Question

Down Coats, Inc. originally forecasted the following financial data for next year: Sales = $800,000, Cost of goods sold = $500,000, operating expense and depreciation = $87,500 and Interest expense = $24,000. The firm believes that COGS will always be 62.5% of sales. Suppose the firm wants to achieve a net income of $160,000. Assuming the operating costs, depreciation and interest expense will remain the same, how large must sales be to achieve this goal? Assume a 32% tax rate.

A. more than $930,000

B. more than $905,000 but less than $930,000

C. more than $880,000 but less than $905,000

D. more than $855,000 but less than $880,000

E. less than $855,000

Winnie Peg, Inc. balance sheet lists net fixed assets as $20 million. The fixed assets could currently be sold for $25 million. Winnie Peg's current balance sheet shows current liabilities of $7 million and net working capital of $3 million. If all the current accounts were liquidated today, the company would receive $9 million cash after paying $7 million in liabilities. What is the book value of Winnie Peg’s assets today? What is the market value of these assets?

A. $10 million, $16 million
B. $10 million, $35 million

C. $30 million, $35 million
D. $30 million, $41 million
E. more than $30 million, more than $41 million

You are considering a stock investment in one of two firms (AllDebt, Inc. and AllEquity, Inc.), both of which operate in the same industry and have identical operating income of $3 million. AllDebt, Inc. finances its $6 million in assets with $5 million in debt (on which it pays 5 percent interest annually) and $1 million in equity. AllEquity, Inc. finances its $6 million in assets with no debt and $6 million in equity. Both firms pay a tax rate of 40 percent on their taxable income. What are the asset funders' (the debt holders and stockholders') resulting return on assets for the two firms? (Hint: Interest is a return to the asset funders)

A. 27.5%, and 30.0%, respectively

B. 30.0%, and 27.5%, respectively

C. 31.7%, and 30.0%, respectively

D. 33.3%, and 30.0%, respectively

E. 50.0%, and 50.0%, respectively

Sage Shoes, Inc. had 2015 taxable income of $4,450,000 from operations after all operating costs but before interest charges of $750,000, dividends received of $900,000, dividends paid of $500,000, and income taxes. Using the tax schedule in Table 2.3, what is Sage Shoes' income tax liability? What is Sage's average tax rate on taxable income from operations?

A. $1,349,800, 30.3%, respectively

B. $1,349,800, 34.0%, respectively

C. $1,513,000, 34.0%, respectively

D. $1,564,000, 34.0%, respectively

E. $1,564,000, 35.2%, respectively

Answer 1

1)	Down Coats:
	Desired net income	$         1,60,000
	Income before taxes = 160000/(1-32%) =	$         2,35,294
	Add: Operating expense & depreciation + Interest	$         1,11,500
	EBITDA	$         3,46,794
	Required sales = EBITDA/(1-62.5%) =	$         9,24,784
	Answer: Option [B] More than $905,000 but
	less than $930,000.
2)	Winnie Peg. Inc.
	Book value:
	Net fixed assets+Current assets = 20+(7+3) =	$                     30	million
	Market value:
	= 25+9+7 =	$                     41	million
	Answer: Option [D] $30 million, $41 million
3)	Stock investment:
	AllDebt Inc:
	NI = (3-5*5%)*60% =	$                 1.65	million
	Interest = 5*5% =	$                 0.25	million
	Total return to funders	$                 1.90	million
	Return = 1.90/6 =	31.7%
	AllEquity:
	NI = 3*60% =	$                 1.80	million
	Total return to funders = 1.80/6 =	30.0%
	Answer: Option [C] 31.7% and 30.0%
4)	Sage Shoes:
	Taxable income = 4450000-750000+900000*30% =	$       39,70,000
	Tax liability = 113900+(3970000-335000)*34% =	$       13,49,800
	Average tax rate = 1349800/3970000 =	34.0%
	Option [B] $1349800, 34.0% respectively.