FIN512 Midterm Exam - May 2016 - Graded 175/180


(TCO B) Which of the following characteristics does NOT apply to subchapter S corporations?

 

Student Answer:

 

 

Loss limited to investment

 

  

Income tax at corporate rates

 

  

Limited to fewer than 75 shareholders

 

  

Unlimited life


(TCO D) The planning of cash needs of a business is conducted using a life cycle approach. Which of the following tasks is/are performed in the development stage of the life cycle?

 

Student Answer:

 

Obtain seed financing

 

  

Prepare business plan

 

  

Create and build value

 

  

Obtain seasoned financing 
 

 

  

Train Management

 

(TCO C) What is meant by the terms depreciation and accumulated depreciation? In which financial statement does each of these items appear? What is accrual accounting and how does it influence financial statement presentation?

 

(TCO B) You’re the sole owner of Duarte Spring Company; you paid $200K for the business when you acquired the firm five years ago. Duarte is a manufacturer of high-end springs used by major aerospace and aircraft manufacturing companies. Six months ago, you completed your largest project to date--a $500,000 order delivered to Boeing Corporation. Regrettably, you just received notice from Boeing’s lawyers reporting that they incurred a $50 million loss because your part failed and forced Boeing to miss key delivery dates of its new jumbo jet for customers. What is the dollar amount your personal loss exposure if Duarte Spring Company is a) a sole proprietorship, and b) if it is a C-Corporation, and explain why?

 


(TCO C) AudioFile would like to know its EBDAT breakeven level. The company has only one product, the Voce9000 speaker, a high-end speaker that downloads media player files into its own memory. The firm’s speakers sell for $10,000 each. Each speaker costs $6,500 in materials and manufacturing costs (all production is outsourced to an external manufacturer). The firm’s headquarters facility lease is $350,000 annually, its marketing expense is $100,000 per year, and salary costs are $550,000 annually.
 Complete the following, and show all your calculations for each. 
Part 1: Calculate the firm’s a) EBDAT revenue, and b) contribution profit margin at EBDAT breakeven. 

Part 2: If the firm sells 400 speakers, what will be its c) gross profit percentage, d) operating income, and e) operating income percentage? (Show all calculations)

(TCO A, D)  Lemond Cyclery custom manufactures cutting-edge triathlon bikes used by world-class athletes for major competitive events such as the Ironman in Hawaii. The firm builds each bike using its proprietary titanium blend, which is ultra flexible, super light, very strong, and extremely expensive. Its bikes sell for $35,000 each. In 2014, the company has $4.5 million in revenue, and $2.4 million in net income. Lemond Cyclery began the year with $6 million in book equity on January 1. Complete the following, and show all your calculations for each: 

a) Forecast the firm’s 2019 sales, assuming a 45% sales growth rate per year starting in 2015. 

b) Assuming Lemond Cyclery pays out no dividends in 2014, what is the firm’s maximum sustainable growth rate? 

c) Compare Lemond Cyclery’s anticipated sales growth rate and the firm’s maximum sustainable growth rate (which you just calculated in (b). Will the firm be able to support its growth through internally generated funds? If so, discuss the financial reasons why this is so using the textbook’s concept of maximum sustainable growth rate. If you believe the firm will not be able to support its growth, use the data to explain why, and discuss what action management must take.

d) Part 1: If the firm pays out $960,000 in dividends during 2014, what is the firm’s retention rate? Part 2: Assuming the firm pays out $960,000 in 2014 dividends, what is Lemond Cyclery’s sustainable growth rate? 

e) After paying $960,000 in 2014 dividends on December 31, what will be Lemond Cyclery’s new book equity balance?

f) Use your final answer for (e) to answer the following: if Lemond Cyclery’s balance sheet shows assets with a book value of $9.6 million, how much debt does the firm have? 


(TCO A) Differentiate among the three components of a sound business model; describe each component in detail, and then explain how they work together to provide a sound business model.

 

 

    • Posted: 4 years ago
    FIN512 Midterm Exam - May 2016 - Graded 175/180

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