Financial Management
February 07, 2012

Question2. 8 The Wendt Corporation has $10.5 million of taxable income

(A) What is the company’s federal income tax bill for a year
The solution Tax = $3,400,000 + (10,500,000 - $10,000,000) (0.35) = $3575,000

(B) Assume the firm receives an additional $1 million of interest income from bonds it owns. What is the tax on this interest income?
The solution 1,000,000.00 x 0.35 = $3500, 000.00

(C) Now assume that Wendt does not receive the interest income but does receive an additional $1 million as dividends on some stock it owns. What is the tax on this dividend income?
The solution is to use $1,000,000.00 x 0.105 = $105, 000.00

Q 3.6 Donaldson & Son has an ROA of 10%, a 2% profit margin, and a return on equity equal to 15%. What is the company’s total assets turnover? What is the firm’s equity multiplier? ROE = ROA x Equity Multiplier ROA = (Profit Margin) (Total asset turnover) 15 = 10 = 1.5 = Equity Multiplier 10/2 = 5 = Total Asset turnover S/TA = 5; TA/E = 1.5

Question 3.11 Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial data:
Debt ratio: 50%
Quick ratio: 0.80
Total assets turnover: 1.5
Day’s sales outstanding: 36.5 days
Gross profit margin on sales: (Sales-Cost of goods sold)/Sales = 25%
Inventory turnover ratio: 5.0

Balance Sheet for Hoffmeister Industries Cash $27,000.00 Accounts Payable $90,000.00
Account Receivable $45,000.00 Long-term Debt $60000.00
Inventories $67,500.00 Common Stock $52,500.00
Fixed Assets $169500.00 Retained Earnings $97,500.00
Total Assets $300,000.00 TTL Liabilities & Equity $300,000.00
Sales $450,000.00 Cost of goods sold