Midterm Exam Part B, Problems In Tutorial Library

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TITLE: Midterm Exam Part B, Problems




Question 1:  (Goal of the Firm) 6 points

When asked what should be the objective of a firm's managers, many people reply, “to maximize profits.”  If you agree with that, so state and justify your opinion.  If you do not agree, so state and explain why you think maximizing profits is incorrect.  Then describe what you think the objective of a firm's managers should be and justify your opinion.

Question 2:  (Business Taxes) 6 points

Joe’s Fly-By-Night Oil Company earned $200,000 last year before-taxes.

a.  Calculate how much Joe’s owes in income taxes for the year (use the table on page 27 in your textbook).

b.  What was Joe’s average tax rate?

c.  What was Joe’s marginal tax rate?

Question 3  (Financial Statement Analysis)  10 points

Consider the following set of financial statements:

                                                                           GLOBAL GOODIES, INC.

                                                                                 Income Statements

                                                                              (in 000's, except EPS)


 2007     2008     2009


Net Sales                                                                          $2100    $3051    $3814

Cost of Goods Sold                                                            681        995      1040

Gross Profit                                                                       1419      2056      2774

Selling & Admin Expenses                                               610        705        964

Operating Profit                                                                 809       1351      1810

Interest Expense                                                                  11            75           94

Income Before Tax                                                            798      1276      1716

Income Tax @ 33%                                                           263        421        566

Net Income                                                                        $535      $855    $1150


Dividends Paid                                                                     0            0             0

Increase in Retained Earnings                                       $535     $855     $1150

Avg Number of Common Shares                                  2326     2326       2326

EPS                                                                               $0.230   $0.367    $0.494




                                                                           (see balance sheet, next page)


                                                                           GLOBAL GOODIES, INC.

                                                                                BALANCE SHEETS

                                                                  (in 000's) as of Dec 31, years ended:


 2007     2008     2009


Cash & Equivalents                                        $224      $103     $167

Accounts Receivable                                         381        409        564

Inventories                                                          307        302        960

Other Current Assets                                           69           59           29

Total Current Assets                                          981        873     1720

Prop. Plant & Equip, Gross                            1901     3023     3742

  Less Accum Depr                                             (81)        (82)     (346)

Prop. Plant & Equip, Net                                1820     2941     3396

Other Fixed Assets                                               58         101        200

Total Assets                                                                  $2859    $3915     $5316


Liabilities & Equity:

Accounts Payable                                                          $210      $405     $551

Short Term Debt                                                  35            39           72

Total Current Liabilities                                 245          444         623

Long Term Debt                                                  17            19           91

  Total Liabilities                                                                            262          463        714

Common Stock                                               2062       2062     2062

Retained Earnings                                            535      1390     2540

  Total Equity                                                                 2597       3452     4602

Total Liabilities & Equity                                                        $2859     $3915     $5316



a. Was Global Goodies more or less profitable in 2009 than it was in 2007? Justify your answer using at least two ratios.


b. Was Global Goodies more or less liquid at the end of 2009 than it was at the end of

2007? Justify your answer using at least two ratios.

Question 4:  (Cash Management)  7 points

a.  Big Bob's Discount Appliances expects sales of $5,000, $5,000, and $10,000 during April, May, and June (big sale in June).  To build business, Big Bob lets all customers buy on credit, and all do so.  In the past, 50% of Big Bob's sales have been collected during the month of sale, 40% are collected the following month, and 10% the month after that.  If this trend continues, what will be Big Bob's total cash collections in the month of June?


b.  Charley's South Shore Crab House expects to have $100 in cash on hand at the beginning of May, and the company's target cash balance is $100.  Net cash flow for May is minus $300.  Assuming that Charley borrows to meet short‑term cash needs and pays back as soon as surplus cash is available, what will the company's ending cash balance after financing be at the end of May?  (Note: no loans are outstanding at the beginning of May)

Question 5:  (Forecasting)  10 points


Ma & Pa Kettle’s Chili Company have started up a business selling their new chili recipe and they want you to help them with next year’s sales forecast.  Using the worksheet below, complete Ma & Pa’s financial forecast and answer the questions which follow.


To begin with, Ma & Pa are sure sales will grow 50% next year.  Assume that is true.  Then assume that COGS, Current Assets, and Current Liabilities all vary directly with Sales.  Assume that fixed expenses will remain unchanged and that $1,000 worth of new Fixed Assets will be obtained next year.  Lastly, the current dividend policy will be continued next year.



                                                Ma & Pa Kettle Chili Company, Inc.

                                               Financial Status and Forecast for 2010



    2009            Est for 2010


 Sales                          $10,000          ________

 COGS                              4,000          ________

 Gross Profit                    6,000          ________

 Fixed Expenses               3,000          ________

 Before‑Tax Profit           3,000          ________

 Tax @ 33.3333%            1,000          ________

 Net Profit                      $2,000          ________


 Dividends                        $0              ________


 Current Assets            $25,000          ________

 Net Fixed Assets          15,000          ________

 Total Assets                $40,000          ________


 Current Liabilities       $17,000         ________

 Long‑term debt               3,000          ________

 Common Stock               7,000          ________

 Retained Earnings        13,000          ________

 Total Liabs & Eq        $40,000          ________


Will Ma & Pa be able to get by without any External Funding Required in 2010?                   .

If not, how much will they need?   $________.


Question 6:  (Time Value of Money – Payments and Rate of Return)  8 points


Assume you are planning how to finance your child's college education. The child is 3 years old now so there are 15 years to go before your child enters college at age 18. According to your estimates you will need $80,000 in the bank at that time.


a. If you believe you can earn 9% a year, on average, between now and the time your child starts college, how much will you have to invest each year between now and then in order to reach your target?  (for simplicity, assume end-of-year payments)


b. It appears the annual payment required to reach your target is more than you can afford. If the most you can afford to invest each year is $2,000 what average annual rate of return must you earn in order to reach your target?




End of exam


Directions:  You may complete the exam in Excel or in Word.

•  If you choose to complete the exam in Excel, open the Excel program and create a new spreadsheet named mid-term exam (your last name).xls.  Then answer the following questions on the spreadsheet.  You may put each problem on a separate tab in the spreadsheet if you like.  Save the file when you are finished, then submit the exam on the course website just as you would a normal homework assignment.

•  If you choose to complete the exam in Word, open the Word program and create a new document named mid-term exam (your last name).doc.  Then answer the following questions on the document.  Be sure to show your calculations.  Save the file when you are finished, then submit the exam on the course website just as you would a normal homework assignment.


•  In Excel, use formulas in the spreadsheet to solve the problems so your instructor can see how you arrived at your answers.  If your instructor cannot determine how an answer was calculated, no credit will be given for that answer.  If a question calls for a text answer, such as a few sentences or a short paragraph, create a text box on the spreadsheet and enter your text in the box.  In Word, be sure to show clearly how you arrived at your answers by entering the calculations as text.  If your instructor cannot determine how an answer was calculated, no credit will be given for that answer.

•  Be sure to complete the exam by the deadline posted for it.  Late submissions without good reason will be assessed a penalty.

•  Be sure to put your name on the spreadsheet or in the Word document.

•  You must complete the exam by yourself, without assistance from anyone else.  Copying and pasting from another person’s spreadsheet or Word document or from the Internet is not allowed.  Also, you must not give assistance to anyone else. 

•  Ask your instructor if you have any questions.

Exam problems begin on the next page.  There are six questions worth a total of 47 points.

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