# Sandersen, Inc., sells minicomputers

Question: 1

a.  Sandersen, Inc., sells minicomputers. The firm’s taxable income is \$1,225,000. Calculate the corporation’s tax liability.

 Corporate Tax Rates 15% \$ 0–\$50,000 25% \$ 50,001–\$75,000 34% \$75,001–\$10,000,000 35% over \$10,000,000 Additional surtax: 5% on income between \$100,000 and \$335,000. 3% on income between \$15,000,000 and \$18,333,333.

b.  “Originally, the sole objective of the federal government in taxing income was to generate financing for government expenditures. Although this purpose continues to be important, social and economic objectives have been added.” Substantiate the statement with enough explanations.

Question: 2

a.  Friedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration. Which investment is better, based on risk (as measured by the standard deviation) and return?

 Common Stock A Common Stock B Probability Return Probability Return 0.2 12% 0.1 4% 0.5 18% 0.3 6% 0.3 27% 0.4 10% 0.2 15%

b.  “ More can be said about risk, especially as to its nature, when we own more than one asset in our investment portfolio.” Define risk and explain how risk is affected if we diversify our investment by holding a variety of securities?

Question 3:

a.  J and S Corporation is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.

Last year J and S Corp. had \$15 million in sales with net income of \$1.5 million. The firm anticipates that next year’s sales will reach \$18 million with net income rising to \$3 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.

The firm’s balance sheet for the year just ended is found below:

 J and S Corporation Balance Sheet 12/31/2000 % of Sales Current assets \$6,000,000 40% Net fixed assets 9,000,000 60% Total \$15,000,000 Liabilities and Owners’ Equity Accounts payable \$3,750,000 25% Long-term debt 4,250,000 NAa Total liabilities \$8,000,000 Common stock 2,000,000 NA Paid-in capital 2,800,000 NA Retained earnings 2,200,000 Common equity 7,000,000 Total \$15,000,000

Not applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year’s forecast of financing requirements.

Estimate J and S corp. total financing requirements (i.e., total assets) for 2001 and its net funding requirements (DFN).

b.  Give a brief summary of forecasting to determine additional (discretionary) funding (financing) needed.

Question 4:

The balance sheet and income statement for the McDonald’s are as follows.

 McDonald’s Corporation 2016 Income Statement (\$ Millions) Sales \$11,508 Cost of goods sold 6,537 Gross profits \$4,971 Marketing expenses and general and administrative expenses \$1,832 Depreciation expense 345 Total operating expenses \$2,177 Operating profits \$2,794 Interest expenses 387 Earnings before taxes \$2,407 Income taxes 765 Net income before preferred stock dividends \$1,642 Preferred stock dividends 25 Net income available to common stockholders \$1,617
 McDonald’s Corporation December 31, 2016 Balance Sheet (\$ Millions) Assets Cash \$341 Accounts receivables 484 Inventories 71 Prepaid expenses 247 Total current assets \$1,143 Gross fixed assets \$20,088 Accumulated depreciation 5,127 Net fixed assets \$14,961 Investments 702 Other assets 1,436 Total assets \$18,242 Liabilities and Equity Liabilities (debt): Short-term notes payable \$1,629 Accounts payable 651 Taxes payable 53 Accrued expenses 652 Total current liabilities \$2,985 Long-term debt 6,325 Total liabilities \$9,310 Equity: Preferred stock \$80 Common stock: Par value and paid in capital \$708 Retained earnings 11,927 Treasury stock -3,783 Total common equity \$8,852 Total equity \$8,932 Total liabilities (debt) and equity \$18,242

a.  Calculate the following ratios:

 RATIO INDUSTRY NORM Current ratio 0.7 Inventory turnover 90 Average collection period 6.5 days Debt ratio 50% Total asset turnover 1.5 Fixed asset turnover 2 Operating profit margin 21% Return on common equity 15%

b.  Calculate the future sum of \$5,000 given that it will be held in the bank 5 years at an annual interest rate of 6 percent.

c.  Knutson Products, Inc., is involved in the production of airplane parts and has the following inventory, carrying, and storage costs:

• Orders must be placed in round lots of 250,000 units.
• The carrying cost for 1 unit of inventory is \$ 10
• The ordering cost is \$100 per order.
• Determine the optimal EOQ level.
• Determine the average inventory when the safety stock is 2000 units.

Question 5:

“Some of the financial techniques and strategies are necessary for the efficient operation of an international business. Problems inherent to these firms include multiple currencies, differing legal and political environments, differing economic and capital markets, and internal control problems. The difficulties arising from multiple currencies are stressed here, including the dimensions of foreign exchange risk and strategies for reducing this risk.” Elucidate.

Question 6:

Explain the financial Axioms