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INDIVIDUAL ASSIGNMENT QUESTION 1 The 2008 comparative balance sheet and income statement of Motor Trend, Inc., follow.

Motor Trend Comparative Balance Sheet December 31, 2008 2007 Current assets: Cash and cash equivalent Accounts receivable Inventories Plant Assets: Land Net, Equipment Total Assets Current liabilities Accounts payable Accrued liabilities Long-term liabilities: Notes payable Stockholders equity Common stock Retained earnings Total liabilities and stockholders equity $ 14,400 52,500 87,600 49,200 110,900 314,600 $ 34,900 19,400 58,000 143,000 59,300 $314,60 0 $ 19,300 48,900 92,300 18,700 87,400 266,600 27,200 19,900 72,000 125,000 22,500 $266,60 0

Increase (Decrease) $ (4,900) 3,600 (4,700) 30,500 23,400 48,000 7,700 (500) (14,000) 18,000 36,800 $48,900

Motor Trend Income Statement Year Ended December 31, 2008 Revenue Sales revenue Interest Income Total revenue Expenses Cost of goods sold Salary expense Depreciation expense Other operating expense Interest expense
1

$459,000 12,200 471,200 $ 215,900 77,20 0 16,10 0 53,70 0 26,20

0 Income tax expense 0 Total expenses Net Income 404,500 $ 66,700 15,40

Motor Trend had no noncash investing and financing transactions during 2008. During the year, there were no sales of land or equipment, no issuances of notes payable, no retirements of stock, and no treasury stock transactions. Requirements 1. Prepare the 2008 statement of cash flows, formatting operating activities by the indirect method. 2. How will what you learned in this problem help you evaluate an investment? Answer:
Cash flow from operation: Net income Added: 66,700

Depreciation expense
Inventories decrease Payable increase Deducted: Receivables increase

16,100
4,700 7,700 3,600 28,500

Accrued liabilities decrease


Net Cash flow from operation Cash flow from investment: Land purchase Equipment purchase Interest income Net cash flow from investment Cash flow from financing: Stock issues

500

(4,100)
91,100

(30,500) (23,500) 12,200 (41,700)

18,000 2

Financing Dividend Payout Net cash flow from financing

(14,000) (29,900) (25,900) (4,900)

QUESTION 2 Assume that you are purchasing an investment and have decided to invest in a company in the media business. You have narrowed the choice to IBM Corp. and MAC, Inc., and have assembled the following data: Selected income-statement data for the current year: Net sales (all on credit)................... Cost of goods sold.......................... Interest expense.............................. Net income...................................... IBM $467,000 310,000 70,000 MAC $525,000 272,000 22,000 81,000

Selected balance-sheet data at the beginning of the current year: Current receivables, net................................... Inventories....................................................... Total assets...................................................... Common stock, $1 par (20,000 shares)........... $1 par (20,000 shares)........... IBM $ 50,000 92,000 283,000 20,000 MAC $ 58,000 97,000 291,000 20,000

Selected balance-sheet and market-price data at the end of the current year: IBM Current assets: Cash............................................................... Short-term investments.................................. Current receivables, net................................. Inventories..................................................... Prepaid expenses........................................... Total current assets........................................ Total assets........................................................ Total current liabilities...................................... Total liabilities................................................... Common stock, $1 par (20,000 shares)............. $1 par (20,000 shares)............. Total stockholders equity................................. Market price per share of common stock.......... $ 31,000 50,000 42,000 73,000 3,000 199,000 275,000 125,000 162,000 20,000 185,000 $ 70 MAC $ 26,000 28,000 57,000 104,000 4,000 219,000 343,000 118,000 154,000 20,000 207,000 $ 91.30

Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis. Requirements Compute the following ratios for both companies for the current year, and decide which companys stock better fits your investment strategy. MAC is better
IBM MAC

a. Acid-test ratio b. Inventory turnover c. Days sales in average receivables d. Debt ratio e. Earnings per share of common stock f. Price/earnings ratio

0.98 3.75 35.96 0.58 3.5 20

0.94 2.70 39.97 0.44 4.05 22.54

QUESTION 3 Longo National Products sells shirts with team logos. Longo has fixed costs of $601,250 per year plus variable costs of $4.75 per shirt. Each shirt sells for $14.00. Requirements 1. Use the income statement equation approach to compute the number of shirts Longo must sell each year to break even. Break even= (x*14)-[601,250+(x*4.75)] X=65,000

2. Use the contribution margin ratio CVP formula to compute the dollar sales Longo needs to earn $42,500 in operating income for 2007. Cvp= (14-4.75)/14=0.66 Sales= (42,500+601,250)/0.66=975,378 3. Prepare Longos contribution margin income statement for the year ended December 31, 2007, for sales of 75,000 shirts. Cost of goods sold is 60% of variable costs. Operating costs make up the rest of variable costs and all of fixed costs. Sales (75,000*14) Cost of goods sold (.6*(4.75*75,000)) Operating costs (.4*(4.75*75,000) +601,250) Gross income 213,750 743,750 (957,500) 92,500 1,050,000

4. The company is considering an expansion that will increase fixed costs by 20%

and variable costs by 50 cents per shirt. Compute the new breakeven point in units and in dollars. Should Longo undertake the expansion? N0. Fixed costs= 1.2*601,250=721,500 Variable cost=4.75+.5=5.25 Breakeven point= 82,457 ----1,154,400$ QUESTION 4 Alegras Meals on the Go is considering two alternative expansion plans. Plan A is to open three new sites at a total cost of $2,590,000. Expected annual net cash inflows are $600,000, with residual value of $400,000 at the end of six years. Under plan B, Alegras Meals on the Go would open six sites at a total cost of $2,900,000. This investment is expected to generate net cash inflows of $800,000 each year for six years, which is the estimated useful life of the properties. Estimated residual value of the plan B sites is zero. Alegras Meals on the Go uses straight-line depreciation and requires an annual return of 10%. Requirements 1. Compute the payback period, the accounting rate of return, and the net present value of each plan. Use the residual value when calculating the accounting rate of return for plan A, but assume a zero residual value when calculating its net present value. What are the strengths and weaknesses of these capital budgeting models? 2. Which expansion plan should Alegras Meals on the Go adopt? Why? 3. Estimate the internal rate of return (IRR) for plan B. How does plan Bs IRR compare with Alegras Meals on the Gos required rate of return?