Answer All the Auestions
Question: 1
a. Sandersen, Inc., sells minicomputers. The firm’s taxable income is $1,225,000. Calculate the corporation’s tax liability.
| Corporate Tax Rates | |
| 15% | $ 0–$50,000 |
| 25% | $ 50,001–$75,000 |
| 34% | $75,001–$10,000,000 |
| 35% | over $10,000,000 |
| Additional surtax: | |
| |
| |
b. “Originally, the sole objective of the federal government in taxing income was to generate financing for government expenditures. Although this purpose continues to be important, social and economic objectives have been added.” Substantiate the statement with enough explanations.
Question: 2
a. Friedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration. Which investment is better, based on risk (as measured by the standard deviation) and return?
| Common Stock A | Common Stock B | ||
| Probability | Return | Probability | Return |
| 0.2 | 12% | 0.1 | 4% |
| 0.5 | 18% | 0.3 | 6% |
| 0.3 | 27% | 0.4 | 10% |
| 0.2 | 15% | ||
b. “ More can be said about risk, especially as to its nature, when we own more than one asset in our investment portfolio.” Define risk and explain how risk is affected if we diversify our investment by holding a variety of securities?
Question 3:
a. J and S Corporation is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.
Last year J and S Corp. had $15 million in sales with net income of $1.5 million. The firm anticipates that next year’s sales will reach $18 million with net income rising to $3 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.
The firm’s balance sheet for the year just ended is found below:
| J and S Corporation | ||
| Balance Sheet | ||
| 12/31/2000 | % of Sales | |
| Current assets | $6,000,000 | 40% |
| Net fixed assets | 9,000,000 | 60% |
| Total | $15,000,000 | |
| Liabilities and Owners’ Equity | ||
| Accounts payable | $3,750,000 | 25% |
| Long-term debt | 4,250,000 | NAa |
| Total liabilities | $8,000,000 | |
| Common stock | 2,000,000 | NA |
| Paid-in capital | 2,800,000 | NA |
| Retained earnings | 2,200,000 | |
| Common equity | 7,000,000 | |
| Total | $15,000,000 | |
Not applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year’s forecast of financing requirements.
Estimate J and S corp. total financing requirements (i.e., total assets) for 2001 and its net funding requirements (DFN).
b. Give a brief summary of forecasting to determine additional (discretionary) funding (financing) needed.
Question 4:
The balance sheet and income statement for the McDonald’s are as follows.
| McDonald’s Corporation 2016 Income Statement ($ Millions) | ||
| Sales | $11,508 | |
| Cost of goods sold | 6,537 | |
| Gross profits | $4,971 | |
| Marketing expenses and general | ||
| and administrative expenses | $1,832 | |
| Depreciation expense | 345 | |
| Total operating expenses | $2,177 | |
| Operating profits | $2,794 | |
| Interest expenses | 387 | |
| Earnings before taxes | $2,407 | |
| Income taxes | 765 | |
| Net income before preferred stock dividends | $1,642 | |
| Preferred stock dividends | 25 | |
| Net income available to common stockholders | $1,617 | |
| McDonald’s Corporation December 31, 2016 Balance Sheet ($ Millions) Assets | |
| Cash | $341 |
| Accounts receivables | 484 |
| Inventories | 71 |
| Prepaid expenses | 247 |
| Total current assets | $1,143 |
| Gross fixed assets | $20,088 |
| Accumulated depreciation | 5,127 |
| Net fixed assets | $14,961 |
| Investments | 702 |
| Other assets | 1,436 |
| Total assets | $18,242 |
| Liabilities and Equity | |
| Liabilities (debt): | |
| Short-term notes payable | $1,629 |
| Accounts payable | 651 |
| Taxes payable | 53 |
| Accrued expenses | 652 |
| Total current liabilities | $2,985 |
| Long-term debt | 6,325 |
| Total liabilities | $9,310 |
| Equity: | |
| Preferred stock | $80 |
| Common stock: | |
| Par value and paid in capital | $708 |
| Retained earnings | 11,927 |
| Treasury stock | -3,783 |
| Total common equity | $8,852 |
| Total equity | $8,932 |
| Total liabilities (debt) and equity | $18,242 |
a. Calculate the following ratios:
| RATIO | INDUSTRY NORM |
| Current ratio | 0.7 |
| Inventory turnover | 90 |
| Average collection period | 6.5 days |
| Debt ratio | 50% |
| Total asset turnover | 1.5 |
| Fixed asset turnover | 2 |
| Operating profit margin | 21% |
| Return on common equity | 15% |
b. Calculate the future sum of $5,000 given that it will be held in the bank 5 years at an annual interest rate of 6 percent.
c. Knutson Products, Inc., is involved in the production of airplane parts and has the following inventory, carrying, and storage costs:
- Orders must be placed in round lots of 250,000 units.
- The carrying cost for 1 unit of inventory is $ 10
- The ordering cost is $100 per order.
- Determine the optimal EOQ level.
- Determine the average inventory when the safety stock is 2000 units.
Question 5:
“Some of the financial techniques and strategies are necessary for the efficient operation of an international business. Problems inherent to these firms include multiple currencies, differing legal and political environments, differing economic and capital markets, and internal control problems. The difficulties arising from multiple currencies are stressed here, including the dimensions of foreign exchange risk and strategies for reducing this risk.” Elucidate.
Question 6:
Explain the financial Axioms
- Risk – return trade-off
- Time value of money
- Cash is king
- Incremental cash flows
- The agency problem
- Taxes bias business decisions
- All risk is not equal
- Ethical dilemmas are everywhere in finance
- The Curse of Competitive Markets
- Efficient Capital Markets
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