revision+questions+chs.1%2C2+and+3 - M1-21(15 minutes($...

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M 1-21 (15 minutes) ($ millions) Assets = Liabilities + Equity Hewlett-Packard $124,503 $83,722 (a) $40,781 General Mills $18,674 (b) $12,062 $6,612 Target (c) $43,705 $28,218 $15,487 The percent of owner financing for each company follows: Hewlett-Packard ..................... 32.8% ($40,781 million / $124,503 million) General Mills .......................... 35.4% ($6,612 million / $18,674 million) Target ...................................... 35.4% ($15,487 million / $43,705 million) General Mills and Target are more owner financed, while Hewlett-Packard is more nonowner financed, but all are financed with roughly the same level of debt and equity. All three enjoy relatively stable cash flows and can, therefore, utilize a greater proportion of debt vs. equity. As the uncertainty of cash flows increases, companies generally substitute equity for debt in order to reduce the magnitude of contractual payment obligations. M1-23 A (20 minutes) DuPont Statement of Reinvested Earnings For Year Ended December 31, 2010 Beginning reinvested earnings, December 31, 2009 ................. $ 10,710 Net income for 2010 .................................................................... 3,031 Common stock dividends ........................................................... (1,500) Preferred stock dividends ........................................................... (10) Treasury stock retirement* ......................................................... (201) Ending reinvested earnings, December 31, 2010 ...................... $ 12,030 * Treasury Stock represents the company’s repurchase of Common Stock. The effect is to decrease stockholders’ equity, which is the opposite effect from the issuance of stock. During 2010, DuPont retired Treasury Stock and will not reissue these shares again. This transaction reduced the company’s retained earnings but did not affect net income for the year.
E 1-30 (10 minutes) Computation of dividends Beginning retained earnings, 2010 .............................................. $ 13,157 + Net income .................................................................................... 2,203 Cash dividends ............................................................................. (?) = Ending retained earnings, 2010 ................................................... $ 14,329 Thus, dividends were $1,031 million for 2010. The company paid out dividends equal to 46.8% of 2010 net income ($1,031 / $2,203). E1-33 (20 minutes) a. Creditors are an important group of external stakeholders. They are primarily interested in the ability of the company to generate sufficient cash flow in order to repay the amounts owed. Stockholders are another significant stakeholder in the company. They are primarily interested in the company’s ability to effectively raise capital and to invest that capital in projects with a rate of return in excess of the cost of the capital raised, that is, to increase the value of the firm. Regulators such as the SEC and the tax authorities, including the IRS and state and local tax officials, are important constituents that are interested in knowing whether the company is complying with all applicable laws and regulations. b. Generally Accepted Accounting Principles (GAAP) are the various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements. They are primarily set by the Financial Accounting

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