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

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 Cost of goods sold Profit Selling and admin.Expenses Depreciation expense

2,000,000 1,250,000 750,000 160,000 200,000

Operating Profit:

390,000

Problem 6.

Sales Cost of goods sold Profit Selling and administrative expenses Depreciation expense Operating profit Interest expense Earnings before taxes Taxes Earnings after taxes

470,000 140,000 330,000 60,000 70,000 200,000 40,000 160,000 45,000 115,000

Problem 7.

Sales Cost of goods sold Gross profit Selling and administrative expense Depreciation expense Operating profit Interest expense Earnings before taxes

1,600,000 480,000 1,120,000 250,000 190,000 680,000 120,000 560,000

Taxes Earnings after taxes

165,000 395,000

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 Cost of goods sold Gross profit

2,200,000 1,680,000 520,000

Selling and administrative expense Operating profit Interest expense Income before taxes Taxes Income after taxes

300,000 220,000 50,000 170,000 51,000 119,000

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

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 B C

.30 .50 .20

200 $15 320 $30 410 $40

$3,000 $9,600 $16,400

$900 $4,800 $3,280

Total expected value:

$8980

Problem 5. Total value = Units x Price Expected value = Profitability x Total Value Outcome Profitability Units Price Total Value Expected Value

A B C

.20 .50 .30

300 500

$16 $25

$4,800 $12,500 $30,000

$ 960 $ 6,250 $ 9,000

1000 $30

Total expected value:

$ 16,210