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06/05/2012

Milandeep Singh

Class 607

Homework assignment 1

Chapter 1

Discussion problem 1)

Discussion problem 2)

The effect of recession of 2007-2009 on government regulation was to focus on those issues which were

the main cause of the recession and making strict regulations for financial institutions and careful

examination of corporations by outside financial analysts.

Discussion problem 3)

Sole proprietorship is a single person ownership. Most of the small businesses are sole proprietorships.

The main advantage of the sole proprietorship is the simplicity in decision making and low operational

costs. Sole proprietorship is mostly small scale and if it requires any changes in the business operations,

they are very easy and quick to make.

Disadvantages of sole proprietorship

The main disadvantage of sole proprietorship is that there is unlimited liability to the owner. In the case

of failure of business, sometimes the private property of the owner is used to pay off the business debts.

Sole proprietorship is not appropriate for large scale businesses as the business is controlled by one

person with limited managerial capability therefore even the scope of extending the business lacks.

Discussion question 7)

Agency theory examines the relationship between the owners (shareholders) and the managers of the

firm. Agency theory is concerned about any conflicts arising between the shareholders and the

managers regarding the financial decision making of the firm. It is not that important in a private

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company as in private companies the managers and the owners are the same person where as in public

companies the shareholders also have proper right in the decision making and conflicts can arise.

Chapter 2:

Problem 1.

a. 2009.

Earnings per share

Earnings after taxes/ Shares outstanding = 390,000/300,000= $1.30

b. 2010

Earnings after taxes =390,000 x 1.20 = 468,000

Shares outstanding= 300,000 = 25,000 = 325,000.

Earnings per share = 468,000/325,000= $1.44

Problem 4.

Selling and administrative expenses= 160,000 (2,000,000 x .08)

Depreciation=4,000,000 x 5% = 200,000

Sales 2,000,000

Cost of goods sold 1,250,000

Profit 750,000

Selling and admin.Expenses 160,000

Depreciation expense 200,000

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Operating Profit: 390,000

Problem 6.

Sales 470,000

Cost of goods sold 140,000

Profit 330,000

Selling and administrative expenses 60,000

Depreciation expense 70,000

Operating profit 200,000

Interest expense 40,000

Earnings before taxes 160,000

Taxes 45,000

Earnings after taxes 115,000

Problem 7.

Sales 1,600,000

Cost of goods sold 480,000

Gross profit 1,120,000

Selling and administrative expense 250,000

Depreciation expense 190,000

Operating profit 680,000

Interest expense 120,000

Earnings before taxes 560,000

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Taxes 165,000

Earnings after taxes 395,000

Chapter 3:

Problem 4.

Profit Margin = Net Income/ Sales

Net income = Assets x Return on assets

400,000= 5,000,000 x .08

Sales= Assets x total asset turnover

6,000,000= 5,000,000 x 1.2

Profit margin = 400,000/ 6,000,000= 6.67%

Problem 6.

a.

Profit margin= net income/ sales = 175,000/ 2,000,000 = 8.75%

b.

Sales increased by 10 % = 2,000,000 x 1.10 = 2,200,000

Cost of goods sold increased by 20% = 1,400,000 x 1.20 = 1,680,000

Sales 2,200,000

Cost of goods sold 1,680,000

Gross profit 520,000

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Selling and administrative expense 300,000

Operating profit 220,000

Interest expense 50,000

Income before taxes 170,000

Taxes 51,000

Income after taxes 119,000

Profit Margin for 2011= 119,000/ 2,200,000 = 5.4%

Problem 21.

a)

1. Accounts receivable turnover

Sales/ Accounts receivable = 4,000,000 / 800,000 = 5 times

2. Inventory turnover

Sales/ inventory = 4,000,000 / 400,000 = 10 times

3 Fixed asset turnover

Sales/ (net plant and equipment) = 4,000,000/ 500,000= 8 times

4 Total Asset turnover

Sales/ total assets = 4,000,000/ 1,800,000 = 2.22 times

b)

1. Accounts receivable turnover

Sales/ Accounts receivable = 5,000,000/ 900,000 = 5.56 times

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2 Inventory turnover

Sales/ inventory = 5,000,000 / 975,000 = 5.13 times

3 Fixed asset turnover

Sales/ (net plant and equipment) = 5,000,000/ 500,000= 10 times

4. Total Asset turnover

Sales/ total assets = 5,000,000/ 2,275,000 = 2.02 times

C)

The total asset turnover has declined from 2.22 to 2.02. The main reason for the decline in the total

asset turnover is the decline in the inventory turnover from 10 to 5.13 times.

Chapter 4:

Problem 4

Total value = Units x Price

Expected value = Profitability x Total Value

Outcome Profitability Units Price Total Value Expected Value

A .30 200 $15 $3,000 $900

B .50 320 $30 $9,600 $4,800

C .20 410 $40 $16,400 $3,280

Total expected value: $8980

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Problem 5.

Total value = Units x Price

Expected value = Profitability x Total Value

Outcome Profitability Units Price Total Value Expected Value

A .20 300 $16 $4,800 $ 960

B .50 500 $25 $12,500 $ 6,250

C .30 1000 $30 $30,000 $ 9,000

Total expected value: $ 16,210