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Practical Financial Management 5th Edition William R. Lasher - Solutions
2. What will preparing a business plan do for Ed?i. Before he gets started.ii. After he gets started.iii. What will he learn by doing the financial plan?b. What kind of thinking is the bank looking for in Ed’s plan? That is, should the plan be strategic or operational or short term?
1. What will it show the bank?i. List some specific concerns the bank might have that a plan would answer outside of the financial section.ii. List several concerns that the financial plan might answer for the bank.iii. Why is the bank insisting on such a long planning horizon? Does that imply the
1. Ed Perez has always wanted to run his own restaurant. He worked part time in the food service business during high school and college and has worked for a large restaurant chain since graduating from college four years ago. He’s now ready to open a franchised family-style restaurant. However,
11. You are developing next year’s financial plan for Ajax Inc., a medium sized manufacturing company that’s currently operating at 80% of factory’s capacity. The firm is launching a sales promotion that’s expected to generate a sudden 20% increase in revenues starting at the beginning of
10. You’re a new member of the planning staff within the finance department at Bertram Enterprises, a large manufacturer of household goods. The firm does an annual operating plan and a long-range plan every year. You’ve just received a note from the CFO asking you to help him prepare for a
9. Financial planning is no longer a problem in business because of the advent of personal computers. Armed with a PC and the appropriate software, anyone can do a plan for even the largest and most complicated company. Evaluate this statement.
8. Contrast planning cash requirements, especially borrowing, using the statement of cash flows derived from forecast financial statement with a cash budget. Which is likely to be more useful in running a finance department?
7. Comment on the value of the formula (EFR) approach to estimating funding requirements. Could it create more problems than it solves?
6. How are planning assumptions reflected in projected financial statements? Is there a standard computational procedure for incorporating assumptions into planned numbers? What’s the difference between simple, estimated plans and more complex, precise plans? Can a plan be precise, complex, and
5. Briefly describe the debt/interest planning problem and the approach that leads to its solution. (Use a few brief sentences. Don’t list the procedural steps or give a numerical example.)
4. Why is planning for a new business harder than planning for an established operation?In which do you have to make more assumptions? Why? What implicit assumption provides a shortcut in one situation?
3. Why is it important that physical assumptions precede financial results in the planning process? For example, what’s wrong with assuming you want a business that sells $50 million a year earning a profit of $5 million, and then building a revenue and cost plan to fit those goals?
2. The following issues are related to the accuracy and reliability of financial plans.Explain the process/issues related to each.• Top-down versus bottom-up planning• Plans as statements of goals versus plans as predictions of what’s going to happen• Planning assumptions• Aggressive
1. A financial plan has to be either a prediction about the future or a statement of goals; it can’t be both. Explain this statement and comment on its validity.
31. Analyze the performance of each of the four companies we’ve been working with against its competition. This is called a peer analysis in Thomson ONE. The system will show you a variety of ratios arrayed against their average value among a group of competitors. It will also show the
30. Take a piece of paper and set up a simple five-column chart. Write the following ratios in the left-most column.PFM Ratio Name Thomson ONE ratio name Current ratio Current Ratio ACP Receivables Days Sales Total asset turnover Sales/Total Assets Return on Sales Net Income/Sales Return on Assets
29. Write your own analysis program to calculate a common size income statement and the ratios introduced in this chapter. To keep the exercise reasonably simple, just provide for one year of ratios and one common size statement.Construct an input area in your spreadsheet in the form of an income
28. Write a program to generate a statement of cash flows yourself. It isn’t as hard as you might think.First set up the income statement and two balance sheets on the spreadsheet just as they appear in Problem 26. Let the amounts in individual accounts such as Cash, A/R, Revenue, COGS, Interest,
27. Comparative historical financial statements for Northern Manufacturing of the preceeding problem are as follows.a. Use the ANALYS program to prepare common size statements and a set of financial ratios for each of the last three years.b. Analyze the results of ANALYS for Northern Manufacturing.
26. At the close of 20X3, the financial statements of Northern Manufacturing were as follows.In addition, Northern paid dividends of $1.2 million and sold new stock valued at $1.0 million in 20X3. Use the CASHFLO program to produce Northern’s statement of cash flows for 20X3. Northern
25. Learning about different companies is an important part of the financial manager’s job. Go to http://www.annualreports.com, and search for the latest annual report for Merck & co., the pharmaceuticals manufacturer.a. At the Merck site, click on pdf annualreport. Scroll down a short way and
24. Comprehensive Problem. The Protek Company is a large manufacturer and distributor of electronic components. Because of some successful new products marketed to manufacturers of personal computers, the firm has recently undergone a period of explosive growth, more than doubling its revenues
23. The Hardigree Hamburger chain is a closely held corporation with 400,000 shares of common stock outstanding. The owners would like to take the company public by issuing another 600,000 shares and selling them to the general public in an initial public offering (IPO). (IPOs are discussed in
22. Prahm & Associates had EBIT of $5M last year. The firm carried an average debt of $15M during the year on which it paid 8% interest. The company paid no dividends and sold no new stock. At the beginning of the year it had equity of$17M. The tax rate is 40%, and Prahm’s cost of capital is 11%.
21. (Refer to the INSIGHTS box on pages 94–95 before attempting this problem.Notice that the calculations called for here do not involve cost of capital.)William Edwards, Inc. (WEI) had one million shares of common stock outstanding on 12/31/20X0. The stock had been sold for an average of $8.00
20. Tribke Enterprises collected the following data from its financial reports for 20X3:Complete the following abbreviated financial statements, and calculate per share ratios indicated. (Hint: Start by subtracting the formula for the quick ratio from that for the current ratio and equating that to
19. Companies often use ratios as a basis for planning. The technique is to assume the business being planned will achieve targeted levels of certain ratios and then calculate the financial statement amounts that will result in those ratios. The process always starts with a dollar assumption about
18. You are given the following selected financial information for The Blatz Corporation.Calculate accounts receivable, inventory, current assets, current liabilities, debt, equity, ROA, and ROE. Income Statement Balance Sheet COGS $750 Cash $250 Net income $160 Net fixed assets $850 Ratios ROS 10%
17. The Paragon Company has sales of $2,000 with a cost ratio of 60%, current ratio of 1.5, inventory turnover ratio (based on cost) of 3.0, and average collection period(ACP) of 45 days. Complete the following current section of the firm’s balance sheet. Cash $ Accounts receivable Accounts
16. Sweet Tooth Cookies, Inc. has the following ratios.ROE = 15%Total Asset turnover = 1.2 ROS = 10%What percentage of its assets are financed by equity?
15. The Nelson Sheetmetal Company has current assets of $2.5 million and current liabilities of $1.0 million. The firm is in need of additional inventory and has an opportunity to borrow money on a short-term note with which it can buy the needed material. However, a previous financing agreement
14. Epsom Co. manufactures furniture and sells about $40 million a year at a gross margin of 45%.a. What is the maximum inventory level the firm can carry to maintain an inventory turnover (based on COGS) of 8.0?b. If the inventory contains $1.2 million of obsolete and damaged goods that don’t
13. Partridge Inc. sells about $45 million a year on credit. Good credit and collections performance in the industry result in a 35-day ACP.a. What is the maximum receivables balance Partridge can tolerate and still receive a good rating with respect to credit and collections?b. If Partridge is now
12. Norton Industries recorded total cost of goods sold for 20X2 of $6.5 million.Norton had the following inventory balances for the months indicated (end of period balances):a. Compute inventory turnover for Norton using the following methods to calculate the inventory figure:1. End of year 2.
11. Linden Corp. has a 10% market share in its industry. Below are income statements($millions) for Linden and for the industry.a. Develop common sized income statements for Linden and the industry as a whole.b. What areas should management focus on to improve performance, and what kind of issues
10. Slattery Industries reported the following financial information for 20X2:Revenues $10.0 million Costs & expenses (excluding depreciation) 8.0 Depreciation 0.5 Taxes 0.6 Net income 0.9 Fixed assets (gross) 10.0 Working capital 4.0 The firm expects revenues costs, expenses (excluding
9. The Seymour Corp. attempted to increase sales rapidly in 20X1 by offering a new, low-cost product line designed to appeal to credit customers in relatively poor financial condition. The company sold no new stock during the year but paid dividends of $3,000,000. Depreciation for the year was
8. Calculate all of the ratios discussed in the chapter for Axtel Company of the preceding problem. Assume Axtel had leasing costs of $7,267 in 20X1 and had 1,268,000 shares of stock outstanding valued at $28.75 per share at year end.
7. Axtel Company has the following financial statements.In addition, Axtel retired stock for $1,000,000 and paid a dividend of $1,727,000.Depreciation for the year was $1,166,000. Construct a statement of cash flows for Axtel for 20X1. (Hint: Retiring stock means buying it back from
6. Fitch Inc.’s financial statements are as follows:Fitch also sold stock for $2.5 million and paid dividends of $3.1 million. No fixed assets were retired during the year. (Hint: That implies fixed asset purchases and depreciation are the only changes in the gross fixed assets and accumulated
5. Lansing Inc., a profitable food products manufacturer, has undertaken a major expansion that will be financed by new debt and equity issues as well as earnings.During the last year the company borrowed $5 million for a term of 30 years to finance a new building to house the expanded operations.
4. The Blandings Home Construction Company purchased a new crane for $350,000 this year. It sold the old crane for $80,000. At the time it had a net book value of$20,000. Assume any profit on the sale of old equipment is taxed at 25%. These were the only transactions that affected investing
3. Fred Klein started his own business recently. He began by depositing $5,000 of his own money (equity) in a business account. Once he’d done that his balance sheet was as follows.During the next month, his first month of business, he completed the following transactions. (All payments were made
2. Timberline Inc. had the following current accounts last year. ($000)In addition, the company had sales revenues of $9,453,000 and costs and expenses (including interest and tax) of $7,580,000. Depreciation of $1,462,000 is included in the cost and expense figures.Construct a statement showing
1. The Waterford Wax Company had the following current account activity last year.a. Calculate and display the current account detail required for the Cash from Operating Activities section of the statement of cash flows.b. If you also knew that Waterford’s revenues had risen by 20% last year,
5. You invested $10,000 in the stock of HiFly Inc. two years ago. Since then the stock has done very well more than doubling in value. You tried to analyze HiFly’s financial statements twice in the last two year, but were confused by several of the detailed notes to those statements. You
4. The industry average inventory turnover ratio is 7 and your company’s is 15. This could be good or bad news. Explain each possibility. How would you find out whether it is bad news?
3. The term “liquidity” is used in several ways. What does it mean in the context of an asset or liability, such as those on the balance sheet? What does it mean when applied to an operating company? What does the similar term “liquidate” mean when applied to a company?
2. A company has been growing rapidly for the last three years. It was profitable before the growth spurt started. Although this year’s revenues are almost three times those of three years ago, the firm is now losing money. What’s the first thing you would do to try to pinpoint where the
1. The present format for the statement of cash flows is organized according to operating activities, investing activities, and financing activities. That format has only been in use since the late 1980s. The previous format first listed all sources and then all uses of cash, giving a subtotal for
16. Can a competent financial analyst always correctly assess a firm’s financial health from publicly available information? Explain.
15. Can managers affect market value ratios?
14. It can be argued that the TIE ratio doesn’t make much sense. Why? How would you change the measure to be more meaningful? (Hint: Think in terms of cash flows.)
13. Why do people view having too much debt as risky? If you were interested in determining whether a company had too much debt, what measure would you use? Why? How much debt do you think would generally be considered too much?
12. Discuss the different definitions of debt in ratio analysis.
11. A company’s terms are net 30 and the ACP is 35 days. Is that cause for alarm?Why or why not?
10. Why do we need the quick ratio when we have the current ratio?
9. What is the reasoning behind using the current ratio as a measure of liquidity?
8. Financial ratios don’t do you much good by themselves. Explain.
7. Outline the thinking behind ratio analysis in brief, general terms (a few lines;don’t go into each ratio individually).
6. What are free cash flows? Who is likely to be most interested in them? Why?
5. Why don’t we calculate the difference in the equity account between the beginning and end of the year and consider that difference as a source or use of cash?Why do we similarly exclude the cash account?
4. If a company’s cash account increases from the beginning to the end of the year, there’s more cash on hand so that must be a source of cash. Yet the cash account is an asset, and the first cash flow rule says that an asset increase is a use of cash.Explain this apparent conflict.
3. Financial analysts are generally optimists who believe what they’re told. Right or wrong? Explain.
2. Where do analysts get financial information about companies? What are their concerns about the information?
1. List the main user groups of financial information. What are the reasons for their interest?
31. You’ve been hired by the nation of Utopia to computerize its approach to calculating taxes. Utopia’s progressive tax system contains only two brackets that are applicable to all households. These are as follows.Income Rate Under $30,000 20%Over $30,000 30%The treatment of personal
30. Rachel and Harry are planning to get married. Both have successful careers and expect to earn the following this year.a. Use the PERSTAX program to calculate their total tax bill as single individuals and determine how much it will cost them in taxes to get married. Assume that getting married
29. Large corporations often begin as small businesses, and both share many of the same issues. Visit the Small Business Administration at http://www.sba.gov and find information on balance sheets, income statements, and other topics discussed in this chapter. The SBA page includes links to many
28. Dick Dowen is considering three investment opportunities:(1) A 4.5% city of Chicago bond that is tax exempt at both state and federal levels.(2) A 4.75% state of Illinois bond that is tax exempt at the federal level but taxable at the state level.(3) A 6.7% McDonald’s corporate bond that is
27. The Snyder Corporation had the following income and expense items.Sales $180,870,000 Cost 110,450,000 Expenses 65,560,000 In addition, it received both interest and dividends from the Bevins Corp., of which it owns 30%. The interest received from Bevins was $2,430,000, and the dividends were
26. Inky Inc. reported the following financial information in 2006.Operating income (EBIT) $650,000 Interest $430,000 Dividends from Printers Inc. not included in operating income (Inky owns 3% of Printers) $ 20,000 Dividends paid to Inky’s stockholders $ 50,000a. What is Inky’s tax liability?
25. Microchip Inc. had the following profits and losses in the years indicated.2004 $5,000,000 2005 350,000 2006 (3,450,000)How much federal tax will it eventually pay for 2004? The corporate tax schedule on page 48 is the same for all three years.
24. Calculate the corporate tax on earnings before tax (EBT) of the following amounts:a. $37,000b. $57,000c. $88,500d. $110,000e. $5,375,000f. $14,000,000 g. $17,350,000 h. $23,500,000
23. Joan and Harry Leahy both had income in 2006. Harry made $52,500 in wages.Joan has an incorporated small business that paid her a salary of $30,000. In addition, the business had profits of $15,000, which were paid to the Leahys as dividends. They received $5,600 in interest on savings and $350
22. The Benjamin family had wage earnings of $85,000 in 2006. They received interest of $4,500 on corporate bonds and $1,500 on bonds issued by the state. Their dividend income was $500, and they had a $1,000 long-term capital gain on the sale of securities.They paid real estate taxes of $1,450 and
21. The Lindscomb family had the following income in 2006:The family made home mortgage payments that included interest of $16,480, and paid real estate (property) tax of $4,320 on their home. They also paid state income tax of $5,860 and donated $1,250 to well-known charities. The Lindscombs have
20. Joan Petros reported taxable income in 20X2 of $150,000, which included the following transactions:(1) In June 20X2, Joan sold 100 shares of stock for $40 per share. She had purchased them three months earlier for $35 per share.(2) In October 20X2, Joan sold 200 shares of stock for $79 per
19. Use the following tax brackets for taxable income:Compute the average tax rate for the following taxable income amounts:a. $20,000b. $125,000c. $350,000d. $1,000,000 Bracket Tax Rate $0-$10,000 $10,000-$50,000 $50,000-$250,000 15% 25% 30% Over $250,000 35%
18. The Coolidge family had taxable income of $165,000 in 2006. They live in a state in which income over $100,000 is taxed at 11%. What was their total effective(marginal) tax rate?
17. The Digital Systems Company was organized two years ago to take advantage of an Internet opportunity. Investors paid $12 a share for 2 million shares with a $4 par value. In the next two years, the company had earnings of $2 million and $3 million, respectively. It paid dividends of $1.2
16. Preston Road Inc. was organized last year when its founders contributed $9 million and issued 3 million shares of $1.25 par value stock. The company earned$750,000 in its first year and paid dividends of $325,000. Construct the Equity section of Preston Road’s balance sheet as of the end of
15. Mints Entertainment, Inc. had net income of $170,000 and paid dividends of$0.25 per share on its 100,000 shares of outstanding stock in 2006. At the end of the year its balance sheet showed retained earnings of $250,000. What was Mints’retained earnings balance at the end of 2005?
14. The Glavits Company opened for business on Monday, June 1, with inventory of$5,000 and cash in the bank of $7,000. These were its only assets. All start-up financing was provided from the owner’s personal funds, and there were no other liabilities. The firm has a line of credit at the bank
13. Ed Fletcher is planning to start a business in corporate form that requires an investment of $500,000. He has that much money, but he can also borrow virtually the whole amount from a rich relative. (This is very unusual.) Ed feels that after the business is started, it will be important to
12. Gatwick Ltd. has after-tax profits (net income) of $500,000 and no debt. The owners have a $6 million equity investment in the business. If they borrow $2 million at 10% and use it to retire stock, how will the return on their investment(equity) change if earnings before interest and taxes
11. In January 20X3, Elliott Industries recorded the following transactions:(1) Paid bills from 20X2 totaling $120,000 and collected $150,000 for sales that were made in 20X2.(2) Purchased inventory on credit totaling $500,000, 30% of which remained unpaid at the end of January.(3) Sold $400,000 of
10. Sanderson Metals Inc. accrues four liability items: payroll, employee vacation that has been earned but not used, property taxes, and inventory that arrives at its factory dock before an invoice is received from the vendor.Payroll: Sanderson pays its employees every other Friday for work
9. Belvedere Inc. has an annual payroll of $52 million. The firm pays employees every two weeks on Friday afternoon. Last month, the books were closed on the Tuesday after payday. How much is the payroll accrual at the end of the month?
8. Becher Industries has three suppliers for its raw materials for manufacturing.The firm purchases $180 million per year from Johnson Corp. and normally takes 30 days to pay these bills. Becher also purchases $150 million per year from Jensen, Inc., and normally pays Jensen in 45 days. Becher’s
7. On January 1, 20X2, Miller Corp. purchased a milling machine for $400,000. It will be depreciated on a straight line basis over 20 years. On January 1, 20X3, Miller purchased a heavy-duty lathe for $250,000, which will be depreciated on a straight line basis over 40 years.a. Compute Miller’s
6. Consider the current asset accounts (Cash, Accounts Receivable, and Inventory)individually and as a group. What impact will the following transactions have on each account and current assets in total (Increase, Decrease, No Change)?a. The purchase of a fixed asset for cashb. The purchase of a
5. McFadden Corp. reports the following balances on its December 31, 20X2, balance sheet: Amounts in Thousands Accounts payable $ 60 Accounts receivable 120 Accumulated depreciation 350 Fixed assets (net) 900 Inventory 150 Long-term debt 400 Paid in excess 160 Retained earnings 380 Total assets
4. Fred Gowen opened Gowen Retail Sales as a sole proprietorship and recorded the following transactions during his first month in business:(1) Purchased $50,000 of fixed assets, putting 10% down and borrowing the remainder.(2) Sold 1,000 units of product at an average price of $45 each. Half of
3. Heald and Swenson Inc. purchased a drill press for $850,000 one year and nine months ago. The asset has a six-year life and has been depreciated according to the following accelerated schedule.The press was just sold for $475,000. The firm’s marginal tax rate is 35%.Calculate Heald and
2. If the Johnson Company of Problem 1 is subject to a marginal tax rate of 34%, what is the cash flow associated with the sale of the used truck?
1. The Johnson Company bought a truck costing $24,000 two and a half years ago.The truck’s estimated life was four years at the time of purchase. It was accounted for by using straight line depreciation with zero salvage value. The truck was sold yesterday for $19,000. What taxable gain must be
17. Explain the reasoning behind tax loss carry backs and carry forwards.
16. Why are dividends paid from one corporation to another partially tax exempt?
15. What are the tax implications of financing with debt versus equity? If financing with debt is better, why doesn’t everyone finance almost entirely with debt?
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