructionsCalculate the net present value and
Eisler Corporation is involved in the business of injection molding of plastics. It is considering the purchase of a new computer-aided design and manufacturing machine for $430,000. The company believes that with this new machine it will improve productivity and increase quality, resulting in an
BSU Inc. wants to purchase a new machine for $29,300, excluding $1,500 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $2,000, and BSU Inc. expects to sell it for that
Ueker Company is considering three capital expenditure projects. Relevant data for the projects are as follows.Annual income is constant over the life of the project. Each project is expected to have zero salvage value at the end of the project. Ueker Company uses the straight-line method of
Pierre’s Hair Salon is considering opening a new location in French Lick, California. The cost of building a new salon is $300,000. A new salon will normally generate annual revenues of $70,000, with annual expenses (including depreciation) of $41,500. At the end of 15 years the salon will have a
Brady Service Center just purchased an automobile hoist for $35,000. The hoist has an 8-year life and an estimated salvage value of $3,000. Installation costs and freight charges were $3,300 and $700, respectively. Brady uses straight-line depreciation. The new hoist will be used to replace
Vilas Company is considering a capital investment of $190,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual
BAP Corporation is reviewing an investment proposal. The initial cost and estimates of the book value of the investment at the end of each year, the net cash flows for each year, and the net income for each year are presented in the schedule below. All cash flows are assumed to take place at the
Henkel Company is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.Depreciation is computed by the straight-line method with no salvage value. The company€™s cost of capital is 15%.
Lon Timur is an accounting major at a midwestern state university located approximately 60 miles from a major city. Many of the students attending the university are from the metropolitan area and visit their homes regularly on the weekends. Lon, an entrepreneur at heart, realizes that few good
Goltra Clinic is considering investing in new heart-monitoring equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 4 years. Option B would require no rebuilding expenditure, but its maintenance costs would be
Jane’s Auto Care is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $60,000 price tag for a new truck would represent a major expenditure. Jane Austen, owner of the garage, has compiled the estimates shown on the next page in trying to
Goldbloom Corp. is thinking about opening a soccer camp in southern California. To start the camp, Goldbloom would need to purchase land and build four soccer fields and a sleeping and dining facility to house 150 soccer players. Each year, the camp would be run for 8 sessions of 1 week each. The
The Borders and Noble partnership is considering three long-term capital investment proposals. Each investment has a useful life of 5 years. Relevant data on each project are as follows.Depreciation is computed by the straight-line method with no salvage value. The company€™s cost of
Ben Paul is an accounting major at a western university located approximately 60 miles from a major city. Many of the students attending the university are from the metropolitan area and visit their homes regularly on the weekends. Ben, an entrepreneur at heart, realizes that few good commuting
Platteville Eye Clinic is considering investing in new optical-scanning equipment. It has two options: Option A would have an initial lower cost but would require a significant expenditure for rebuilding after 3 years. Option B would require no rebuilding expenditure, but its maintenance costs
Isaac’s Auto Repair is considering the purchase of a new tow truck. The garage doesn’t currently have a tow truck, and the $65,000 price tag for a new truck would represent a major expenditure for the garage. Isaac Mayer, owner of the garage, has compiled the following estimates in trying to
Lewis Corp. is thinking about opening a basketball camp in Texas. In order to start the camp, the company would need to purchase land and build eight basketball courts and a dormitory-type sleeping and dining facility to house 110 basketball players. Each year, the camp would be run for 8 sessions
A company that manufactures recreational pedal boats has approached Mike Cichanowski to ask if he would be interested in using Current Designs€™ rotomold expertise and equipment to produce some of the pedal boat components. Mike is intrigued by the idea and thinks it would be an
Luang Company is considering the purchase of a new machine. Its invoice price is $122,000, freight charges are estimated to be $3,000, and installation costs are expected to be $5,000. Salvage value of the new machine is expected to be zero after a useful life of 4 years. Existing equipment could
Hawke Skateboards is considering building a new plant. Bob Skerritt, the company€™s marketing manager, is an enthusiastic supporter of the new plant. Lucy Liu, the company€™s chief financial officer, is not so sure that the plant is a good idea. Currently, the company purchases
Tecumseh Products Company has its headquarters in Tecumseh, Michigan. It describes itself as “a global multinational corporation producing mechanical and electrical components essential to industries creating end-products for health, comfort, and convenience.” The following was excerpted from
Campbell Soup Company is an international provider of soup products. Management is very interested in continuing to grow the company in its core business, while “spinning off” those businesses that are not part of its core operation.Address: www.campbellsoups.com, or go to
Refer back to E12-9 to address the following.InstructionsPrepare a memo to Maria Fierro, your supervisor. Show your calculations from E12-9, (a) and (b).In one or two paragraphs, discuss important non-financial considerations. Make any assumptions you believe to be necessary. Make a recommendation
NuComp Company operates in a state where corporate taxes and workers’ compensation insurance rates have recently doubled. NuComp’s president has just assigned you the task of preparing an economic analysis and making a recommendation relative to moving the entire operation to Missouri. The

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