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P3–5 Calculation of EPS and retained earnings
Philagem, Inc., ended 2012 with a net profit before taxes of $218,000. The company is subject to a 40% tax rate and must pay $32,000 in preferred stock dividends before distributing any earnings on the 85,000 shares of common stock currently outstanding. a. Calculate Philagem’s 2012 earnings per share (EPS). b. If the firm paid common stock dividends of $0.80 per share, how many dollars would go to retained earnings?
P3–12 Ratio comparisons
Robert Arias recently inherited a stock portfolio from his uncle. Wishing to learn more about the companies in which he is now invested, Robert performs a ratio analysis on each one and decides to compare them to each other. Some of his ratios are listed below. 100 PART 2 Financial Tools LG 2 LG 3 LG 4 LG 5 Island Burger Fink Roland Ratio Electric Utility Heaven Software Motors Current ratio 1.10 1.3 6.8 4.5 Quick ratio 0.90 0.82 5.2 3.7 Debt ratio 0.68 0.46 0.0 0.35 Net profit margin 6.2% 14.3% 28.5% 8.4% Assuming that his uncle was a wise investor who assembled the portfolio with care, Robert finds the wide differences in these ratios confusing. Help him out. a. What problems might Robert encounter in comparing these companies to one another on the basis of their ratios? b. Why might the current and quick ratios for the electric utility and the fast-food stock be so much lower than the same ratios for the other companies? c. Why might it be all right for the electric utility to carry a large amount of debt, but not the software company? d. Why wouldn’t investors invest all of their money in software companies instead of in less profitable companies? (Focus on risk and return.)
P3–14 Liquidity ratio
Josh Smith has compiled some of his personal financial data in order to determine his liquidity position. The data are as follows. Account Amount Cash $3,200 Marketable securities 1,000 Checking account 800 Credit card payables 1,200 Short-term notes payable 900 Month of origin Amounts receivable July $ 3,875 August 2,000 September 34,025 October 15,100 November 52,000 December Year-end accounts receivable $300,000 193,000 Quarter Inventory 1 $ 400,000 2 800,000 3 1,200,000 4 200,000 a. Calculate Josh’s liquidity ratio. b. Several of Josh’s friends have told him that they have liquidity ratios of about 1.8. How would you analyze Josh’s liquidity relative to his friends?
P3–20 The relationship between financial leverage and profitability
Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firms’ financial leverage and profitability. 104 PART 2 Financial Tools LG 4 LG 5 Item Pelican Paper, Inc. Timberland Forest, Inc. Total assets $10,000,000 $10,000,000 Total equity (all common) 9,000,000 5,000,000 Total debt 1,000,000 5,000,000 Annual interest 100,000 500,000 Total sales 25,000,000 25,000,000 EBIT 6,250,000 6,250,000 Earnings available for common stockholders 3,690,000 3,450,00 a. Calculate the following debt and coverage ratios for the two companies. Discuss their financial risk and ability to cover the costs in relation to each other. (1) Debt ratio (2) Times interest earned ratio b. Calculate the following profitability ratios for the two companies. Discuss their profitability relative to each other. (1) Operating profit margin (2) Net profit margin (3) Return on total assets (4) Return on common equity c. In what way has the larger debt of Timberland Forest made it more profitable than Pelican Paper? What are the risks that Timberland’s investors undertake when they choose to purchase its stock instead of Pelican’s?
P4–3 MACRS depreciation expense and accounting cash flow
Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $430,000 this year. The company’s financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $80,000 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule. a. If the firm purchases the grinders before year-end, what depreciation expense will it be able to claim this year? (Use Table 4.2 on page 117.) b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result?
P4–7 Cash receipts
A firm has actual sales of $65,000 in April and $60,000 in May. It expects sales of $70,000 in June and $100,000 in July and in August. Assuming that sales are the only source of cash inflows and that half of them are for cash and the remainder are collected evenly over the following 2 months, what are the firm’s expected cash receipts for June, July, and August?
P4–10 Preparation of cash budget
Sam and Suzy Sizeman need to prepare a cash budget for the last quarter of 2013 to make sure they can cover their expenditures during the period. Sam and Suzy have been preparing budgets for the past several years and have been able to establish specific percentages for most of their cash outflows. These percentages are based on their take-home pay (that is, monthly utilities normally run 5% of monthly take-home pay). The information in the following table can be used to create their fourth-quarter budget for 2013. CHAPTER 4 Cash Flow and Financial Planning 149 LG 4 LG 4 Income Monthly take-home pay $4,900 Expenses Housing 30% Utilities 5% Food 10% Transportation 7% Medical/dental .5% Clothing for October and November 3% Clothing for December $440 Property taxes (November only) 11.5% Appliances 1% Personal care 2% Entertainment for October and November 6% Entertainment for December $1,500 Savings 7.5% Other 5% Excess cash 4.5% a. Prepare a quarterly cash budget for Sam and Suzy covering the months October through December 2013. b. Are there individual months that incur a deficit? c. What is the cumulative cash surplus or deficit by the end of December 2013?