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Managerial Finance

BA 620 Managerial Finance

Group Problem Set 1: This problem Set is based on materials covered in module 1/week 1. It is designed for you to demonstrate your understanding of basic financial statements, financial statement analysis, break-even concepts, financial and operating leverages. Before you start this assignment, please review weeks 1 and 2 materials thoroughly.

Finance date of Adams Stores, Inc. for the year ending 2016 and 2017.

 

Items 

Sales

Cash

Other   Expenses

Retained   Earnings

Long-term   debt

Cost   of goods sold

Depreciation

Short-term   investments

Fixed   Assets

Interest   Expenses

Shares outstanding (par   value

=   $4.60)

Market   Price of stock Accounts Receivable

Accounts   payable

Inventory

Notes   Payable

Accumulated   Depreciation

2016 

$3,432,000

9,000 340,000

203,768

323,432

2,864,000 18,900

48,600

491,000

62,500

100,000

8.50 351,200

145,600

715,200

200,000

146,200

2017 

$5,834,400

7,282

720,000

97,632 1,000,000

4,980,000

116,960

20,000

1,202,950

176,000

100,000

6 632,160

324,000

1,287,360 720,000

263,160

 

Accruals

136,000

284,960

 

Tax Rate

40%

40%

Instructions:

As a group, complete the following activities using the financial information above:

Part 1: Financial Statements

A. Prepare the income statement for 2016 and 2017. Include statement of retained earnings for 2017

B. Prepare the balance sheet for 2016 and 2017

C. Prepare Common-Size financial statements of income statement and balance sheet.

D. Prepare Statement of Cash Flows

Part 2: Financial Statement Analysis

A. Based on your financial statements (from Part 1), calculate the following ratios for the two years. Show all your calculations in good form. Show your formulas. If you use excel, each calculation need to show the excel formula

Current ratio

Quick ratio

Inventory turnover (times)

Average collection period (days)

Total asset turnover (times)

Debt ratio

Times interest earned

Gross profit margin

Net profit margin

Return on total assets

Return on equity

P/E ratio

Return on equity using DuPont Analysis

B. Comments on the ratios by comparing 2016 to 2017 ratios.

C. Assume Adams Stores, Inc. is a retail company similar to WalMart, Myers, or Target. Compare 2017 ratios to the industry average. Please note that Adams Stores, Inc. is not a real company. To find comparable industry ratios, you need to search for industry ratios for retail. See information on Moodle for instructions on how to find industry ratios. Based on the industry average, how is Adams Stores, Inc. doing financially?

Part 3: Break-even, Financial and Operating Leverages

Johnson Products, Inc.

Income Statement

For the Year Ended December 31, 2018

 

Sales (40,000 bags at $50 each)   …………………………….

$2,000,000

 

Less: Variable costs (40,000 bags at $25) …………….

1,000,000

 

Fixed costs   ……………………………………………………..

600,000

 

Earnings before interest and   taxes …………………………

400,000

 

Interest expense …………………………………………………..

120,000

 

Earnings before taxes ………………………………………….

280,000

 

Income tax expense (20%)   ……………………………………

56,000

 

Net income   …………………………………………………………

$ 224,000

Based on the information above, calculate (show all calculations and responses in good form):

a. Break-even in units (in dollars and units). Explain what your numbers mean. As a manager, how would you use the numbers in financial planning?

b. What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?

c. What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?

Specific Instructions:

1. Complete and submit your assignment no later than the last day of Module 1/Week 1.

2. Include only the names of your group members who participated in this assignment when you submit.

3. Submit only one copy per group.

4. You may use Excel or Word. Please DO NOT use any other format such PDF, etc.

 

Side Note:   Please note that this is not the type of assignment where the assignment is

 

divided and   each student completes the part that is assigned. Each person in your

 

group need   participate fully in the completion of each part of the assignment.

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