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 ACommon Stock B
ProbabilityReturnProbabilityReturn
0.212%0.1  4%
0.518%0.3  6%
0.327%0.410%
0.215%

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$6,000,00040%
Net fixed assets9,000,00060%
   Total$15,000,000
Liabilities and Owners’ Equity
Accounts payable$3,750,00025%
Long-term debt4,250,000NAa
   Total liabilities$8,000,000
Common stock2,000,000NA
Paid-in capital2,800,000NA
Retained earnings2,200,000
Common equity7,000,000
   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 receivables484
Inventories71
Prepaid expenses     247
Total current assets $1,143
Gross fixed assets$20,088
Accumulated depreciation   5,127
Net fixed assets$14,961
Investments702
Other assets   1,436
Total assets$18,242
Liabilities and Equity
Liabilities (debt):
Short-term notes payable$1,629
Accounts payable651
Taxes payable53
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 earnings11,927
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:

RATIOINDUSTRY NORM
Current ratio0.7
Inventory turnover90
Average collection period6.5 days
Debt ratio50%
Total asset turnover1.5
Fixed asset turnover2
Operating profit margin21%
Return on common equity15%

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

  1. Risk – return trade-off
  2. Time value of money
  3. Cash is king
  4. Incremental cash flows
  5. The agency problem
  6. Taxes bias business decisions
  7. All risk is not equal
  8. Ethical dilemmas are everywhere in finance
  9. The Curse of Competitive Markets
  10. Efficient Capital Markets

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