Principles of Managerial Finance Custom Edition for Wilmington University, 4/e
4th Edition
ISBN: 9781323419571
Author: Gitman
Publisher: Pearson Education
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Chapter 7, Problem 7.1WUE
Summary Introduction
To determine: The debt amount of the corporation.
Introduction: Common stock is a security which represents the ownership in company. Common stock holder have are right to take decision on corporate policy.
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Using the financial statements mentioned above estimate the annual rate of interest paid by the corporation (cost of debt). Also, find the tax rate and capitalization ratio (proportions among equity and debt). Using these values that you have found estimate the annual weighted cost of capital (WACC) of the corporation.
Income statement
PERIOD ENDING:
12/31/2019
Total Revenue
$20,972,000
Cost of Revenue
$17,755,000
Gross Profit
$3,217,000
OPERATING EXPENSES
Research and Development
$0
Sales, General and Admin.
$938,000
Non-Recurring Items
$138,000
Other Operating Items
$341,000
Operating Income
$1,800,000
Add'l income/expense items
$180,000
Earnings Before Interest and Tax
$1,993,000
Interest Expense
$394,000
Earnings Before Tax
$1,599,000
Income Tax
$326,000
Minority Interest
$13,000
Equity Earnings/Loss Unconsolidated Subsidiary
$0
Net Income-Cont. Operations
$1,286,000
Net Income
$1,273,000
Net Income Applicable to Common Shareholders…
The balance sheet for Solomon Corporation follows:
Current assets $ 237,000
Long-term assets (net) 752,000
Total assets $ 989,000
Current liabilities $ 156,000
Long-term liabilities 450,000
Total liabilities 606,000
Common stock and retained earnings 383,000
Total liabilities and stockholders’ equity $ 989,000
Required
Compute the Debt-to-assets ratio
The following information pertains to Austin, Incorporated and Huston Company.
Account Title
Austin
Huston
Current assets
$ 90,000
$ 87,500
Total assets
320,000
680,000
Current liabilities
29,250
43,750
Total liabilities
210,000
530,000
Stockholders’ equity
290,000
150,000
Interest expense
17,800
21,200
Income tax expense
35,600
30,800
Net income
90,000
93,700
Requireda-1. Compute each company’s debt-to-assets ratio, current ratio, and times interest earned (EBIT must be computed).a-2. Which company has the greater financial risk?b. Compute each company’s return-on-equity ratio and return-on-assets ratio. Use EBIT instead of net income when computing the return-on-assets ratio.
Chapter 7 Solutions
Principles of Managerial Finance Custom Edition for Wilmington University, 4/e
Ch. 7.1 - What are the key differences between debt and...Ch. 7.2 - What risks do common stockholders take that other...Ch. 7.2 - Prob. 7.3RQCh. 7.2 - Explain the relationships among authorized shares,...Ch. 7.2 - Prob. 7.5RQCh. 7.2 - Prob. 7.6RQCh. 7.2 - Explain the cumulative feature of preferred stock....Ch. 7.2 - Prob. 7.8RQCh. 7.2 - Prob. 7.9RQCh. 7.2 - Prob. 7.10RQ
Ch. 7.2 - Prob. 7.11RQCh. 7.3 - Prob. 1FOECh. 7.3 - Describe the events that occur in an efficient...Ch. 7.3 - Prob. 7.13RQCh. 7.3 - Describe, compare, and contrast the following...Ch. 7.3 - Describe the free cash flow valuation model, and...Ch. 7.3 - Explain each of the three other approaches to...Ch. 7.4 - Prob. 7.17RQCh. 7.4 - Assuming that all other variables remain...Ch. 7 - Prob. 1ORCh. 7 - Prob. 7.1STPCh. 7 - Prob. 7.2STPCh. 7 - Prob. 7.1WUECh. 7 - Prob. 7.2WUECh. 7 - Prob. 7.3WUECh. 7 - Prob. 7.4WUECh. 7 - Prob. 7.5WUECh. 7 - Prob. 7.6WUECh. 7 - Authorized and available shares Aspin...Ch. 7 - Prob. 7.2PCh. 7 - Learning Goal 2 P7-3 Preferred dividends In each...Ch. 7 - Learning Goal 2 P7-4 Convertible preferred stock...Ch. 7 - Learning Goal 4 P7-5 Preferred stock valuation TXS...Ch. 7 - Prob. 7.6PCh. 7 - Preferred stock valuation Jones Design wishes to...Ch. 7 - Learning Goal 4 P7-8 Common stock value: Constant...Ch. 7 - Common stock value: Constant growth McCracken...Ch. 7 - Prob. 7.10PCh. 7 - Prob. 7.11PCh. 7 - Prob. 7.12PCh. 7 - Learning Goal 4 P7-14 Common stock value: Variable...Ch. 7 - Prob. 7.14PCh. 7 - Prob. 7.15PCh. 7 - Prob. 7.16PCh. 7 - Prob. 7.17PCh. 7 - Prob. 7.19PCh. 7 - Prob. 7.20PCh. 7 - Prob. 7.21PCh. 7 - Prob. 7.22PCh. 7 - Prob. 7.23PCh. 7 - Prob. 7.24P
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- Owners equity represents which of the following? A. the amount of funding the company has from issuing bonds B. the sum of the retained earnings and accounts receivable account balances C. the total of retained earnings plus paid-in capital D. the business owners/owners share of the company, also known as net worth or net assetsarrow_forwardAssume you are given the following relationships for the Haslam Corporation: Calculate Haslam’s profit margin and liabilities-to-assets ratio. Suppose half its liabilities are in the form of debt. Calculate the debt-to-assets ratio.arrow_forwardA corporation has $86,000 in total assets, $33,000 in total liabilities, and a $15,600 credit balance in retained earnings. What is the balance in the contributed capital account? a) 37,400 b) 53,000 c) 68,600 d) 48,600arrow_forward
- Given the balance sheet for the Moderately Large Corporation (Table 4–4),answer the following:a. For each year, calculate the following ratios: current, quick, debt-to-asset,and debt-to-equity.b. In a written explanation, state what each ratio means.c. Compare the ratios for the 2-year period and determine if the MLC is sufficientlyliquid.d. How well is the MLC managing its debt?arrow_forwardIf you were (or are) an investor, would you lend your own money to a company with a Debt/Assets ratio (a "Total Debt Ratio") of 87%?arrow_forwardhe following information pertains to Austin, Incorporated and Huston Company: Account Title Austin Huston Current assets $ 85,000 $ 85,000 Total assets 590,000 660,000 Current liabilities 23,375 42,500 Total liabilities 310,000 514,500 Stockholders’ equity 280,000 145,500 Interest expense 17,600 21,100 Income tax expense 35,200 30,600 Net income 88,000 91,400 Required a-1. Compute each company’s debt-to-assets ratio, current ratio, and times interest earned (EBIT must be computed). Note: Round your "Debt-arrow_forward
- Describe” the Ch9 - return on assets ratio. Explain the factors used in the formula, how the ratio assists the investor in evaluating a company’s performance, and whether it assesses liquidity, solvency, or profitability. Using the numbers in the recent Balance Sheet (Statements of Financial Position) and Income Statement (Statement of Operations) of a U.S. public corporation (state page numbers from the Form 10-K Annual Report), show your calculation and “analyze” the return on assets ratio for a public corporation and its competitor. Describe if the company is doing well in comparison to its competitor’s ratio results.arrow_forwardThe balance sheet for Munoz Corporation follows: Current assets Long-term assets (net) Total assets Current liabilities Long-term liabilities Total liabilities Common stock and retained earnings Total liabilities and stockholders' equity $ 235,000 762,000 $997,000 $160,000 457,000 617,000 380,000 $997,000 Required Compute the following. (Round "Ratios" to 1 decimal place.) ace Working capital Current ratio Debt to assets ratioarrow_forwardThe balance sheet for Fanning Corporation follows: Current assets $ 247,000 Long-term assets (net) 752,000 Total assets $ 999,000 Current liabilities $ 144,000 Long-term liabilities 452,000 Total liabilities 596,000 Common stock and retained earnings 403,000 Total liabilities and stockholders’ equity $ 999,000 RequiredCompute the following. (Round "Ratios" to 1 decimal place.) Working capital Current ratio Debt-to-assets ratio Debt-to-equity ratioarrow_forward
- The balance sheet for Fanning Corporation follows: Current assets 237,000 Long-term assets (net) 757,000 Total assets $994,000 Current liabilities $146,000 Long-term liabilities 443,000 Total liabilities 589,000 Common stock and retained earnings 405,000 Total liabilities and stockholders' equity $994,000 Compute the following. (Round "Ratios" to 1 decimal place.) Working capital Current ratio Debt to assets ratio Debt to equity ratioarrow_forwardFinney Corporation has the following data as of December 31, 2018: Compute the debt to equity ratio at December 31,2018. Total Current Liabilities $36,210 Total Stockholders' Equity $ ? Total Current Assets 32,670 Other Assets 33,500 Long-term Liabilities 204,970 Property, Plant, and Equipment, Net 330,610arrow_forwardA company has total assets of $500,000, total liabilities of $200,000, and total equity of $300,000. Calculate the company's debt-to-equity ratio.arrow_forward
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