ECON 2560 Chapter Notes - Chapter 3: Tax Rate, Factor X, Dividend Tax

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skydog833

8 Apr 2014

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Balance sheet: financial statement that shows the value of the firm"s assets and liabilities at a particular time. Shareholder"s equity = total assets total liabilities. Generally accepted accounting principles: procedures for preparing financial statement. Book value: net worth of the firm according to the balance sheet. Income statement: financial statement that shows the revenues, expenses, and net income of a firm over a period of time. Ebit (earnings before interest and taxes) = sales and other income operating expenses . To calculate the cash produced by the business it is necessary to add back the depreciation charge (which is not a cash payment) and to subtract the expenditure on new capital equipment (which is a cash payment) The cash that the company receives is equal to the sales shown in the income statement less the increase in unpaid bills: example:

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Marion has just received the year-end financial statements shown below. Evaluate the state of her company from the perspective of shareholders. What should Marion conclude based on this, and what possible actions can be recommended?
Marion's, Inc.
Income Statement		2012	Cash Flow Statement
Revenue		$3,906,000	Balance Forward		$212,500
	Returns, Credits, etc.	($1,400)	Net Income	$124,480
	Net Sales (Revenue)	$3,904,600	Depreciation	$75,000
Direct Costs			Change in Working Capital	($17,140)
	Labor	($1,450,000)	Capital Expenditures	($70,000)
	Materials	($989,000)	Financial Activities	($75,000)
	Cost of Goods Sold (COGS)	($2,439,000)	Net change in cash	$37,340
	Gross Margin	$1,465,600	Ending Cash Balance		$249,840
Selling General and Admin.
	Marketing	($400,000)
	Research and Development	($350,000)
	Administration	($250,000)
	Other	($200,000)
	Depreciation	($75,000)
	S G & A	($1,275,000)
Earnings Before Interest and Taxes (EBIT)		$190,600
	Interest Expense/Income	($35,000)
	Pre-tax Income	$155,600
	Income Tax @ 20%	($31,120)
	Net Income	$124,480

Balance Sheets, 2011
Assets			Liabilities
Current Assets			Current Liabilities
	Cash	$249,840		Accounts Payable	$125,000
	Accounts receivable	$60,160		Taxes Payable	$10,000
	Finished Goods Inventory	$40,000	Total Current Liabilities		$135,000
	Materials Inventory	$85,000	Long Term Liabilities
Total Current Assets		$435,000		Bank Loans @ 6%	$125,000
				Mortgage @ 4.5%	$460,000
Long term Assets			Total Long Term Liabilities		$585,000
	Buildings	$1,050,000
	Equipment and machines	$80,000	Capital	Stock	$650,000
	Other	$100,000		Retained Earnings	$295,000
Total Fixed Assets		$1,230,000	Stockholders Equity		$945,000
Total Assets		$1,665,000	Total Liabilities and Stockholders equity		$1,665,000

	Current Stock Price	$44.25
	Current Outstanding Shares	5,000

Problem 3-14
Comprehensive Ratio Analysis

The Jimenez Corporation's forecasted 2014 financial statements follow, along with some industry average ratios.

Jimenez Corporation: Forecasted Balance Sheet as of December 31, 2014

Assets
Cash	$ 72,000
Accounts receivable	439,000
Inventories	894,000
Total current assets	$1,405,000
Fixed assets	431,000
Total assets	$1,836,000
Liabilities and Equity
Accounts payable	$ 332,000
Notes payable	100,000
Accruals	170,000
Total current liabilities	$ 602,000
Long-term debt	404,290
Common stock	575,000
Retained earnings	254,710
Total liabilities and equity	$1,836,000

Jimenez Corporation: Forecasted Income Statement for 2014

Sales	$4,290,000
Cost of goods sold	3,580,000
Selling, general, and administrative expenses	370,320
Depreciation and amortization	159,000
Earnings before taxes (EBT)	$ 180,680
Taxes (40%)	72,272
Net income	$ 108,408
Per Share Data
EPS	$ 4.71
Cash dividends per share	$ 0.95
P/E ratio of	5.0
Market price (average)	$ 23.57
Number of shares outstanding	23,000
Industry Financial Ratios (2013)*
The quick ratio of	1.0
The current ratio of	2.7
Inventory turnover**	7.0
Days sales outstanding***	32.0 days
Fixed assets turn over**	13.0
Total assets turnover**	2.6
Return on assets	9.1%
Return on equity	18.2%
The profit margin on aales of	3.5%
Debt-to-assets ratio	21.0%
Liabilities-to-assets ratio	50.0%

P/E ratio of	6.0
Price/Cash flow ratio of	3.5
Market/Book ratio of	3.5
*Industry average ratios have been constant for the past 4 years.
**Based on year-end balance sheet figures.
***Calculation is based on a 365-day year.

Calculate Jimenez's 2014 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez's projected strengths and weaknesses. Assume that there are no changes from the prior period to any of the operating balance sheet accounts. Round DSO to the nearest whole number. Round the other ratios to one decimal place.

Ratios	Firm	Industry	Comment
Quick ratio		1.0	-Select-Strong Weak Item 2
Current ratio		2.7	-Select-Strong Weak Item 4
Inventory turnover		7.0	-Select-Poor Rich Item 6
Days sales outstanding	days	32 days	-Select-Poor Rich Item 8
Fixed assets turnover		13.0	-Select-Poor Rich Item 10
Total assets turnover		2.6	-Select-Poor Rich Item 12
Return on assets	%	9.1%	-Select-Bad Good Item 14
Return on equity	%	18.2%	-Select-Bad Good Item 16
The profit margin on sales	%	3.5%	-Select-Bad Good Item 18
Debt ratio	%	21.0%	-Select-Low High item 20
Liabilities-to-assets	%	50.0%	-Select-Low High Item 22
EPS	$4.71	n.a.	--
Stock Price	$23.57	n.a.	--
P/E ratio		6.0	-Select-PoorRich Item 24
P/CF ratio		3.5	-Select-PoorRich Item 26
M/B ratio		n.a.	--

So, the firm appears to be -Select-badly good item 28 managed

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ECON 2560 Chapter Notes - Chapter 3: Tax Rate, Factor X, Dividend Tax

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