CLASS / COURSE: BUSN 5200
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.
(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.
(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.
Completed Solution is attached. Click on Buy button and then download file to get full solution.
SUBJECTS / CATEGORIES:
2. Financial Management
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