Week 10 Problems 1. Given the following information: Total assets $100,000 Debt (12% interest rate) $80,000 Equity $20,000 Variable costs of production $14 per unit Fixed cost of production $27,000 Units Sold 12,300 Sales price $19.75 per unit What happens to operating income and net income if output is increased by 10 percent? Verify your answer. Revenue: $19.75*(12,300) = $242,925 Expenses: $14*(12,300) = $172,200 Operating Income: $242,925-$172,200 = $70,725 Net Income: $72,725- (.12*$80,000) = $63,125 With 10% increase in revenue: Revenue: $19.75*(13,530) = $267,217.50 Expenses: $14*(13,530) = $189,420 Operating Income: $267,217.50- $189,420 =$77,797.50 Net Income: $77,797.50 - (.12*$80,000) =$38,197.50 Operating Income rose from $70,725 to $77,797.50 for a 91% increase. Net income dropped from $63,125 to $38,197.50 which cuts losses by $24,927.50.
Profit: the amount of money a business has made over a certain time period. Profit= Total revenue-Total costs. Budgets Budgets Profit Profit Net profit margin: A net profit margin is a ratio that expresses a business’s profit after the deduction of all costs, as a percentage of sales income. Net profit margin= Net profit x 100 / sales revenue Net profit margin: A net profit margin is a ratio that expresses a business’s profit after the deduction of all costs, as a percentage of sales income. Net profit margin= Net profit x 100 / sales revenue Profit is when a business is generating higher revenue than its total costs over a period of time.
Brandywine Income Statement, 2007 Revenue 12,000,000 Expenses: Depreciation 1,500,000 Other Expenses 9,000,000 Total Expenses 10,500,000 Net Income 1,500,000 Total Profit Margin 13% Brandywine Cash Flows Statement, 2007 Cash 12,000,000 Add: Depreciation 1,500,000 Less: Expenses (9,000,000) Net Cash 4,500,000 Supposed the company changed its depreciation calculation procedures (still within GAAP) such that its depreciation expenses doubled. How would this change affect Brandywine’s net income, total profit margin, and cash flow? If Brandywine doubled its depreciation expenses, their expenses would increase and the net income would vanish. As for profit margin it would decrease and the company would not be profitable and the cash flow would increase. For example, Brandywine home care would be as follow: Increase of depreciation Revenue 12,000,000 Expenses: Depreciation 3,000,000 Other Expenses 9,000,000 Total Expenses 12,000,000 Net Income - Total Profit Margin 0% Brandywine Cash Flows Statement, 2007 Cash 12,000,000 Add: Depreciation 3,000,000 Less: Expenses (9,000,000) Net Cash 6,000,000 Explain the difference between cash and accrual accounting.
Brandywine Homecare Income statement Month ending December 31, 2007 Revenue $12,000,000 Total revenue $12,000,000 Expenses: Depreciation $ 1,500,000 Other 12,000,000 x 75/100 = 9,000,000 Total expenses= Depreciation + Other expenses= 1,500,000+ 9,000,000= $10,500,000 Total revenue – total expenses = Net income or Profit - 12,000,000- 10,500,000= 1,500,000 B. What were Brandywine’s 2007 net income, total profit margin, and cash flow? The net income = $1,500,000. total profit margin= total margin and is equal with net income divided by total revenues. $1,500,000/$12,000,000 = 0.125 or 12.5% Each dollar of revenue produces 12.5% of net income or profit.
Problem 17-19 on Dividend Capture Strategy based on Chapter 17 Payout Policy Que Corporation pays a regular dividend of $1 per share. Typically, the stock price drops by $0.80 per share when the stock goes ex-dividend. Suppose the capital gains tax rate is 20%, but investors pay different tax rates on dividends. Absent transactions costs, what is the highest dividend tax rate of an investor who could gain from trading to capture the dividend? Problem 23-5 on Preferred Stock based on Chapter 23 Raising Equity Capital Three years ago,
In brief, if the demand is more than the supply, consumers will pay a larger fraction of the tax. Conversely, if supply is more than demand the firms will pay a larger fraction of the tax (Edmund Quek, 2011). Firm pay one third of the taxes (Economic café, 2011). For example, the initial price and quantity are RM 9 and 9bottles. Firms pay RM3 to the government for each bottle sold and this induces them to increase the price by RM3 at each quantity to maintain profitability.
The price is 1000 and the monopolist's profit is 10000. Example (A more complicated example to show the possibility of two outputs at which MR is equal to MC.) A monopolist's cost function is TC(y) = (y/2500)(y 100)2 + y, so that MC(y) = 3y2/2500 4y/25 + 5. It faces the inverse demand function P(y) = 4 4y/100. Find its output, the associated price, and its profit.
What is the amount of its credit carryover and the last year to which the carryover could be used? Answer: $7,750 carried over to 2004 or 2025 4. Margolin Corporation has a regular taxable income of $120,000. It has a positive adjustment of $90,000, preference items of $50,000 and negative adjustments of $40,000. What is its alternative minimum tax?
Under first in, first out (FIFO), the first costs into inventory are the first costs assigned to costs of goods sold. Last in, last out (LIFO) costing assigns the last costs of inventory to the first costs of goods sold. A fast moving consumer goods company (FMCG) in times of rising prices would pay less income tax if it used the LIFO inventory accounting method. A FMCG in times of rising prices that uses LIFO would be selling its inventory with the highest prices. This would increase the costs of goods sold and lower the net income for the company for that accounting period.
The weighted-average number of common shares outstanding during the year is 200,000 shares, and the weighted-average number of preferred shares outstanding during the year is 10,000 shares. Earnings per share for Clair, Inc. is (round your answer to the nearest cent): $3.25 Correct! Net income minus preferred dividends is divided by the weighted average of common shares outstanding to compute earnings per share - Prior period adjustments are reported as: an addition to (or a deduction from) the beginning balance of retained earnings. orrect! Prior period adjustments are added to (or deducted from) the beginning retained earnings balance.