Chapter 1

1.1. Capital: What are the two basic sources of funds for all businesses?

1.2. Management role: What is net working capital?

1.3. Cash flows: Explain the difference between profitable and unprofitable firms.

1.4. Management role: What three major decisions are of most concern to financial managers?

1.5. Cash flows: What is the appropriate decision rule for a firm considering undertaking a
capital project? Give a real-life example.

1.6. Management role: What is firm's capital structure, and why is it important?

1.7. Management role: What are some of the working capital decisions that a financial manager
faces?

1.8. Organizational form: What are the common forms of business organization discussed in
this chapter?

1.9. Organizational form: What are the advantages and disadvantages of a sole proprietorship?

1.10. Organizational form: What is a partnership, and what is the biggest disadvantage of this
form of business organization? How can this disadvantage be avoided?

1.11. Organizational form: Who are the owners of a corporation, and how is their ownership
represented?

1.12. Organizational form: Explain what is meant by stockholders' limited liability.

1.13. Firm's goal: What are some of the drawbacks to setting profit maximization as the main
goal of a company?

1.14. Firm's goal: What is the appropriate goal of financial managers? How do managers'
decisions affect how successful the firm is in achieving this goal?

1.15. Firm's goal: What are the major factors that affect a firm's stock price?
1.16. Agency conflicts: What is an agency relationship, and what is an agency conflict? How can
agency conflicts be reduced in a corporation?
1.17. Firm's goal: What can happen if a firm is poorly managed and its stock price falls
substantially below its maximum potential price?

1.18. Agency conflicts: What are some of the regulations that pertain to boards of directors that
were put in place to reduce agency conflicts?

1.19. Business ethics: How can a lack of business ethics negatively affect the performance of an
economy? Give an example.

1.20. Agency conflicts: What are some ways to resolve a conflict of interest?

Chapter 3

Basic

3.1. Given the following information about Elkridge Sporting Goods, Inc., construct a balance
sheet for June 30, 2017. On that date the firm had cash and marketable securities of $25,135,
accounts receivable of $43,758, inventory of $167,112, net fixed assets of $325,422, and other
assets of $13,125. It had accounts payables of $67,855, notes payables of $36,454, long-term
debt of $223,125, and common stock of $150,000. How much retained earnings did the firm
have?

3.2. What is the difference between FIFO and LIFO accounting.

3.3. Explain how the choice of FIFO versus LIFO can affect a firm's balance sheet and income
statement.

3.4. Market-value accounting: How does the use of market-value accounting help managers?

3.5. Laurel Electronics reported the following information at its annual meeting: The company
had cash and marketable securities worth $1,235,455, accounts payables worth $4,159,357,
inventory of $7,121,599, accounts receivables of $3,488,121, short-term notes payable worth
$1,151,663, and other current assets of $121,455. What is the company's net working capital?

3.6. The financial information for Laurel Electronics referred to in Problem 3.5 is all at book
value. Suppose marking to market reveals that the market value of the firm's inventory is 20
percent below its book value, its receivables are 25 percent below their book value, and the
 market value of its current liabilities is identical to the book value. What is the firm's net
working capital using market values? What is the percentage difference in net working capital
using market versus book values?

3.7. The Oakland Mills Company has disclosed the following financial information in its annual
reports for the period ending March 31, 2017: sales of $1.45 million, costs of goods sold of
$812,500, depreciation expenses of $175,000, and interest expenses of $89,575. Assume that
the firm has an average tax rate of 35 percent. What is the company's net income? Set up an
income statement to answer the question.

3.8. Describe the organization of the statement of cash flows.

3.9. During 2017 Towson Recording Company increased its investment in marketable
securities by $36,845, funded fixed-assets acquisitions of $109,455, and had marketable
securities of $14,215 mature. What is the net cash used in investing activities?

3.10. Caustic Chemicals management identified the following cash flows as significant in its
year-end meeting with analysts: During the year, Caustic repaid existing debt of $312,080 and
raised additional debt capital of $650,000. It also repurchased stock in the open market for a
total of $45,250. What is the net cash provided by financing activities?

3.11. Identify and describe the noncash expenses that a firm may incur.
3.12. Given the data for Oakland Mills Company in Problem 3.7, compute the cash flows to
investors from operating activity.

3.13. Hillman Corporation reported current assets of $3,495,055 on December 31, 2017 and
current assets of $3,103,839 on December 31, 2016. Current liabilities for the firm were
$2,867,225 and $2,760,124 at the end of 2017 and 2016, respectively. Compute the cash flow
invested in net working capital at Hillman Corporation during 2017.

3.14. Del Bridge Construction had long-term assets before depreciation of $990,560 on
December 31, 2016, and $1,211,105 on December 31, 2017. How much cash flow was invested
in long-term assets by Del Bridge during 2017?
Intermediate

3.15. Balance sheet: Tim Dye, the CFO of Blackwell Automotive, Inc., is putting together this
year's financial statements. He has gathered the following balance sheet information: The firm
had a cash balance of $23,015, accounts payable of $163,257, common stock of $313,299,
retained earnings of $512,159, inventory of $212,444, goodwill and other assets equal to
$78,656, net plant and equipment of $711,256, and short-term notes payable of $21,115. It also
had accounts receivable of $141,258 and other current assets of $11,223. How much long-term
debt does Blackwell Automotive have?

3.16. Working capital: Mukhopadhya Network Associates has a current ratio of 1.60, where the
current ratio is defined as follows: Current ratio = Current assets/Current liabilities. The firm's
current assets are equal to $1,233,265, its accounts payables are $419,357, and its notes
payables are $351,663. Its inventory is currently at $721,599. The company plans to raise funds
in the short-term debt market and invest the entire amount in additional inventory. How much
can notes payable increase without the current ratio falling below 1.50?

3.17. Reservoir Bottling Company reported the following information at the end of the year.
Total current assets are worth $237,513 at book value and $219,344 at market value. In addition,
plant and equipment have a market value of $343,222 and a book value of $362,145. The
company's total current liabilities are valued at market for $134,889 and have a book value of
$129,175. Both the book value and the market value of long-term debt are $144,000. If the
company's total assets have a market value of $562,566 and a book value of $599,658, what is
the difference between the book value and market value of its stockholders' equity?

3.18. Nimitz Rental Company provided the following information to its auditors. For the year
ended March 31, 2017, the company had revenues of $878,412, general and administrative
expenses of $352,666, depreciation expenses of $131,455, leasing expenses of $108,195, and
interest expenses equal to $78,122. If the company's average tax rate is 34 percent, what is its
net income after taxes?

3.19. Sosa Corporation recently reported an EBITDA of $31.3 million and net income of $9.7
million. The company had $6.8 million in interest expense, and it's average corporate tax rate
was 35 percent. What was its depreciation and amortization expense?
3.20. Fraser Corporation has announced that its net income for the year ended June 30, 2017,
was $1,353,412. The company had EBITDA of $4,967,855 and its depreciation and
amortization expense was equal to $1,112,685. The company's average tax rate is 34 percent.
What was its interest expense?

3.21. For its most recent fiscal year, Carmichael Hobby Shop recorded EBITDA of $512,725.20,
EBIT of $362,450.20, zero interest expense, and cash flow to investors from operating activity
of $348,461.25. Assuming there are no noncash revenues recorded on the income statement,
what is the firm's net income after taxes?

3.22. Columbia Construction Company earned $451,888 during the year ended June 30, 2017.
After paying out $225,794 in dividends, the balance went into retained earnings. If the firm's
total retained earnings were $846,972 at the end of fiscal year 2017, what were the retained
earnings on its balance sheet on July 1, 2016?

3.23. Refer to the information given in Problem 3.18. What is the cash flow from operating
activity for Nimitz Rental?

3.24. Mount Hebron Electrical Company's financial statements indicated that the company had
earnings before interest and taxes of $718,323. The interest rate on its $850,000 debt was 8.95
percent. Calculate the taxes the company is likely to owe. What are the marginal and average
tax rates for this company?

Advanced

3.25. The Centennial Chemical Corporation announced that, for the period ending March 31,
2017, it had earned income after taxes of $2,768,028.25 on revenues of $13,144,680.

3.26. The company's costs (excluding depreciation and amortization) amounted to 61 percent of
sales, and it had interest expenses of $392,168. What is the firm's depreciation and amortization
expense if its average tax rate is 34 percent?

3.27. Eau Claire Paper Mill, Inc., had, at the beginning of the current fiscal year, April 1, 2016,
retained earnings of $323,325. During the year ended March 31, 2017, the company produced
net income after taxes of $713,445 and paid out 45 percent of its net income as dividends.
 Construct a statement of retained earnings and compute the year-end balance of retained
earnings.

3.28. Menomonie Casino Company earned $23,458,933 before interest and taxes for the fiscal
year ending March 31, 2017. If the casino had interest expenses of $1,645,123, calculate its
tax obligation using Exhibit 3.6. What are the marginal and the average tax rates for this
company?

3.29. Vanderheiden Hog Products Corp. provided the following financial information for the
quarter ending June 30, 2017:

Net income: $189,425

Depreciation and amortization: $63,114

Increase in receivables: $62,154

Increase in inventory: $57,338

Increase in accounts payable: $37,655

Decrease in other current assets: $27,450

What is this firm's cash flow from operating activities during this quarter?

3.30. Analysts following the Tomkovick Golf Company were given the following balance sheet
information for the years ended June 30, 2017, and June 30, 2016:

Assets 2017 2016

Cash and marketable securities $ 33,411 $ 16,566
Accounts receivable 260205.00 318,768
Inventory 423,819 352740.00
Other current assets 41251.00 29,912
Total current assets $ 758,686.00 $ 717,986
Plant and equipment 1,931,719 1609898.00
Less: Accumulated depreciation (419044.00) (206,678)
Net plant and equipment $1,512,675 $1,403,220
Goodwill and other assets 382,145 412,565
Total assets $2,653,506 $2,533,771
 Liabilities and Equity 2017 2016
Accounts payable and accruals $ 378,236 $ 332,004
Notes payable 14,487 7,862
Accrued income taxes 21,125 16,815
Total current liabilities $ 413,848 $ 356,681
Long-term debt 679,981 793,515
Total liabilities $1,093,829 $1,150,196
Preferred stock — —
Common stock (10,000 shares) 10,000 10,000
Additional paid-in capital 975,465 975,465
Retained earnings 587,546 398,110
Less: Treasury stock (13,334) —
Total common equity $1,559,677 $1,383,575
Total liabilities and equity $2,653,506 $2,533,771

In addition, it was reported that the company had a net income of $3,155,848 and thatdepreciation
expenses were equal to $212,366 2017. Assume amortization expense was $0in 2017.

a. Construct a 2017 cash flow statement for this firm.

b. Calculate the net cash provided by operating activities for the statement of cash flows.

c. What is the net cash used in investing activities?

d. Compute the net cash provided by financing activities.

3.31. Based on the financial statements for Tomkovick Golf Company in Problem 3.30, compute
the cash flow invested in net working capital and the cash flow invested in long-term assets
that you would use in a calculation of the cash flow to investors for 2017.

Chapter 4

Basic

4.1. Explain why the quick ratio or acid-test ratio is a better measure of a firm's liquidity than
the current ratio.

4.2. Flying Penguins Corp. has total current assets of $11,845,175, current liabilities of
$5,311,020, and a quick ratio of 0.89. How much inventory does it have?
4.3. If Newton Manufacturers has an accounts receivable turnover of 4.8 times and net sales of
$7,812,379, what would its receivables be?

4.4. Bummel and Strand Corp. has a gross profit margin of 33.7 percent, sales of $47,112,365,
and inventory of $14,595,435. What is its inventory turnover ratio?

4.5. Sorenson Inc. has sales of $3,112,489, a gross profit margin of 23.1 percent, and inventory
of $833,145. What are the company's inventory turnover ratio and days' sales in inventory?

4.6. Breckenridge Ski Company has total assets of $422,235,811 and a debt ratio of 29.5 percent.
Calculate the company's debt-to-equity ratio and equity multiplier.

4.7. Norton Company has a debt-to-equity ratio of 1.65, ROA of 11.3 percent, and total equity
of $1,322,796. What are the company's equity multiplier, debt ratio, and ROE?

4.8. The Rangoon Timber Company has the following ratios:

Net sales/Total assets = 2.23

ROA = 9.69%

ROE = 16.4%

What are Rangoon's profit margin and debt ratios?

4.9. Lemmon Enterprises has a total asset turnover of 2.1 and a net profit margin of 7.5%. If its
equity multiplier is 1.90, what is the ROE for Lemmon Enterprises?

4.10. List the ways a company's financial manager can benchmark the company's own
performance.

4.11. Trademark Corp.'s financial manager collected the following information for its peer group
to compare its performance against that of its peers.

a. Explain how Trademark is performing relative to its peers.

 b. How do the industry ratios help Trademark's management?

4.12. Rockwell Jewelers management announced that the company had net earnings of
$6,481,778 for this year. The company has 2,543,800 shares outstanding, and the year-end
stock price is $54.21. What are Rockwell's earnings per share and P/E ratio?

4.13. Chisel Corporation has 3 million shares outstanding at a price per share of $3.25. If the
debt-to-equity ratio is 1.7 and total book value of debt equals $12,400,000, what is the market-
to-book ratio for Chisel Corporation?

Intermediate

4.14. Laurel Electronics has a quick ratio of 1.15, current liabilities of $5,311,020, and
inventories of $7,121,599. What is the firm's current ratio?

4.15. Lambda Corporation has current liabilities of $450,000, a quick ratio of 1.8, inventory
turnover of 5.0, and a current ratio of 3.5. What is the cost of goods sold for Lambda
Corporation?

4.16. Norwood Corp. currently has accounts receivable of $1,223,675 on net sales of $6,216,900.
What are its accounts receivable turnover and days' sales outstanding (DSO)?

4.17. If Norwood Corp.'s management wants to reduce the DSO from that calculated in Problem
4.16 to an industry average of 56.3 days and its net sales are expected to decline by about 12
percent, what would the new level of receivables be?

4.18. Nimitz Rental Company had depreciation expenses of $108,905, interest expenses of
$78,112, and an EBIT of $1,254,338 for the year ended June 30, 2017. What are the times-
interest-earned and cash coverage ratios for this company?

4.19. Conseco, Inc., has a debt ratio of 0.56. What are the company's debt-to-equity ratio and
equity multiplier?

4.20. Cisco Systems has total assets of $35.594 billion, total debt of $9.678 billion, and net sales
of $22.045 billion. Its net profit margin for the year is 20 percent, while the operating profit
margin is 30 percent. What are Cisco's net income, EROA, ROA, and ROE?

4.21. Procter & Gamble reported the following information for its fiscal year end: On net sales
of $51.407 billion, the company earned net income after taxes of $6.481 billion. It had cost of
 goods sold of $25.076 billion and EBIT of $9.827 billion. What are the company's gross profit
margin, operating profit margin, and net profit margin?

4.22. Wal-Mart, Inc., has net income of $9,054,000 on net sales of $256,329,812. The company
has total assets of $104,912,112 and stockholders' equity of $43,623,445. Use the extended
DuPont identity to find the return on assets and return on equity for the firm.

4.23. Xtreme Sports Innovations has disclosed the following information:

EBIT = $25,664,300

Net income = $13,054,000

Net sales = $83,125,336

Total debt = $20,885,753

Total assets = $71,244,863

Compute the following ratios for this firm using the DuPont identity: debt-to-equity ratio, EROA,
ROA, and ROE.

4.24. Market-value ratios: Cisco Systems had net income of $4.401 billion and, at year end,
6.735 billion shares outstanding. Calculate the earnings per share for the company.

4.25. Market-value ratios: Use the information for Cisco Systems Problem 4.24. In addition, the
company's EBITDA was $6.834 billion and its share price was $22.36. Compute the firm's
price-earnings ratio and the price-EBITDA ratio.

4.26. DuPont equation: Carter, Inc., a manufacturer of electrical supplies, has an ROE of 23.1
percent, a profit margin of 4.9 percent, and a total asset turnover ratio of 2.6 times. Its peer
group also has an ROE of 23.1 percent, but has outperformed Carter with a profit margin of
5.3 percent and a total asset turnover ratio of 3.0 times. Explain how Carter managed to achieve
the same level of profitability as reflected by the ROE.

4.27. DuPont equation: Grossman Enterprises has an equity multiplier of 2.6 times, total assets
of $2,312,000, an ROE of 14.8 percent, and a total asset turnover ratio of 2.8 times. Calculate
the firm's sales and ROA.
Advanced

4.28. Complete the balance sheet of Flying Roos Corporation.

Flying Roos Corporation Balance Sheet as of December 31, 201

Assets Liabilities and Equity

Cash and marketable securities Accounts payable and accruals

Accounts receivable Notes payable $300,000
Inventory
Total current assets Total current liabilities
Long-term debt $2,000,000
Common stock
Net plant and equipment Retained earnings $1,250,000
Total assets $8,000,000 Total liabilities and equity

You have the following information:

Debt ratio = 40% Inventory turnover ratio = 3.375

DSO = 39 days Sales = $2.25 million

Current ratio = 1.5 Cost of goods sold = $1.6875 million

4.29. For the year ended June 30, 2017, Northern Clothing Company has total assets of
$87,631,181, ROA of 11.67 percent, ROE of 21.19 percent, and a net profit margin of 11.59
percent. What are the company's net income and net sales? Calculate the firm's debt-to-equity
ratio.

4.30. Blackwell Automotive's balance sheet at the end of its most recent fiscal year shows the
following information:

Assets Liabilities and Stockholders’ Equity

Cash and marketable $ 23,015 Accounts payable $ 163,257
securities
Accounts receivable 141,258 Notes payable 21,115
Inventories 212,444
Total current assets $ 376,717 Total current liabilities $ 184,372
 Long-term debt 168,022
Total liabilities $ 352,394
Net plant and equipment 711,256 Common stock 313,299
Goodwill and other assets 89,879 Retained earnings 512,159
Total liabilities and
Total assets $1,177,852 stockholders’ equity $1,177,582

In addition, it was reported that the firm had a net income of $156,042 on net sales of $4,063,589.

a. What are the firm's current ratio and quick ratio?

b. Calculate the firm's days' sales outstanding, total asset turnover ratio, and fixed asset
turnover ratio.

4.31. The following are the financial statements for Nederland Consumer Products Company for
the fiscal year ended September 30, 2017.

Nederland Consumer Products Company

Income Statement for the Fiscal Year
Ended September 30, 2011

Net sales $51,407

Cost of products sold 25,076
Gross margin $26,331
Marketing, research, administrative exp. 15,746
Depreciation 758
Operating income (loss) $ 9,827
Interest expense 477
Earnings (loss) before income taxes 9,350
Income taxes 2,869
Net earnings (loss) $ 6,481
 Nederland Consumer Products
Balance Sheet as of 9/30/2011
Assets Liabilities and Stockholders’
Equity
Cash and marketable securities $ 5,469 Accounts payable $ 3,617
Investment securities 423 Accrued and other liabilities 7,689
Accounts receivable 4,062 Taxes payable 2,554
Total inventories 4,400 Debt due within one year 8,287
Deferred income taxes 958
Prepaid expenses & other 1,803
receivables
Total current assets $17,115 Total current liabilities $22,147
Property, plant, and equip., at 25,304 Long-term debt 12,554
cost
Less: Accumulated depreciation 11,196 Deferred income taxes 2,261
Net plant and equipment $14,108 Other non-current liabilities 2,808
Net goodwill & other intangible 23,900 Total liabilities $39,770
assets
Other non-current assets 1,925 Convertible Class A preferred 1,526
stock
Common stock 2,141
Retained earnings 13,611
Total stockholders’ equity $17,278
(deficit)
Total liabilities and
Total assets $57,048 stockholders’ equity $57,048

Calculate all the ratios for which industry figures are available below for Nederland and compare
the firm’s ratios with the industry ratios.
4.32. Refer to the preceding information for Nederland Consumer Products Company. Compute
the firm's ratios for the following categories and briefly evaluate the company's performance
using these numbers.

a. Efficiency ratios.

b. Asset turnover ratios.

c. Leverage ratios.

d. Coverage ratios.

4.33. Refer to the earlier information for Nederland Consumer Products Company. Using the
DuPont identity, calculate the return on equity for Nederland, after calculating the ratios that
make up the DuPont identity.

4.34. Nugent, Inc., has a gross profit margin of 31.7 percent on net sales of $9,865,214 and total
assets of $7,125,852. The company has a current ratio of 2.7 times, accounts receivable of
$1,715,363, cash and marketable securities of $315,488, and current liabilities of $870,938.

a. What is Nugent's total current assets?

b. How much inventory does the firm have? What is the inventory turnover ratio?

c. What is Nugent's days' sales outstanding?

d. If management sets a target DSO of 30 days, what should Nugent's accounts receivable
be?
4.35. Recreational Supplies Co. has net sales of $11,655,000, an ROE of 17.64 percent, and a
total asset turnover of 2.89 times. If the firm has a debt-to-equity ratio of 1.43, what is the
company's net income?

4.36. Nutmeg Houseware Inc. has an operating profit margin of 10.3 percent on revenues of
$24,547,125 and total assets of $8,652,352.

a. Calculate the company's total asset turnover ratio and its operating profit (EBIT).

b. The company's management has set a target for the total asset turnover ratio of3.25 for
next year. If there is no change in the total assets of the company, what will the new net
sales level have to be next year? Calculate the dollar change in sales necessary and the
percentage change in sales necessary.

c. If the operating profit margin declines to 10 percent, what will be the EBIT at the new
level of sales?

4.37. Modern Appliances Corporation has reported its financial results for the year ended
December 31, 2017.

Modern Appliances Corporation

Income Statement for the Fiscal
December 31, 2011
Sales $5,398,412,000
Cost of goods sold 3,432,925,255
Gross profit margin $1,965,486,745
Selling, general, and admin. expenses 1,036,311,231
Depreciation 299,928,155
Operating income $ 629,247,359
Interest expense 35,826,000
EBT $ 593,421,359
Income taxes 163,104,554
Net earnings $ 430,316,805

Consolidated Balance Sheet

 Modern Appliances Corporation
Balance Sheet as of December 31, 2011
Assets Liabilities and Stockholders’
Equity
Cash and cash $ 514,412,159 Short-term borrowing $ 117,109,865
equivalents
Accounts receivable 1,046,612,233 Trade accounts payable 466,937,985
Inventories 981,870,990 Other current liabilities 994,289,383
Other current assets 313,621,610
Total current assets $2,856,516,992 Total current liabilities $1,578,337,233
Net fixed assets 754,660,275 Long-term debt 1,200,691,565
Goodwill 118,407,710 Common stock 397,407,352
Other assets 665,058,761 Retained earnings 1,218,207,588
Total liabilities and stockholders’
Total assets $4,394,643,738 equity $4,394,643,738

Using the information from the financial statements, complete a comprehensive ratio
analysis for Modern Appliances Corporation.

a. Calculate these liquidity ratios: current and quick ratios.

b. Calculate these efficiency ratios: inventory turnover, accounts receivable turnover,

DSO.

c. Calculate these asset turnover ratios: total asset turnover, fixed asset turnover.

d. Calculate these leverage ratios: total debt ratio, debt-to-equity ratio, equity
multiplier.

e. Calculate these coverage ratios: times interest earned, cash coverage.

f. Calculate these profitability ratios: gross profit margin, net profit margin, ROA,
ROE.

g. Use the DuPont identity, and after calculating the component ratios, compute the
ROE for this firm.