Question

Use the following financial data for Greta’s Gadgets, Inc.

Greta’s Gadgets, Inc.

Income Statement
For the Year Ended December 31, 2014

Sales	$4,000,000
– Costs and expenses @ 90%	3,600,000
Earnings before interest & taxes	$   400,000
– Interest (.10*$1,000,000)	100,000
Earnings before taxes	$   300,000
Taxes @ 40%	120,000
Net income	$   180,000

Greta’s Gadgets, Inc.

Balance Sheet

As of December 31, 2014

Assets		Liabilities and Stockholders’ Equity
Current assets	$              0	Current liabilities	$             0
Fixed assets	2,000,000	Long-term debt @ 10%	1,000,000
Total assets	$2,000,000	Total liabilities	$1,000,000
		Common stock equity	1,000,000
		Total liabilities and stockholders’     equity	$2,000,000

1. Calculate the current (2014) net profit margin, total asset turnover, assets-to-equity ratio, return on total assets, and return on common equity for Greta’s. Show your calculations!

2. Show mathematically the tax disadvantage to organizing a U.S. business today as a corporation versus a partnership, given the following assumptions. All earnings will be paid out as dividends, and operating income before taxes will be $1,500,000. The effective corporate tax rate is 35%, and the tax rate on corporate dividends is 15%. The average personal tax rate for partners in the business is 35%.

Tax Table

Taxable income over	Not over	Tax Rate
$                0	$       50,000	15%
50,000	75,000	25%
75,000	100,000	34%
100,000	335,000	39%
335,000	10,000,000	34%
10,000,000	15,000,000	35%
15,000,000	18,333,333	38%
18,333,333	...............	35%

3. Refer to the Tax Table. First Watch, Inc. has a pretax income of $3,755,250. What is the company’s average tax rate, marginal tax rate and tax liability?

4. The Park Corp. had earnings before interest and taxes of $500,000 and had a depreciation expense of $200,000 this last year. If the firm was subject to an average tax rate of 30%, what was Park’s operating cash flow for the year? If you need to, assume that Park’s interest expense was zero for the year.

5. List and briefly describe the three general areas of responsibility for a financial manager.

6. Give some examples of ways in which manager's goals can differ from those of shareholders.

Galaxy Interiors

2011 Income Statement ($ in Millions)

Net Sales: $21415

Cost of goods sold: 16408

Depreciation: 1611

Earnings before Interest and taxes: 3396

Interest Paid: 1282

Taxable Income: 2114

Less Taxes: 740

Net Income: 1374  

Galaxy Interiors  

2010 and 2011 Balance Sheet ($ in millions)

cash: $668(2010) $297(2011)

Accounts Rec: 1611(2010) 1527(2011)

Inventory:3848(2010) 2947(2011)

Total: $6127(2010) $4771(2011)

Net fixed assets: 17489(2010) 17107(2011)

Total assets: $23616(2010) $21878(2011)

Accounts payable: $1694 (2010) $1532 (2011)  

Notes payable: 2500 (2010) 0 (2011)

Total: $4194 (2010) $1532 (2011)  

Long term debt: 9800 (2010) 10650 (2011)  

Common stock: 7500 (2010) 7000 (2011)

Retained Earnings: 2122 (2010) 2696 (2011)

Total liab. & Equity: $23616 (2010) $21878 (2011)  

7. What is the cash flow from assets for 2011? What is the cash flow to creditors for 2011? What is the cash flow to stockholders for 2011? Show your calculations!

8. Discuss the difference between book values and market values and explain which one is more important to the financial manager and why.

9. It is commonly recommended that the managers of a firm compare the performance of their firm to that of its peers. Increasingly, this is becoming a more difficult task. Explain some of the reasons why comparisons of this type can frequently be either difficult to perform or produce misleading results.

Answer 1

Note: All given questions are separate & independent. So as per rule I am answering first question including all its parts.

Net profit margin;

Net profit margin = (Net income * 100 / Sales)

Net income = $180000

Sales = $4000000

Now let’s put the values in the above given formula;

Net profit margin ($180000 * 100 / $4000000) = 4.5%

Total asset turnover;

Total asset turnover = (Sales / Total assets)

Total assets = $2000000

Sales = $4000000

Now let’s put the values in the above given formula;

Total asset turnover ($4000000 / $2000000) = 2 times

Asset to equity ratio;

Asset to equity ratio = (Total assets / Equity)

Total assets = $2000000

Equity = $1000000

Now let’s put the values in the above given formula;

Asset to equity ratio ($2000000 / $1000000) = 2 times

Return on total assets;

Return on total assets = (Net income * 100 / Total assets)

Total assets = $2000000

Net income = $180000

Now let’s put the values in the above given formula;

Return on total assets ($180000 * 100 / $2000000) = 9%

Return on common equity;

Return on common equity = (Net income * 100 / Common stock equity)

Common stock equity = $1000000

Net income = $180000

Now let’s put the values in the above given formula;

Return on common equity ($180000 * 100 / $1000000) = 18%