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The Wendt Corporation

Chapter 2 problem 2-8, p. 79 The Wendt Corporation had $10. 5 million of taxable income. a. What is the company’s federal income tax bill for the year? Answer: $10. 5 x 0. 35 = $525, 000. 00 b. Assume the firm receives an additional $1 million of interest from some bonds it owns. What is the tax on this interest income? Answer: $1,000,000. 00 x 0. 35 = $350,000. 00 c. Now assume that Wendt does not receive the interest income but does receive an additional $1 million as dividends on some stock it owns. What is the tax on this dividend income? Answer: $1. 000,000. 00 x 0. 105 = $105, 000. 00 Chapter 3 problem, 3-6 p. 112 (Du Pont Analysis)

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Donaldson & Sons has a ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. What is the company’s total assets turnover? Answer: ROA = 10%; PM = 2%; ROE = 15% PM = NI/Sales = ROA = NI/TA = NI/Sales x Sales/TA NI/TA = PM x TATO 10% = 2% x TATO = TATO = 5 What is the firm’s equity multiplier? Answer: ROE = PM x TATO x TA/E [Equity Multiplier] DU Pont= 15% = 2% x 5 x EM 15%/10% = EM = 1. 5 Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial datat. Debt Ratio: 50%

Quick Ratio: 0. 80 Total Assets Turnover: 1. 5 Days Sales Outstanding: 36. 5 days (based upon 365 day year) Gross Profit margin on sales: (Sales – Cost of goods sold)/Sales = 25% Inventory turnover ratio: 5. 0 Balance Sheet Cash$27,000Accounts Payable$90,000 AR$45,000Long-term debt$60,000 Inventories$67,500Common Stock$52,500 Fixed assets$169,500Retained Earnings$97,500 Total assets$300,000Total liabilities &$300,000 Equity Sales$450,000Cost of goods sold $337,500 Answer: Asset turnover = Revenue / Total Assets Total Assets = ($300,000 x 1. 5) (revenue) = $40,000 Debt Ratio = Total Liabilities / Total Assets

Total Assets = ($300,000 x 0. 20) (debt ratio) = $150,000 Total Liabilities = $150. 000. 00 (accts payable unknown) Long Term debt = $60,000 Accounts Payable = ($150,000 – $60,000) = $90,000 Days Sales outstanding = 36. 5 days = AR Balance/ Sales x 365 DSO = 36. 5 AR = 10% of $450,000 = $45,000 GPM = 25%; Cost of Goods Sold = (. 75 x $450,000) $337,500 QR = (Cash + AR)/CL. = $90,000 x . 80) $72,000 Cash = ($72,000 – $45,000) $27,000 Debt Ratio = 5. 0, inventory balance = (337,500/5) $67,500 Fixed Assets = ($300,000 – $27,000, – $45,000, – $67,500) $169,500 Balance of Common Stock = $300,000 – $150,000 – $97,500) $52,500

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