Kaelea, Inc., has no debt outstanding and a total market value of $110,000. Earnings before interest and taxes, EBIT, are projected to be $8,800 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 23 percent higher. If there is a recession, then EBIT will be 32 percent lower. The company is considering a $36,000 debt issue with an interest rate of 6 percent. The proceeds will be used to repurchase shares of stock. There are currently 4,400 shares outstanding. Assume the company has a market-to-book ratio of 1.0.

a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

b. Calculate the percentage changes in ROE when the economy expands or enters a recession, assuming no taxes. (A negative answer should be indicated by a minussign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.)

  
Assume the firm goes through with the proposed recapitalization and no taxes.

c. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

d. Calculate the percentage changes in ROE for economic expansion and recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Assume the firm has a tax rate of 35 percent.

e. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for economic expansion and recession. (A negative answer should be indicated by a minus sign.Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

f. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming the firm goes through with the proposed recapitalization. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

Quantitative Problem: Rosnan Industries' 2019 and 2018 balance sheets and income statements are shown below.

1. What is the firm's 2019 current ratio? Round your answer to two decimal places.

1a. The 2019 current ratio indicates that Rosnan has -Select- insufficient,sufficient current assets to meet its current obligations as they come due.

2. What is the firm's 2019 total assets turnover ratio? Round your answer to four decimal places.

2a. Given the 2019 current and total assets turnover ratios calculated above, if Rosnan's 2019 quick ratio is 1.0 then an analyst might conclude that Rosnan's fixed assets are managed -Select-efficiently,inefficiently.

3. What is the firm's 2019 debt-to-capital ratio? Round your answer to two decimal places.

%

3a. If the industry average debt-to-capital ratio is 30%, then Rosnan's creditors have a -Select-smaller,bigger cushion than indicated by the industry average.

4. What is the firm's 2019 profit margin? Round your answer to two decimal places.

%

4a. If the industry average profit margin is 12%, then Rosnan's lower than average debt-to-capital ratio might be one reason for its high profit margin. -Select-True,False

5. What is the firm's 2019 price/earnings ratio? Round your answer to two decimal places.

6. Using the DuPont equation, what is the firm's 2019 ROE? Round your answer to two decimal places.

The comparative balance sheets for 2021 and 2020 and the statement of income for 2021 are given below for Dux Company. Additional information from Dux’s accounting records is provided also. DUX COMPANY Comparative Balance Sheets December 31, 2021 and 2020 ($ in thousands) 2021 2020 Assets Cash $ 129.0 $ 36.0 Accounts receivable 64.0 66.0 Less: Allowance for uncollectible accounts (5.0 ) (4.0 ) Dividends receivable 19.0 18.0 Inventory 71.0 66.0 Long-term investment 31.0 26.0 Land 86.0 40.0 Buildings and equipment 161.0 266.0 Less: Accumulated depreciation (6.0 ) (130.0 ) $ 550.0 $ 384.0 Liabilities Accounts payable $ 29.0 $ 36.0 Salaries payable 18.0 21.0 Interest payable 20.0 18.0 Income tax payable 23.0 24.0 Notes payable 46.0 0 Bonds payable 91.0 50.0 Less: Discount on bonds (2.0 ) (3.0 ) Shareholders' Equity Common stock 210.0 200.0 Paid-in capital—excess of par 24.0 20.0 Retained earnings 99.0 18.0 Less: Treasury stock (8.0 ) 0 $ 550.0 $ 384.0 DUX COMPANY Income Statement For the Year Ended December 31, 2021 ($ in thousands) Revenues Sales revenue $ 440.0 Dividend revenue 19.0 $ 459.0 Expenses Cost of goods sold 152.0 Salaries expense 57.0 Depreciation expense 2.0 Bad debt expense 1.0 Interest expense 40.0 Loss on sale of building 35.0 Income tax expense 48.0 335.0 Net income $ 124.0 Additional information from the accounting records: A building that originally cost $168,000, and which was three-fourths depreciated, was sold for $7,000. The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment. Property was acquired by issuing a 13%, seven-year, $46,000 note payable to the seller. New equipment was purchased for $63,000 cash. On January 1, 2021, bonds were sold at their $41,000 face value. On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time. Cash dividends of $29,000 were paid to shareholders. On November 12, 12,500 shares of common stock were repurchased as treasury stock at a cost of $8,000. Required: Prepare the statement of cash flows for Dux Company using the indirect method. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in thousands (i.e., 10,000 should be entered as 10).)

The comparative balance sheets for 2021 and 2020 and the statement of income for 2021 are given below for Dux Company. Additional information from Dux’s accounting records is provided also.

Additional information from the accounting records:

1. A building that originally cost $72,000, and which was three-fourths depreciated, was sold for $7,000.
2. The common stock of Byrd Corporation was purchased for $5,000 as a long-term investment.
3. Property was acquired by issuing a 13%, seven-year, $34,000 note payable to the seller.
4. New equipment was purchased for $27,000 cash.
5. On January 1, 2021, bonds were sold at their $29,000 face value.
6. On January 19, Dux issued a 5% stock dividend (1,000 shares). The market price of the $10 par value common stock was $14 per share at that time.
7. Cash dividends of $17,000 were paid to shareholders.
8. On November 12, 12,500 shares of common stock were repurchased as treasury stock at a cost of $8,000.

Required:
Prepare the statement of cash flows for Dux Company using the indirect method. (Amounts to be deducted should be indicated with a minus sign. Enter your answers in thousands (i.e., 10,000 should be entered as 10).)

Kaelea, Inc., has no debt outstanding and a total market value of $153,000. Earnings before interest and taxes, EBIT, are projected to be $9,500 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20 percent higher. If there is a recession, then EBIT will be 30 percent lower. The company is considering a $45,300 debt issue with an interest rate of 5 percent. The proceeds will be used to repurchase shares of stock. There are currently 5,100 shares outstanding. Assume the company has a market-to-book ratio of 1.0.

a. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued, assuming no taxes. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

ROE
Recession %
Normal %
Expansion %

b. Calculate the percentage changes in ROE when the economy expands or enters a recession, assuming no taxes. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to the nearest whole number, e.g., 32.)

%?ROE
Recession %
Expansion %

  
Assume the firm goes through with the proposed recapitalization and no taxes.

c. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

ROE
Recession %
Normal %
Expansion %

d. Calculate the percentage changes in ROE for economic expansion and recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

%?ROE
Recession %
Expansion %

Assume the firm has a tax rate of 35 percent.

e. Calculate return on equity, ROE, under each of the three economic scenarios before any debt is issued. Also, calculate the percentage changes in ROE for economic expansion and recession. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

ROE
Recession %
Normal %
Expansion %

%?ROE
Recession %
Expansion %

f. Calculate return on equity, ROE, under each of the three economic scenarios after the recapitalization. Also, calculate the percentage changes in ROE for economic expansion and recession, assuming the firm goes through with the proposed recapitalization. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)

ROE
Recession %
Normal %
Expansion %

%?ROE
Recession %
Expansion %

Hints

Siegel Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.

Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $6,758,325 in manufacturing overhead cost and produce 20,000 units of the deluxe model and 124,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires 0.5 hour. Material and labor costs per unit are as follows:

Required:

1-a. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate.

1-b. Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model.

2. Management is considering using activity-based absorption costing to apply manufacturing overhead cost to products. The activity-based system would have the following four activity cost pools:

Determine the predetermined overhead rate for each of the four activity cost pools.

3. Using the predetermined overhead rates you computed in part (2), do the following:

a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model.

b. Compute the unit product cost of each model (direct materials, direct labor, and manufacturing overhead).

Siegel Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.

Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $6,758,325 in manufacturing overhead cost and produce 20,000 units of the deluxe model and 124,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires 0.5 hour. Material and labor costs per unit are as follows:

    Model
    Deluxe   Regular
Direct materials   $   150      $   116     
Direct labor   $   18      $   10     

Required:

1-a. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate.

1-b. Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model.

2. Management is considering using activity-based absorption costing to apply manufacturing overhead cost to products. The activity-based system would have the following four activity cost pools:

Activity Cost Pool   Activity Measure   Estimated Overhead Cost
Purchasing   Purchase orders issued   $   238,650
Processing   Machine-hours      4,800,000
Scrap/rework   Scrap/rework orders issued      585,675
Shipping   Number of shipments      1,134,000
       $   6,758,325

   
Expected Activity

Activity Measure   Deluxe   Regular   Total
Purchase orders issued   430   860   1,290
Machine-hours   19,200   28,800   48,000
Scrap/rework orders issued   475   380   855
Number of shipments   5,040   7,560   12,600

Determine the predetermined overhead rate for each of the four activity cost pools.

3. Using the predetermined overhead rates you computed in part (2), do the following:

a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model.

b. Compute the unit product cost of each model (direct materials, direct labor, and manufacturing overhead).

She developed an ABC system very similar to the one used by Kane​'s
chief rival. Part of the reason Johnson developed the ABC system was because Kane​'s
profits had been declining even though the company had shifted its product mix toward the product that had appeared most profitable under the old system. Before adopting the new ABC​ system, the company had used a plantwide overhead rate based on direct labor hours that was developed years ago.

The​ company's managers expect to produce 1,000 units of each model during the year.

Activity Cost:

Activity.... Allocation Base........ Allocation Rate

Materials handling. . . .Number of parts.... $4.50 per part

Machine setup. . . . . . .Number of setups.... $325.00 per setup

Insertion of parts. . . . .Number of parts.......$31.00 per part

Finishing. . . . . . . . . . . .Finishing direct labor hours....$51.00 per hour

Requirement 1. Compute the total budgeted manufacturing overhead cost for the upcoming year. ​(Enter the rates to two decimal​ places.)

Requirement 2. Compute the manufacturing overhead cost per wheel of each model using ABC. ​(Round the cost allocation base to three decimals and cost per wheel to the nearest​ cent.)

Requirement 3. Compute the​ company's traditional plantwide overhead rate. Use this rate to determine the manufacturing overhead cost per wheel under the traditional system.  

Begin by identifying the formula to compute the current plantwide manufacturing overhead​ rate, then compute the rate. ​(Round your answer to the nearest​ cent.)

Now use the plantwide overhead rate to determine the manufacturing overhead cost per wheel. ​(Round your answers to the nearest​ cent.)

Module Four Homework Assignment

Exhibit A

James Trading Corporation

Balance Sheet

December 31, 20XX

James Trading Corporation

Income Statement

December 31, 20XX

Industry Average Ratios

1. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute the current ratio.

2. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute the quick ratio.

3. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute days outstanding in accounts receivable.

4. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute the gross margin.

5. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute the net income percentage.

6. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute the long term debt to equity ratio.

7. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute the interest coverage.

8. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute the ROA.

9. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute the ROE.

10. Using the Exhibit A document, compute the following ratio, compare it to the industry average, and comment. Compute the ROE using the DuPont Model.