Q1. Why is profit maximization, by itself, an inappropriate goal? What is meant by the goal of maximization of shareholder wealth?
Q2. What issue does agency theory examine? Why is it important in a public corporation rather than in a private corporation? Answer in your own words. Do not copy from anywhere.
Q3. Stein Books Inc. sold 1,900 finance textbooks for $250 each to High Tuition University in 20X1. These books cost $210 to produce. Stein Books spent $12,200 (selling expense) to convince the university to buy its books.
Depreciation expense for the year was $15,200. In addition, Stein Books borrowed $104,000 on January 1, 20X1, on which the company paid 12 percent interest. Both the interest and principal of the loan were paid on December 31, 20X1. The publishing firm's tax rate is 30 percent.
Did Stein Books make a profit in 20X1? Please verify with an income statement presented in good form.
Do your own work. Do not copy from anywhere.
Q4. Botox Facial Care had earnings after taxes of $370,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was $31.50. In 20X2, earnings after taxes increased to $436,000 with the same 200,000 shares outstanding. The stock price was $42.00.
a. Compute earnings per share and the P/E ratio for 20X1. (The P/E ratio equals the stock price divided by earnings per share.)
b. Compute earnings per share and the P/E ratio for 20X2.
c. Give a general explanation of why the P/E ratio changed.
Do your own work. Do not copy from anywhere.
Q5. Identify whether each of the following items increases or decreases cash flow:
Increase in accounts receivable Decrease in prepaid expenses
Increase in notes payable Increase in inventory
Depreciation expense Dividend payment
Increase in investments Increase in accrued expenses
Decrease in accounts payable
Do your own work. Do not copy from anywhere.
Q6. Given the financial statements for Jones Corporation and Smith Corporation shown here:
a. To which one would you, as credit manager for a supplier, approve the extension of (short-term) trade credit? Why?
b. In which one would you buy stock? Why?
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JONES CORPORATION
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Current Assets
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Liabilities
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Cash
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$ 20,000
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Accounts payable
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$100,000
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Accounts receivable
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80,000
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Bonds payable (long-term)
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80,000
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Inventory
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50,000
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Long-Term Assets
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Stockholders' Equity
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Fixed assets
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$500,000
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Common stock
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$150,000
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Less: Accumulated depreciation
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(150,000)
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Paid-in capital
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70,000
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Net fixed assets*
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350,000
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Retained earnings
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100,000
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Total assets
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$500,000
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Total liab. and equity
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$500,000
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Sales (on credit)
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$1,250,000
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Cost of goods sold
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750,000
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Gross profit
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500,000
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Selling and administrative expense†
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257,000
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Less: Depreciation expense
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50,000
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Operating profit
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193,000
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Interest expense
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8,000
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Earnings before taxes
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185,000
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Tax expense
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92,500
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Net income
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$ 92,500
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*Use net fixed assets in computing fixed asset turnover.
†Includes $7,000 in lease payments.
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SMITH CORPORATION
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Current Assets
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Liabilities
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Cash
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$ 35,000
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Accounts payable
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$ 75,000
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Marketable securities
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7,500
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Bonds payable (long-term)
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210,000
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Accounts receivable
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70,000
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Inventory
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75,000
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Long-Term Assets
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Stockholders' Equity
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Fixed assets
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$500,000
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Common stock
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$ 75,000
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Less: Accum. dep
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(250,000)
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Paid-in capital
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30,000
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Net fixed assets*
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250,000
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Retained earnings
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47,500
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Total assets
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$437,500
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Total liab. and equity
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$437,500
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*Use net fixed assets in computing fixed asset turnover.