Which organizational forms give their owners limited liability

Managerial Accting

What is the most important difference between a corporation and all other organizational forms?

2.

What does the phrase limited liability mean in a corporate context?

3.

Which organizational forms give their owners limited liability?

4.

What are the main advantages and disadvantages of organizing a firm as a corporation?

5.

Explain the difference between an S corporation and a C corporation.

6.

You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How much is left for you after all taxes are paid?

7.

Repeat Problem 6 assuming the corporation is an S corporation.

8.

In early 2009, General Electric (GE) had a book value of equity of $105 billion, 10.5 billion shares outstanding, and a market price of $10.80 per share. GE also had cash of $48 billion, and total debt of $524 billion. Three years later, in early 2012, GE had a book value of equity of $116 billion, 10.6 billion shares outstanding with a market price of $17 per share, cash of $84 billion, and total debt of $410 billion. Over this period, what was the change in GE’s

· a. market capitalization?

· b. market-to-book ratio?

· c. enterprise value?

11.

Suppose that in 2013, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income, interest expenses are unchanged, and taxes are the same percentage of pretax income as in 2012.

· a. What is Global’s EBIT in 2013?

· b. What is Global’s net income in 2013?

· c. If Global’s P/E ratio and number of shares outstanding remains unchanged, what is Global’s share price in 2013?

24.

Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 million upfront in cash; you also issue a bill for the customer to pay the remaining balance of $4 million in 30 days. Suppose your firm’s tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following:

· a. Revenues

· b. Earnings

· c. Receivables

· d. Inventory

· e. Cash

29.

In fiscal year 2011, Starbucks Corporation (SBUX) had revenue of $11.70 billion, gross profit of $6.75 billion, and net income of $1.25 billion. Peet’s Coffee and Tea (PEET) had revenue of $372 million, gross profit of $72.7 million, and net income of $17.8 million.

· a. Compare the gross margins for Starbucks and Peet’s.

· b. Compare the net profit margins for Starbucks and Peet’s.

· c. Which firm was more profitable in 2011?

30.

In mid-2012, Apple had cash and short-term investments of $27.65 billion, accounts receivable of $14.30 billion, current assets of $51.94 billion, and current liabilities of $33.06 billion.

· a. What was Apple’s current ratio?

· b. What was Apple’s quick ratio?

· c. What was Apple’s cash ratio?

· d. In mid-2012, Dell had a cash ratio of 0.67, a quick ratio of 1.11 and a current ratio of 1.35. What can you say about the asset liquidity of Apple relative to Dell?

31.

See Table 2.5 showing financial statement data and stock price data for Mydeco Corp.

· a. How did Mydeco’s accounts receivable days change over this period?

· b. How did Mydeco’s inventory days change over this period?

· c. Based on your analysis, has Mydeco improved its management of its working capital during this time period?

36.

You are analyzing the leverage of two firms and you note the following (all values in millions of dollars):

Debt

Book Equity

Market Equity

EBIT

Interest Expense

Firm A

500

300

400

100

50

Firm B

80

35

40

8

7

· a. What is the market debt-to-equity ratio of each firm?

· b. What is the book debt-to-equity ratio of each firm?

· c. What is the EBIT/interest coverage ratio of each firm?

· d. Which firm may have more difficulty meeting its debt obligations? Explain.

42.

For fiscal year 2011, Starbucks Corporation (SBUX) had total revenues of $11.70 billion, net income of $1.25 billion, total assets of $7.36 billion, and total shareholder’s equity of $4.38 billion.

· a. Calculate the Starbucks’ ROE directly, and using the DuPont Identity.

· b. Comparing with the data for Peet’s in Problem 41, use the DuPont Identity to understand the difference between the two firms’ ROEs.

43.

Consider a retailing firm with a net profit margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million.

· a. What is the firm’s current ROE?

· b. If the firm increased its net profit margin to 4%, what would be its ROE?

· c. If, in addition, the firm increased its revenues by 20% (while maintaining this higher profit margin and without changing its assets or liabilities), what would be its ROE?

3.

Calculate the future value of $2000 in

· a. Five years at an interest rate of 5% per year.

· b. Ten years at an interest rate of 5% per year.

· c. Five years at an interest rate of 10% per year.

· d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

4.

What is the present value of $10,000 received

· a. Twelve years from today when the interest rate is 4% per year?

· b. Twenty years from today when the interest rate is 8% per year?

· c. Six years from today when the interest rate is 2% per year?

11.

Suppose you receive $100 at the end of each year for the next three years.

· a. If the interest rate is 8%, what is the present value of these cash flows?

· b. What is the future value in three years of the present value you computed in (a)?

· c. Suppose you deposit the cash flows in a bank account that pays 8% interest per year. What is the balance in the account at the end of each of the next three years (after your deposit is made)? How does the final bank balance compare with your answer in (b)?

12.

You have just received a windfall from an investment you made in a friend’s business. He will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000 at the end of the year after that (three years from today). The interest rate is 3.5% per year.

· a. What is the present value of your windfall?

· b. What is the future value of your windfall in three years (on the date of the last payment)?

27.

· Your oldest daughter is about to start kindergarten at a private school. Tuition is $10,000 per year, payable at the beginning of the school year. You expect to keep your daughter in private school through high school. You expect tuition to increase at a rate of 5% per year over the 13 years of her schooling. What is the present value of the tuition payments if the interest rate is 5% per year? How much would you need to have in the bank now to fund all 13 years of tuition?

Chapter 3

10.

Your firm has identified three potential investment projects. The projects and their cash flows are shown here:

Project

Cash Flow Today ($)

Cash Flow in One Year ($)

A

−10

20

B

5

5

C

20

−10

Suppose all cash flows are certain and the risk-free interest rate is 10%.