Unit 2 Assignment

Brian Powell
9/11/11

2-8) The Wendt Corporation had $10.5million of taxable income.

a.) What is the companys federal income tax bill for the year?
As of January 2008 if a corporation has taxable income between 10million and 15 million
dollars then the amount they pay is 3.4 million dollars. In additional to this 3.4 million the
corporation will also have to pay an additional 35% of any excess taxable income that is over
the base of the 10 million dollars. Since Wendt corporation had half a million dollars over
the base of 10 million Wendt corporation must pay $175,000 which is 35% of 500,000$. The
entire amount that Wendt must pay in federal income tax this year is $3,750,000.
b.) Assume the firm receives an additional 1$ million of interest income from some bonds it
owns. What is the tax on this interest income?
With Wendt still being in the 35% income tax bracket it would need to pay 35% on the 1
million dollars it receives in interest from these bonds. 35% of 1 million dollars is $350,000,
and Wendt after tax income is $650,000. Wendt will be paying a total of $350,000 for this
income at the end of the tax year. Many companies are trying to have this tax removed or
just simply removed because it is cutting into their profits and causing jobs to be cut as well.
35% to a small regular investor might not seem like a whole bunch until the dollar signs
really start to add up and the big picture is really shown.
c.) Now assume that Wendt does not receive the interest income but does receive an
additional $1 million as dividends on some stock it owns. What is the tax on this dividend
income?
Wendt would still need to pay 35% on the dividends that it receives but the formula is a
little different and way more favorable for the corporation. 70% of the dividends received
by one corporation from another is excluded from taxable income, while the remaining 30%
is taxed at the ordinary tax rate (Ehrhardt p. 72). The equations for this question would be
as follows 0.35[(.30)(1,000,000)]=$105,000. This is how much Wendt corporation will be
taxed on the dividend income it receives. Because Wendt is receiving dividends from
another corporations stock it does not have to pay 70% on the dividends received only the
30% and then the original 35% income tax bracket.
3-6) Donaldson & Son has an ROA of 10%, a 2% profit margin, and a return on equity equal to 15%.
In order to find out the answers to the questions below we must first find out what Donaldson & Son
sales, total assets, net income available to investors, and what its common equity is. Because no prior
knowledge of this company all numbers will have to be the same in order for this to work. They not
represent the true figures of Donaldson & Son, but will give a good estimate of what they could look
like.
First off in order to get ROA of 10%:
Net income available to common stockholders(Divided by)/ Total Assets= ROA of 10%
$200(Net income)/$2000(Total Assets)= 10%

Next, 2% profit margin:

Net income available to common stockholders (Divided by)/ Sales= Profit margin 2%
$200(Net income)/$10,000(Sales)=2% Profit margin

Finally, Return of equity is 15%:

Net income available to common stockholder (Divided by)/Common Equity= Return on Equity of 15%
$200(Net income)/$1333(Common Equity)=15% return on equity
a.) What is the companys total assets turnover?
When a company has an below average turnover ratio it indicates that the company is not
generating a sufficient volume of business given its total asset investment. On seconf hand if
it has an above average means that it generating sufficient volume of business and needs to
continue what they are doing and try to grow and expand.
The formula for total asset turnover is: sales/total assets. Based on my calculations the total
sales is $10,000 and total assets is $2000. So $10,000/$2000= 5 which might be a good
thing. Not knowing what the industry average is, according to our book 1.8 was the
industries average so if they are in the same industry this 5 would be ranked pretty high.
b.) What is the firms equity multiplier?
 Firms that have a lot of leverage have a high equity multiplier because the assets are
financed with a relatively smaller amount of equity. Therefore the return on equity depends on
the ROA and the use of leverage.
The formula for finding the equity multiplier is to divide total assets by common equity. In
the scenario that I chose is $2,000/$1333=1.5. To validate my number we can take our ROA and
multiple it with our equity multiplier and get our return on equity. .10x1.5=.15 which is 15%.

3-11) Complete the balance sheet and sales information in the table that follows for Hoffmeister
Industries using the following financial date:
Debt Ratio: 50%
Quick Ratio: 0.80
Total Assets turnover: 1.5
Days sales outstanding: 36.5 days
Gross profit margin on sales: (Sales-Cost of goods sold)/Sales =25%
Inventory turnover ratio: 5.0

-To find Total liabilities and equity for the balance sheet below we must take look at total asset which
was provided to us from the book at $300,000. These two items must be equal to each other. Since total
assets is $300,000 we can assume that total liabilities and equity is also $300,000

-To find Sales for the balance sheet below we must take what we know the equation to find total asset
turnover is sales/total assets=total asset turnover. Our book has given the information of a total asset
turnover of 1.5. So sales/300,000=1.5 sales must equal $450,000

-To find Inventories for the balance sheet below we must take what the book gives us and what we have
figured out. Inventory turnover equation is sales/inventory=inventory turnover. What I have figured out
is that 450,000/inventory=5.0. With this knowledge inventory must equal 90,000

-To find Account Receivables for the balance sheet below we must find out the missing information from
the days sales outstanding formula, which is DSO=Receivables/annual sales/365. By putting in the
numbers it would look something like 36.5=receivables/(450,000)/(365) then the following step would
make the equation look like 36.5=receivables/1232.88 then we would multiply both sides by 1232.88 to
get a receivable number of 45,000.

To find Cost of goods sold for the balance sheet below we must take the percentage that they give us in
the book which is 25%. Then we must take the equation (sales-cost of goods sold)/sales=Gross profit
margin on sales. The numbers will look like this. 25%= (450,000-Cost of good sold)/450,000). Once you
solve for X (cost of good sold) you will come up with a number 337500.

Next we have to get the total liabilities with the debt ratio being at 50% which was given. Since total
assets is at 300,000 we will take half of 300,000 and will get 150,000 as our total liability and 150,000 as
our total equity.

To find Common stock for the balance sheet below we must take we must take what we have learned
that total equity is only 150,000 and we must minus it from retained earning of 97,500 to get us a total
of 52500 for common stock.

To find account payable for the balance sheet below we must take total liabilities and equity as our
benchmark and minus everything we have just uncovered to get out accounts payable of 90,000. All I did
was subtracted 300,000-97,500-52,500-60,000=90,000

To find cash for the balance sheet below we must figure out what current asset is. To do that we must
take what was given of a quick ratio of .80. So current asset (X)-Inventories/Current liabilies. The
equation will look a lot like X-90,000/90,000=.80. To go a step future we will multiple each side by 90000
to get X-90000=72,000 then we will take it a step future and add 90,000 to each side to get 162,000 as
our current assets. Since we already know two of our assets we will just have to substract to find cash.
162,000-90000(inventory)-45,000(Account Receivables)= Cash of 27,000

To find fixed assets for the balance sheet below we must take Once I knew all of the above information
from cash,account receivables to inventories all I did was subtracted everything from Total asset to get
my fixed assets of 138,000. The equation looked a lot like 300,000(Total assets)- 90,000(Inventories)-
45,000(Account Receivables)- 27,000(Cash).
Balance Sheet:

Cash 27000 Accounts Payable 90,000

Account receivable 45,000 Long term Debt 60,000
Inventories 90,000 Common Stock 52,500
Fixed Assets 138,000 Retained Earnings 97,500
Total assets 300,000 Total liabilities and equity 300,000
Sales 450,000 Cost of goods sold 337,500

Finding out information on a balance sheet is a lot of work but to a business owner taking the time to do
it and do it correctly is well worth the effort. It not only shows the managers where they stand it shows
where they might be lacking in certain departments. The main things all accountants must remember is
that total assets MUST equal total liabilities and equity or else their balance sheet will not ever balance
properly. Many of the equations took many hours to figure out, because knowing what is a fixed asset
along with a current liability when it is not always painted black and white it makes the problem that
much more challenging. With less clues about what certain things are in a balance sheet always start
with total assets or total liabilities and equity. With this information all other answers will begin to
follow with the right formulas.
Managers need to play close attention to the balance sheet as it will help determine if overspending has
occurred or if certain future investment can be made. As you can see in this problem with 27,000$ of
cash on hand Hoffmeister Industries can make a sizable investment in new equipment or even some
stocks and bonds to create future revenue.