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1. Vanity Press, Inc., has annual credit sales of $1.6 million and a gross profit margin of 35 percent. a. If the firm wishes to maintain an average

8. In the Industrial Supply Company example (Table 4.4) it was assumed that the company’s fixed assets were being used at nearly full capacity and that net fixed assets would have to increase proportionately as sales increased. Alternatively, suppose that the company has excess fixed assets and that no increase in net fixed assets is required as sales are increased. Assume that the company plans to maintain its dividend payments at the same level in 2011 as in 2010. Determine the amount of additional financing needed for 2011 under each of the following conditions:

Increase in Sales Increase in Expenses
a. $3,750,000 $3,750,000
b. $3,000,000 $2,800,000
c. $4,500,000 $4,000,000

1. Vanity Press, Inc., has annual credit sales of $1.6 million and a gross profit margin of 35 percent. a. If the firm wishes to maintain an average collection period of 50 days, what level of accounts receivable should it carry? (Assume a 365-day year.) b. The inventory turnover for this industry averages six times. If all of Vanity s sales are on credit, what average level of inventory should the firm maintain to achieve the same inventory turnover figure as the industry? 2. Pacific Fixtures lists the following accounts as part of its balance sheet. Total assets $10,000,000 Accounts payable $ 2,000,000 Notes payable (8%) 1,000,000 Bonds (10%) 3,000,000 Common stock at par 1,000,000 Contributed capital in excess of par 500,000 Retained earnings 2,500,000 Total liabilities and stockholders’ equity $10,000,000 Compute the return on stockholders’ equity if the company has sales of $20 million and the following net profit margin: a. 3 percent b. 5 percent 4. Williams Oil Company had a return on stockholders’ equity of 18 percent during 2010. Its total asset turnover was 1.0 times, and its equity multiplier was 2.0 times. Calculate the company’s net profit margin. 5. Using the data in the following table for a number of firms in the same industry, do the following: a. Compute the total asset turnover, the net profit margin, the equity multiplier, and the return on equity for each firm. b. Evaluate each firm s performance by comparing the firms with one another. Which firm or firms appear to be having problems? What corrective action would you suggest the poorer performing firms take? Finally, what additional data would you want to have on hand when conducting your analyses?
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Firm (In Millions of Dollars) A B C D Sales $20 $10 $15 $25 Net income after tax 3 0.5 2.25 3 Total assets 15 7.5 15 24 Stockholders’ equity 10 5.0 14 10 Chapter 4 1. Last year, Blue Lake Mines, Inc., had earnings after tax of $650,000. Included in its expenses were depreciation of $400,000 and deferred taxes of $100,000. The company also purchased new capital equipment for $300,000 last year. Calculate Blue Lake s after-tax cash flow for last year. 3. Consider the Industrial Supply Company example (Table 4.4) again. Assume that the company plans to maintain its dividend payments at the same level in 2011 as in 2010. Also assume that all of the additional financing needed is in the form of short-term notes payable. Determine the amount of additional financing needed and pro forma financial statements (that is, balance sheet, income statement, and selected financial ratios) for 2011 under each of the following conditions: Increase in Sales Increase in Expenses a. $3,750,000 $3,750,000 b. $3,000,000 $2,800,000 c. $4,500,000 $4,000,000 8. In the Industrial Supply Company example (Table 4.4) it was assumed that the company s fixed assets were being used at nearly full capacity and that net fixed assets would have to increase proportionately as sales increased. Alternatively, suppose that the company has excess fixed assets and that no increase in net fixed assets is required as sales are increased. Assume that the company plans to maintain its dividend payments at the same level in 2011 as in 2010. Determine the amount of additional financing needed for 2011 under each of the following conditions: Increase in Sales Increase in Expenses a. $3,750,000 $3,750,000 b. $3,000,000 $2,800,000 c. $4,500,000 $4,000,000 INTERMEDIATE
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