E3.8. Pricing Multiples: General Mills, Inc. (Medium)
General Mills, the consumer foods company, traded at 1.6 times sales in 2011. It was
reporting a net profit margin on its sales of 10.4 percent. What was its P/E ratio?
E3.9. Measuring Value Added (Medium)
a. Buying a stock. A firm is expected to pay an annual dividend of $2 per share forever.
Investors require a return of 12 percent per year to compensate for the risk of not
receiving the expected dividends. The firm's shares trade for $19 each. What is the
value added by buying a share at $19?
b. An investment within a firm. The general manager of a soccer club is considering pay-
ing $2.5 million per year for five years for a "star" player, along with a $2 million up-
front signing bonus. He expects the player to enhance gate receipts and television
advertising revenues by $3.5 million per year with no added costs. The club requires a
9 percent return on its investments. What would be the value added from the acquisi-
tion of the player?

THE COMPANY:

GESTION S.A., is a company whose activity is the commercialization of articles
several, aimed at the flower sector. Your average sales revenue is in order
of $ 7,000,000 annually. Statistically, the gross profit margin obtained in
this type of business is 27%.
Credit sales correspond to a quarter of its total sales. The condition
current, for credit sales it is 1/10, n / 30. Of those who make purchases on credit,
who take advantage of the discount for prompt payment represent 60% of total sales
on credit. The average collection on credit sales is 40 days.
As cover for possible unpaid credits, the company allocates 2% of sales to
credit. In the company's budget, 3.5% of sales are allocated to credit to
collection expenses.

THE SITUATION:
They are meeting, reviewing the situation of the company, Carlos Espinoza, General Manager
and Fernando Tapia, Financial Manager, and despite the excellent results of the
They are committed to increasing income.
Fernando made an exhibition to Carlos, in which he concludes that you cannot
increase revenue by increasing gross profit margin, so suggest how
alternative increase sales.
Carlos requests Ricardo Jácome, Commercial Manager, that until the next day,
Prepare and present a project that meets the following expectations:
Increase total sales by 20%; considering that, of the total sales, the
70% are cash, and that 75% of credit sales take advantage of the discount for
I'll pay soon.

THE PROPOSAL:
After the deadline for presenting the result, the three meet again and
Ricardo proposes the following:
• That the credit condition is 2/10, n / 40.
• That the average collection period of days reaches 60 days.
• That 5% be assigned to collection expenses.
• Allocate 4% of annual sales for bad loans.
Carlos listened carefully and at the end, he directed his gaze to where he was
Fernando, waiting for your comments.

THE QUESTION:
What will be Fernando's comment, is it financially convenient for the company
accept the proposal to change their credit policies in this way, knowing that the market
pay up to 12% on bank investments?
Explain your calculations and support the reason for your comment as if you were
Fernando.

The following selected accounts appear in the adjusted trial balance for Bender Company:

Instructions
Identify the accounts that would be included in the post-closing trial balance.

1. ABC expends $500,000 for work performed under a contract with a total contract price of $3 million and estimated costs of $2.5 million. It sends a bill to the customer for $400,000 under the terms of the contract.

a. How much revenue and gross profit should the company recognize in the income statement?

b. How is the $400,000 billing reported on the balance sheet?

Red Canyon T-shirt Company operates a chain of T-shirt shops in the southwestern United States. The sales manager has provided a sales forecast for the coming year, along with the following information: Quarter 1-49000, Quarter 2-78000, Quarter 3- 39000 Quarter 478000 Budgeted Unit Sales. Each T-shirt is expected to sell for $24. The purchasing manager buys the T-shirts for $10 each. The company needs to have enough T-shirts on hand at the end of each quarter to fill 34 percent of the next quarter’s sales demand. Selling and administrative expenses are budgeted at $98,000 per quarter plus 14 percent of total sales revenue. Required: 1. Determine budgeted sales revenue for each quarter. 2. Determine budgeted cost of merchandise purchased for each quarter. 3. Determine budgeted cost of good sold for each quarter. 4. Determine selling and administrative expenses for each quarter. 5. Complete the budgeted income statement for each quarter.

Exercise 7-28 Publishing; Contribution Income Statement (LO 7-7, 7-8)

Europa Publications, Inc., specializes in reference books that keep abreast of the rapidly changing political and economic issues in Europe. The results of the company’s operations during the prior year are given in the following table. All units produced during the year were sold. (Ignore income taxes.)

Required:
1-a. Prepare a traditional income statement for the company.
1-b. Prepare a contribution income statement for the company.
2. What is the firm’s operating leverage for the sales volume generated during the prior year?
3. Suppose sales revenue increases by 14 percent. What will be the percentage increase in net income?
4. Which income statement would an operating manager use to answer requirement 3?

The following information is given about your company. The company needs raise new capital to expand its facilities. The company’s optimum capital structure has been 40% debt, 10% preferred stock and 50% equity. The company will maintain this capital structure in financing this expansion plan. Currently the company's common stock is traded at a price of $15.65 per share. The last dividend paid on the common stock was $1.25 per share. The company will grow at 6% constant rate for long time in the future. The company's preferred stock is selling at $85 and has a quarterly preferred dividend of $1.35. Flotation costs have been estimated at 8% on the common stocks and 5% on the preferred stocks. The company has some bonds with $1000 par value outstanding, the market price of the bonds is $1025, and the bonds have 14 years to maturity. The coupon rate on those bonds is 8% with semi-annual payments. The tax rate is 40%.

What is the WACC for this company if they will issue new common stocks and new preferred stocks?