Felipe de Jess Lpez Cano

Homework 1

Chapter 1

1.1.- What advantages does a sole proprietorship offer? What is the major
drawback of this type of organization?

Some of the advantages offered by a sole proprietorship are simple decision
making and low organizational & operating costs

The major drawback is unlimited liability and taxation is on owner as income


1-7. - Why is profit maximization, by itself, an inappropriate goal? What is meant
by the goal of maximization of shareholder wealth?

Some reasons why profit maximization is an appropriate goal:
The time value of money must be considered. The timing of profits can have a
big effect on the benefit to the business.
Profit is subject to many different measurements that can be manipulated.
Changes in profit may represent changes in risk that may cause future problems
for the business.
Problems of inflation and currency movement also complicate things.

Maximization of shareholder means achieving the highest value for the business
(Stock prices and options for management).




Chapter 2

2-8. - Prepare in good form an income statement for Franklin Kite Co., Inc. Take
your calculations all the way to computing earnings per share.


Sales $900,000
Shares outstanding . 50,000
Costs of goods sold . 400,000
Interest expense . 40,000
Selling and administrative expense . 60,000
Depreciation expense . 20,000
Preferred stock dividends . 80,000
Taxes
.
50,000

Franklin Kite Co., Inc.
Income Statement

Sales.. $900,000
Cost of goods sold.... 400,000
Gross profit.......... 500,000
Selling and administration expense.. 60,000
Amortization expense....... 20,000
Operating profit.... 420,000
Interest expense... 40,000
Earnings before taxes 380,000
Taxes .. 50,000
Earnings aftertaxes. 330,000
Preferred stock dividends.. 80,000
Earnings available to common shareholders..... $250,000
Shares outstanding...... 50,000
Earnings per share... $5.00





2-14. Arrange the following items in proper balance sheet presentation.




Accumulated depreciation $200,000
Retained earnings . 110,000
Cash . 5,000
Bonds payable . 142,000
Accounts receivable 38,000
Plant and equipment-original cost . 720,000
Accounts payable . 35,000
Allowance for bad debts . 6,000
Common stock, $1 par, 100,000
shares outstanding 150,000
Inventory 66,000
Preferred stock, $50 par, 1,000
shared outstanding 50,000
Marketable securities . 15,000
Investments . 20,000
Notes payable . 83,000
Capital paid in excess of par
(common stock) . 88,000




Assets
Current Assets:
Cash................................................... $ 5,000
Marketable securities......................... 15,000
Accounts receivable........................... $38,000
Less: Allowance for bad debts...... 6,000
32,000
Inventory............................................ 66,000
Total Current Assets................. 118,000
Other Assets:
Investments........................................ 20,000
Capital Assets:
Plant and equipment.......................... 720,000
Less: Accumulated depreciation.. 200,000
Net plant and equipment................... 520,000
Total Assets........................................... $658,000

Liabilities and Shareholders' Equity
Current Liabilities:
Accounts payable.............................. $ 35,000
Notes payable.................................... 83,000
Total current Liabilities................ 118,000
Long-Term Liabilities............................
Bonds payable................................... 142,000
Total Liabilities............................. 260,000
Shareholders' Equity:
Preferred stock, 1,000 shares outstanding.... 50,000
Common stock, 100,000 shares outstanding.... 150,000
Retained earnings............................................. 110,000
Total Shareholders' Equity........................... 398,000
Total Liabilities and Shareholders' Equity.... $658,000


2-24. Bradley Gypsum Company has assets of $1,900,000, current liabilities of
$700,000, and long-term liabilities of $580,000. There is $170,000 in preferred
stick outstanding; 30,000 shares of common stock have been issued,

a) Compute book value (net worth) per share.
b) If there is $42,000 in earnings available to common stockholders and
Bradleys stock has a P/E of 15 times earnings per share, what is the
current price of the stock?
c) What is the ratio of market value per share to book value per share?

a. Total assets...................................... $1,900,000
Current liabilities......................... 700,000
Long-term liabilities.................... 580,000
Shareholders' equity........................ 620,000
Preferred stock.............................. 170,000
Net worth assigned to common....... $ 450,000

Common shares outstanding............ 30,000
Book value (net worth) per share..... $15.00

b. Earnings available to common......... $42,000

Shares outstanding........................... 30,000
Earnings per share............................ $1.40

P/E ratio earnings per share = price
15 $1.40 = $21.00
c. Market value per share (price) to book value per share
$21.00/$15.00 = 1.4


2-25. In problem 24, if the firm sells at two times book value per share, what will
be the P/E ratio be?


2 book value = price
2 $15.00 = $30.00
P/E ratio = $30.00/$1.40
= 21.43



Chapter 3

3-9. Baker Oats had an asset turnover of 1.6 times per year.

a) If the return on total assets (investment) was 11.2 percent, what was
Bakers profit margin,

b) The following year, on the same level of assets, Bakers assets turnover
declined to 1.4 times and its profit margin was 8 percent. How did the
return on total assets change from that of the previous year?

a. Total asset turnover Profit Margin = Return on Total assets
1.6 ? = 11.2%
Profit margin =
11.2%
1.6
=7.0%
b. 1.4 8% = 11.2%

It did not change because of the increasing of profit margin made up the
decreasing in the asset turnover.


3-23. - A firm has net income before interest and taxes of $120,000 and interest
expense of $24,000.
a. What is the time interest earned ratio?
b. If the firms lease payments are $40,000, what is the fixed charge
coverage?

a)
Times interest earned =
Income before interest and taxes
Interest
Times interest earned =120,000 / $24,000
Times interest earned = 5x


b)
Fixed charge converage =
IBIT + Before tax fixed charges
Interest + Fixed charges
Fixed charge converage =
$120,000+$40,000
$24,000+$40,000
Fixed charge converage = 2.5x




28. Omni Technology Holding Company has the following three affiliates:

Personal Foreign
Software Computers Operations
Sales ....................................... $40,000,000 $60,000,000 $100,000,000
Net income (after taxes) 2,000,000 2,000,000 8,000,000
Assets .................................... 5,000,000 25,000,000 60,000,000
Stockholders equity ........ 4,000,000 10,000,000 50,000,000


a. Which affiliate has the highest return on sales?
b. Which affiliate has the lowest return on assets?
c. Which affiliate has the highest total asset turnover?
d. Which affiliate has the highest return on stockholders equity?
e. Which affiliate has the highest debt ratio? (Assets minus stockholders
equity equals debt.)
f. Returning to question b, explain why the software affiliate has the
highest return on total assets.
g. Returning to question d, explain why the personal computer affiliate has
a higher return on stockholders equity than the foreign operations
affiliate even though it has a lower return on total assets.

a. Net income/sales
Personal Foreign
Software Computers Operations
5.0% 3.3% 8.0%

The foreign operation affiliate has the highest return on sales.
b. Net income/total assets

Personal Foreign
Software Computers Operations
40.0% 8.0% 13.3%

The personal computer affiliate has the lowest return on assets
c. Sales/total assets

Personal Foreign
Software Computers Operations
8.0x 2.4x 1.7x

The software affiliate has the highest return on total asset turnover.
d. Net income/
Stockholders equity

The Software affiliate has the highest return on stockholders equity.
e. Debt/total assets

Personal Foreign
Software Computers Operations
20.0% 60.0% 16.7%


The personal computer affiliate has the highest debt/total assets
ratio.
f. Because of the high total turnover ratio of 8.0x times in part c.
g. Because the personal computer affiliate has a higher debt ratio
(60.0%) than the foreign operations affiliate (16.7%).