BA 620 Managerial Finance
Group Problem Set 1: This problem Set is based on materials covered in module 1/week 1. It is designed for you to demonstrate your understanding of basic financial statements, financial statement analysis, break-even concepts, financial and operating leverages. Before you start this assignment, please review weeks 1 and 2 materials thoroughly.
Finance date of Adams Stores, Inc. for the year ending 2016 and 2017.
Items
Sales
Cash
Other Expenses
Retained Earnings
Long-term debt
Cost of goods sold
Depreciation
Short-term investments
Fixed Assets
Interest Expenses
Shares outstanding (par value
= $4.60)
Market Price of stock Accounts Receivable
Accounts payable
Inventory
Notes Payable
Accumulated Depreciation
2016
$3,432,000
9,000 340,000
203,768
323,432
2,864,000 18,900
48,600
491,000
62,500
100,000
8.50 351,200
145,600
715,200
200,000
146,200
2017
$5,834,400
7,282
720,000
97,632 1,000,000
4,980,000
116,960
20,000
1,202,950
176,000
100,000
6 632,160
324,000
1,287,360 720,000
263,160
Accruals
136,000
284,960
Tax Rate
40%
40%
Instructions:
As a group, complete the following activities using the financial information above:
Part 1: Financial Statements
A. Prepare the income statement for 2016 and 2017. Include statement of retained earnings for 2017
B. Prepare the balance sheet for 2016 and 2017
C. Prepare Common-Size financial statements of income statement and balance sheet.
D. Prepare Statement of Cash Flows
Part 2: Financial Statement Analysis
A. Based on your financial statements (from Part 1), calculate the following ratios for the two years. Show all your calculations in good form. Show your formulas. If you use excel, each calculation need to show the excel formula
Current ratio
Quick ratio
Inventory turnover (times)
Average collection period (days)
Total asset turnover (times)
Debt ratio
Times interest earned
Gross profit margin
Net profit margin
Return on total assets
Return on equity
P/E ratio
Return on equity using DuPont Analysis
B. Comments on the ratios by comparing 2016 to 2017 ratios.
C. Assume Adams Stores, Inc. is a retail company similar to WalMart, Myers, or Target. Compare 2017 ratios to the industry average. Please note that Adams Stores, Inc. is not a real company. To find comparable industry ratios, you need to search for industry ratios for retail. See information on Moodle for instructions on how to find industry ratios. Based on the industry average, how is Adams Stores, Inc. doing financially?
Part 3: Break-even, Financial and Operating Leverages
Johnson Products, Inc.
Income Statement
For the Year Ended December 31, 2018
Sales (40,000 bags at $50 each) …………………………….
$2,000,000
Less: Variable costs (40,000 bags at $25) …………….
1,000,000
Fixed costs ……………………………………………………..
600,000
Earnings before interest and taxes …………………………
400,000
Interest expense …………………………………………………..
120,000
Earnings before taxes ………………………………………….
280,000
Income tax expense (20%) ……………………………………
56,000
Net income …………………………………………………………
$ 224,000
Based on the information above, calculate (show all calculations and responses in good form):
a. Break-even in units (in dollars and units). Explain what your numbers mean. As a manager, how would you use the numbers in financial planning?
b. What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?
c. What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?
Specific Instructions:
1. Complete and submit your assignment no later than the last day of Module 1/Week 1.
2. Include only the names of your group members who participated in this assignment when you submit.
3. Submit only one copy per group.
4. You may use Excel or Word. Please DO NOT use any other format such PDF, etc.
Side Note: Please note that this is not the type of assignment where the assignment is
divided and each student completes the part that is assigned. Each person in your
group need participate fully in the completion of each part of the assignment.
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