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Financial Management For Decision Makers 2nd Canadian Edition Peter Atrill, Paul Hurley - Solutions

Some businesses try to overcome the agency problem referred to in the chapter by using an incentive pay plan that is based on the growth of profits over a period. What are the drawbacks of this type of compensation plan?
Do you think an investment mutual fund that restricts its investment to environmentally friendly companies (green investments) can outperform mutual funds unrestricted in where they invest their money? Why?
Why is the shareholders' equity section of the balance sheet sometimes called the residual?
What makes the balance sheet balance?
Does the matching principle mean that expenses have to equal revenues? Explain.
Explain why net income is not the same as taxable income.
Executives would prefer to show lower earnings per share because the company's tax bill will be reduced. Discuss.
Your company is reviewing the following accounts: Bonds payable ..................................... Inventory Dividends .......................................... Accounts payable Cash ................................................. Accounts receivable Accumulated depreciation-Cars
Laurier Baseball Inc. sells baseballs to minor league teams. Below is some data for 2010.Unit sales price ...............................................$ 7.00Unit cost of goods sold price ............................... 5.50Fixed costs:Depreciation expense
You have been employed for six months in the marketing department at Joe's Transports Ltd. Joe has asked for your advice on how to invest the firm's $100,000 in liquid cash since you are the most recent graduate on staff. He wants to invest in the trucking industry since that is what he understands
(a) Calculate the difference in account balances for the balance sheet accounts between 2009 and 2010 for MHA.(b) Prepare the cash flow from operating activities section of the cash flow statement for MHA for 2010.
Use the data in Problem and Case 2.12.In problemRequired:(a) Prepare a calculation to prove the net loss on the sale of the truck.(b) Prepare the cash flow from investing activities section of the cash flow statement for MHA for 2010.
Use the data in Problem and Case 2.12.In problemRequired:Prepare the cash flow from financing activities section of the cash flow statement for MHA for 2010.
Use your answers to Problems and Cases 2.12 through 2.14.In problemRequired:(a) Prepare a summary cash flow statement showing only a single line for each of the three activity sections of the cash flow statement for MHA for 2010 and reconciling it to opening and closing cash for 2010.(b) Did it
In 2010, the Moosonee Beer Company reported net income of $46,340, paid $20,000 in dividends, and incurred depreciation expense of $10,000, $4,200, and $2,000 on its buildings, furniture, and equipment respectively. The balance sheets for the years ended December 31, 2010 and 2009 are shown
In 2010, Sudbury Wolverine Comics Ltd. (SWC) sold some furniture for $6,000. It had cost $10,000 and had accumulated depreciation of $4,000 associated with it. In the same year, SWC also sold a truck for $12,000 (cost: $54,000; accumulated depreciation $45,000).Required:(a) Calculate the gain or
Trail Mixer Corp. earned net income of $200,000 and paid dividends of $80,500 in 2010. Depreciation expense in 2010 was: Buildings $10,000; Furniture $7,500; Equipment $14,000; and amortization expense on the copyrights was $4,000. The comparative balance sheets are shown below for 2010 and
Rain Coast Adventures Ltd. acquired a new ski lift on January 1, Year 1, for $1,500,000. It has an estimated useful economic life of 10 years with no residual value. The ski lift has a CCA rate of 20%.Required:Compare accounting straight-line depreciation and net book value with tax return CCA and
Complete the following summary income statements for the year ended December 31, 2010, by calculating the missing numbers.
Tim's Bits and Drills Inc. has had the following results over the past five fiscal years.Required:(a) Calculate income taxes payable for each year.(b) Describe two things that might cause the difference between net income and taxable income.
On January 1, 2010 Hudson Semiconductor Limited acquired a new wafer pressing machine at a cost of $500,000. The estimated economic life of this machine is 10 years, at which time it can be sold for $10,000 scrap value. Hudson uses the straight-line depreciation method. This machine qualifies for a
Using the data provided in Problem and Case 2.21, complete the required questions for the year 2011.In problem 2.21(a) Calculate the amount of depreciation expense for 2010.(b) Calculate the capital cost allowance for 2010.(c) How much tax saving did Hudson receive in 2010 as a result of purchasing
Maritime Breweries Limited reported the following results for 2010.Earnings before income taxes................................$5,025,000Depreciation expense.........................................$1,250,000UCC-Buildings, Jan. 1, 2010 ..............................$ 3,000,000CCA
The president of Fallen Down Gold Mines stated, "The company does not have sufficient cash to pay its $2 million dividend in 2010." During his speech, he said that cash inflows from operations are expected to be $2,500,000, cash outflows from investing are expected to be $(1,400,000), and cash
(a) Complete the following income statements for the year ended December 31, 2010, by calculating the missing information.(b) Assuming there are no adjustments from the income statements to the tax return, calculate the income tax rate for each company.(c) Provide a reason why company D has a
Jazz Inc. has the following statements of retained earnings for the years ended December 31, 2008 to December 31, 2010.Jazz Inc. has the following condensed balance sheets as at December 31 from 2008 to 2010.Required:(a) Complete the statement of retained earnings for each year from 2008 to
The Jamery Goods Company has the following account balances:Bonds payable, due 2016 ......................................$100,000Inventory ................................................................30,000Dividends ...............................................................10,000Accounts
Using the data from Problem and Case 2.5, prepare a balance sheet as at December 31, 2010, for the Jamery Goods Company.In problem Bonds payable, due 2016 ......................................$100,000Inventory ................................................................30,000Dividends
Flex Motors shows the following account balances on March 31, 2010.Cash ..............................................................$ 16,450Accounts payable ...............................................8,230Unearned royalty fees ..........................................5,000Selling expenses
The following Trial Balance exists at December 31, 2010 for Hockey Consultants Inc.Required:Prepare an income statement, statement of retained earnings, and a balance sheet for Hockey Consultants Inc.
Below is the Trial Balance for the MicroHard Company as at December 31, 2010.Required:Prepare a formal balance sheet for MicroHard Company.
In what ways might pro forma financial statements help a business that is growing quickly?
The future is uncertain and so pro forma financial statements will almost certainly prove to be inaccurate. It is, therefore, a waste of time to prepare them. Comment.
Why would it normally be easier to prepare pro forma financial statements for an existing business than for a new one?
Why is the sales forecast normally of critical importance to the preparation of pro forma financial statements?
Why are depreciation expenses excluded from net income when preparing the cash budget?
Calculate the breakeven point in units for each product.
The income statements for the Fresh Sandwich Company for 2009 and 2010 are given below. Your boss wants you to prepare a pro forma income statement for 2011 using the same percentage increases as last year for sales, purchases, closing inventory, maintenance expenses, and other expenses. Rent and
Pro Martin Shoes, which operates one store in Guelph, Ontario, is forecasting next year's income statement results based on a preliminary 10% increase in sales.Required:(a) Complete the 2010 pro forma income statement using the 10% sales increase figure.(b) Explain whether the store owner should be
Your assistant has prepared the following pro forma income statement for 2010. He used your forecast sales figure as the starting point. The administrative expenses are fixed except for salaries, which are expected to increase 3%. The cost of goods sold and selling expenses vary in direct
East Coast Pipelines Ltd. had the following income statement data for the month of December 2010.Sales are expected to increase in 2011 by 10% each month. Purchases and closing inventory will increase by 12% per month. Maintenance expenses will increase by 7% per month. Other expenses will increase
Choice Designs Ltd. operates a small group of wholesale/retail carpet stores in Alberta and British Columbia. The balance sheet is below:As a result of falling profits, the directors of the business would like to completely renovate each store during June 2010 at a total cost of $300,000. However,
Prolog Ltd. is a small wholesaler of powerful microcomputers. In recent months, it has been selling 50 machines a month at a price of $2,000 each. These machines cost $1,600 each. A new model has just been launched and this is expected to offer greatly enhanced performance. Its selling price and
Changes Ltd. owns a chain of eight stores selling fashion accessories. In the past the business maintained a healthy cash balance. However, this has fallen in recent months, and at the end of September 2010 the company had an overdraft of $70,000. In view of this, Changes Ltd.'s president has asked
Kwaysar Limited sells television satellite dishes Doth to retail outlets and directly to the public. The balance sheet is as follows:In the second half of the financial year ended May 31, 2010, the business generated a net income of $62,400 and sales of $525,000. It is believed that this level of
Newtake Records Limited owns a chain of 14 stores selling CDs and DVDs. At the beginning of June, the business had an overdraft of $35,000, and the bank has asked for this to be eliminated by the end of November of the same year. As a result, the directors of the business have recently decided to
It is November 2010 and you have been asked to work on next year's cash budget for the Far Flung Sports Company. You have gathered the following information:Required:(a) Prepare a monthly cash budget for 2011 and the first quarter of 2012. Prepare your calculations to one decimal.(b) Evaluate the
You have gathered the following data for your new line of engagement rings.Sales ........................................... $10,000,000Fixed costs ....................................8,000,000Variable costs ................................ 6,000,000Mixed costs
The Lavalle Ladies Legends (LLL), a professional hockey team playing in the Canadian Hockey League, is preparing an outline forecast of its pro forma income statement for 2010. The president of the team thinks it is most likely that she can increase ticket sales by 20% in 2010. League officials
Betty-Lou Tsu owns and operates Betty's Gourmet Milkshakes. Here is the financial data from last year. She has come to you for help in calculating the breakeven point for her business. Sales .................................. $ 2,000,000 Fixed costs ........................... 1,200,000 Variable
The following companies in the movie business produced these results over the past two years.Required:Determine which company has the higher operating leverage.
All-Season Gloves Ltd. finished December 2010 with a balance of $450,000 in its accounts receivable. January's sales are forecast to be $560,000 (90% on credit) and are expected to grow by 2% per month for the entire year. Assume all amounts are collected in the month following the
Four Seasons Boots Ltd. had sales in November 2010 of $538,255. Ten percent of the sales were cash sales, with 70% of the credit sales collected one month after the sale, 25% collected two months after the sale, and 5% written off as bad debts. Sales are expected to grow by 2% per month between
Diamond Drillers Inc. had sales in December of $60,000. Sales are expected to grow at 5% per month for the foreseeable future because of increased oil field drilling. All sales are on credit and are collected in the month following the sale. Inventory purchases for January are expected to be
Alice's Wholesale Ltd. is trying to plan its cash flows for the next year. On January 2, 2011, it has $7,000 in the bank. On average, 50% of sales each month are collected in the following month, with the remainder collected in the second following month. All sales are on credit. On average, 40% of
Proton Drinks wants to estimate the amount of cash needed for dividends in 2010. Sales will likely grow by 40%. The percentage of sales for variable costs will increase to 40%. Dividends will be bumped up to 50% of net income.Required:Complete the pro forma income statement and dividend data for
Some businesses operate on a low operating profit margin (for example, a supermarket chain). Does this mean that the return on capital employed from the business will also be low?
What potential problems arise for the external analyst from the use of balance sheet figures in the calculation of financial ratios?
Is it responsible to publish financial analyses of businesses that are in financial difficulties? What are the potential problems of doing this?
Identify and discuss three reasons why the P/E ratios of two businesses operating within the same industry may differ.
The times interest earned ratio for Burlington Perfumes Inc. is 3.0, but the current ratio is only 1.2. Discuss future prospects for Burlington, given that the industry average for these ratios is 2.1 for both. Suggest a plan for Burlington.
Describe three problems that could arise from comparing a ratio with one from a past period.
Describe three problems that could arise from trying to compare a ratio with one from a competitor.
You are considering buying a franchise operation in The Tree Pruning Company. One of your friends in a nearby city has had one for two years. She shared her results, below:Required: (a) Prepare a horizontal and vertical analysis on the income statement. (b) Should you buy a franchise?
Victoria Ltd. and Halifax Ltd. are both engaged in retailing, but they seem to approach it differently, according to the following information:Required: Describe what this information indicates about the differences in approach between the two businesses. If one of them prides itself on personal
Creative Advertising constructs, maintains, and sells advertising for highway billboard signs. Use the information in the following financial statements for the next five problems and cases.Required:(a) Calculate the four profitability ratios for Creative Advertising Limited for 2010.(b) What can
Use the data in Problem and Case 4.11. The notes to the financial statements indicated that 80% of the sales for Creative Advertising Limited were credit sales.In problemInventory purchases, 90% of which were on credit, were $215,000 in 2010 and $200,000 in 2009. On average there were 325
(a) Use the data in Problem and Case 4.11. Calculate the two liquidity ratios for Creative Advertising Limited for 2010.(b) What can you conclude from these ratios?In problem
(a) Use the data in Problem and Case 4.11. Calculate the leverage ratio and the times interest earned ratio for Creative Advertising Limited for 2010. Treat the preferred shares the same as long-term debt as they can be converted into an equal amount of debt.(b) What can you conclude from these
(a) Use the data in Problem and Case 4.11. Calculate five investment ratios, including the dividend cover ratio, for Creative Advertising Limited for 2010, given that there was an average of 50,000 shares outstanding during the year.In problemShare prices averaged $10.50 per share throughout 2010
(a) Use the data in Problem and Case 4.11. Redo Problems and Cases 4.11 to 4.15 for 2009. Where an average figure is needed, assume the opening amount and closing amounts are the same.In problemCreative Advertisings share price averaged $13.25 during 2009 and the shares also closed at $13.25 on
Use your answers to Problems and Cases 4.11 to 4.16 to summarize the results for all the ratios for 2009 and 2010. Discuss the results of your ratio analysis. Recommend any action you think Creative Advertising should take, if any.In problem
The financial statements of Helena Beauty Products Ltd. are presented below.Required:Using six ratios, comment on the profitability (three ratios) and efficiency (three ratios) of the business as revealed by the financial statements. Assume there is no interest or taxes.
Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2010 and 2009 are as follows.Required: (a) Assuming that all sales and purchases are on credit, and that the interest expense relates to the long-term debt, calculate the
In 2010, Borden Formal Wear Inc. paid $100 million in dividends. Here are the comparative balance sheets for the latest two years.Required: (a) Prepare a horizontal and vertical analysis on the balance sheet. (b) How did the business do in 2010?
Genesis Ltd. was incorporated in 2007 and has grown rapidly over the past three years. The rapid rate of growth has created problems for the business that management has found difficult to deal with. Recently, a firm of management consultants has been asked to help the company overcome these
Canadian Yogurt Inc. (CYI) had the following results over the past two years.Required: (a) Prepare a horizontal and vertical analysis of the balance sheet and the income statement. (b) What conclusions can you draw from your analysis? (c) Refer to the following data for the yogurt industry and
The following data have been selected from the annual report of Graphic Chips Limited.Required:Calculate the following ratios:(a) Gross profit margin(b) Operating profit margin(c) Sales revenue to capital employed(d) Leverage ratio(e) Average collection period for receivables(f) Times interest
Northern Electric Corporation has the following common share data: Share price ......................... $60.00 P/E ratio ............................ 20.0 Dividend Yield .................. 4% Required: Calculate the following: (a) EPS (b) Dividend per share (c) Dividend payout ratio.
The current ratio for Arrow Industries is 2.0 and the acid test ratio is 1.0. Current assets total $200,000 and cost of goods sold was $1,000,000. Required: (a) Calculate the amount of inventory on Arrow's balance sheet. (b) Determine the average inventory turnover period.
The following is a condensed balance sheet for the Albinitree Corporation.Albinitree CorporationBalance Sheet as at December 31, 2010Assets($000)Cash ......................................................50,000Accounts receivable .....................................90,000Inventory
There are four independent supermarkets in an isolated city in Northern Ontario. In your capacity as a banker, you have obtained the following financial data for all four companies:Required:(a) Calculate the operating profit margin for each store and for the supermarket industry in the city as a
Set out below are ratios relating to three different businesses. Each business operates within a different industrial sector.Required:State, with reasons, which of the above is:(a) A holiday tour operator(b) A supermarket chain(c) A food manufacturer.
When asked about his salary of $60,000 and earning more money than the president of the United States, Babe Ruth, a famous baseball player in the 1920s, is reported to have said that he'd had a better year than the president. When you graduate and start earning $70,000 per year, does that mean you
Explain the difference between an ordinary annuity and an annuity due, when renting an apartment.
Provide a name to describe each of the cash inflow streams in the table at the bottom of this page.
What would you expect to happen to the net present value of a project if the Bank of Canada unexpectedly raised the bank rate, which affects all other interest rates?
An investment advisor has suggested that your mother buy bonds because they won't decrease in value and are safer than stocks. Comment on this investment advice.
Calculate the present values of the following cash flows: (a) $100,000 to be received in 10 years at a discount rate of 6% (b) $50,000 to be received in 5 years at a discount rate of 1% (c) $75,000 to be received in 8 years at a discount rate of 5%.
Montreal Comedy Clubs Limited (MCC) has enjoyed success and now has $500,000 to invest for eighteen months in either bonds or shares before it starts construction on a new club in Vancouver. See the relevant data below. You can ignore taxes since the government has declared a two-year tax holiday
Start with $350,000 savings. Prepare calculations to compare the "rule of 72" estimated time for money to double with the actual time it takes for money to double, for the following interest rates:(a) 5% (b) 10% (c) 14%(d) 20%.
On January 1, 2009, the Government of Canada introduced a new tax-free savings account (TFSA). This allows individuals to contribute up to $5,000 to a TFSA each year. While the contribution is not deductible, all earnings are tax free and will never be taxed. You have decided to contribute the
A new machine costing $250,000 will provide the following cash flows: Year Amount 0 .........................................(250,000) 1 ......................................... 30,000 2 ......................................... 60,000 3 .........................................
You have just turned 25 years of age and accepted your first position after graduation. You understand the power of compound interest and wish to save for early retirement at age 55. Required: How much should you contribute annually to your registered retirement savings plan (RRSP), starting one
Your aunt recently won the lottery and has a difficult choice to make. She has come to you for help in deciding whether she should accept an immediate cash payment of $3.5 million, or instead take an annual payment of $200,000 for life, starting immediately. She is 50 years old. Currently the best
The Oakville Yacht Society has the following lump-sum payments to make to members.Required:Calculate the present value for each lump-sum payment.
The City of Moose Jaw has a budget surplus and can afford to set aside money today to fund future projects connected with the city's infrastructure.Required:Calculate the amount the city will have available when each project starts.
You are planning your finances for college. Your parents started a registered educational savings plan (RESP) for you when you were born by contributing $2,000. Each year thereafter they contributed $1,000 to the RESP on your birthday, and will continue to do so until you turn 19 years of age.You
You work in the accounting department of a major flat-screen television manufacturer. Demand for your product is very high. These televisions sell for $2,000 each. An offer has arrived on your desk from a major retailer to buy 100,000 televisions with 10 equal annual payments of $22 million
Calculate the future values of the following cash flows. Round the table factors to two decimal places. (a) $25,000 deposited now for 30 years at an interest rate of 9% (b) $10,000 deposited now for 20 years at an interest rate of 12% (c) $5,000 deposited now for 50 years at an interest rate of 7%.

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