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Mini Case.

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Introduction

MINI CASE DONNA JAMISON, A 1997 GRADUATE OF THE UNIVERSITY OF TENNESSEE WITH FOUR YEARS OF BANKING EXPERIENCE, WAS RECENTLY BROUGHT IN AS ASSISTANT TO THE CHAIRMAN OF THE BOARD OF COMPUTRON INDUSTRIES, A MANUFACTURER OF ELECTRONIC CALCULATORS. THE COMPANY DOUBLED ITS PLANT CAPACITY, OPENED NEW SALES OFFICES OUTSIDE ITS HOME TERRITORY, AND LAUNCHED AN EXPENSIVE ADVERTISING CAMPAIGN. COMPUTRON'S RESULTS WERE NOT SATISFACTORY, TO PUT IT MILDLY. ITS BOARD OF DIRECTORS, WHICH CONSISTED OF ITS PRESIDENT AND VICE-PRESIDENT PLUS ITS MAJOR STOCKHOLDERS (WHO WERE ALL LOCAL BUSINESS PEOPLE), WAS MOST UPSET WHEN DIRECTORS LEARNED HOW THE EXPANSION WAS GOING. SUPPLIERS WERE BEING PAID LATE AND WERE UNHAPPY, AND THE BANK WAS COMPLAINING ABOUT THE DETERIORATING SITUATION AND THREATENING TO CUT OFF CREDIT. AS A RESULT, AL WATKINS, COMPUTRON'S PRESIDENT, WAS INFORMED THAT CHANGES WOULD HAVE TO BE MADE, AND QUICKLY, OR HE WOULD BE FIRED. ALSO, AT THE BOARD'S INSISTENCE DONNA JAMISON WAS BROUGHT IN AND GIVEN THE JOB OF ASSISTANT TO FRED CAMPO, A RETIRED BANKER WHO WAS COMPUTRON'S CHAIRMAN AND LARGEST STOCKHOLDER. CAMPO AGREED TO GIVE UP A FEW OF HIS GOLFING DAYS AND TO HELP NURSE THE COMPANY BACK TO HEALTH, WITH JAMISON'S HELP. JAMISON BEGAN BY GATHERING FINANCIAL STATEMENTS AND OTHER DATA. ASSUME THAT YOU ARE JAMISON'S ASSISTANT, AND YOU MUST HELP HER ANSWER THE FOLLOWING QUESTIONS FOR CAMPO. (NOTE: WE WILL CONTINUE WITH THIS CASE IN CHAPTER 3, AND YOU WILL FEEL MORE COMFORTABLE WITH THE ANALYSIS THERE, BUT ANSWERING THESE QUESTIONS WILL HELP PREPARE YOU FOR CHAPTER 3. PROVIDE CLEAR EXPLANATIONS, NOT JUST YES OR NO ANSWERS!) BALANCE SHEETS 2001 2000___ ASSETS CASH $ 7,282 $ 9,000 SHORT-TERM INVESTMENTS 0 48,600 ACCOUNTS RECEIVABLE 632,160 351,200 INVENTORIES 1,287,360 715,200 TOTAL CURRENT ASSETS $1,926,802 $1,124,000 GROSS FIXED ASSETS ...read more.

Middle

ANSWER: THIS SITUATION IS LIKELY TO OCCUR AS SUGGESTED IN THE SECOND PART OF THE ANSWER TO QUESTION G. I. IN GENERAL, COULD A COMPANY LIKE COMPUTRON INCREASE SALES WITHOUT A CORRESPONDING INCREASE IN INVENTORY AND OTHER ASSETS? WOULD THE ASSET INCREASE OCCUR BEFORE THE INCREASE IN SALES, AND, IF SO, HOW WOULD THAT AFFECT THE CASH ACCOUNT AND THE STATEMENT OF CASH FLOWS? ANSWER: GENERALLY, A COMPANY LIKE COMPUTRON COULD NOT BE EXPECTED TO INCREASE ITS SALES WITHOUT A CORRESPONDING INCREASE IN INVENTORY AND OTHER ASSETS. (SEE QUESTION G.) J. DID COMPUTRON FINANCE ITS EXPANSION PROGRAM WITH INTERNALLY GENERATED FUNDS (ADDITIONS TO RETAINED EARNINGS PLUS DEPRECIATION) OR WITH EXTERNAL CAPITAL? HOW DOES THE CHOICE OF FINANCING AFFECT THE COMPANY'S FINANCIAL STRENGTH? ANSWER: COMPUTRON FINANCED ITS EXPANSION WITH EXTERNAL CAPITAL RATHER THAN INTERNALLY GENERATED FUNDS. IN PARTICULAR, COMPUTRON ISSUED LONG-TERM DEBT RATHER THAN COMMON STOCK, WHICH REDUCED ITS FINANCIAL STRENGTH. K. REFER TO THE INCOME STATEMENTS AND THE STATEMENT OF CASH FLOWS. SUPPOSE COMPUTRON BROKE EVEN IN 2001 IN THE SENSE THAT SALES REVENUES EQUALED TOTAL OPERATING COSTS PLUS INTEREST CHARGES. WOULD THE ASSET EXPANSION HAVE CAUSED THE COMPANY TO EXPERIENCE A CASH SHORTAGE WHICH REQUIRED IT TO RAISE EXTERNAL CAPITAL? ANSWER: EVEN IF COMPUTRON HAD BROKEN EVEN IN 1998, THE FIRM WOULD HAVE HAD TO FINANCE AN INCREASE IN ASSETS. L. IF COMPUTRON STARTED DEPRECIATING FIXED ASSETS OVER 7 YEARS RATHER THAN 10 YEARS, WOULD THAT AFFECT (1) THE PHYSICAL STOCK OF ASSETS, (2) THE BALANCE SHEET ACCOUNT FOR FIXED ASSETS, (3) THE COMPANY'S REPORTED NET INCOME, AND (4) ITS CASH POSITION? ASSUME THE SAME DEPRECIATION METHOD IS USED FOR STOCKHOLDER REPORTING AND FOR TAX CALCULATIONS, AND THE ACCOUNTING CHANGE HAS NO EFFECT ON ASSETS' PHYSICAL LIVES. ...read more.

Conclusion

ANSWER: CALCULATION OF TAXABLE INCOME: SALARY $45,000 DIVIDENDS 3,000 PERSONAL EXEMPTION (2,800) DEDUCTIONS (4,550) TAXABLE INCOME $40,650 TAX LIABILITY = $3,862.5 + ($40,650 - $26,250)0.28 = $7,969.5. T. 2. WHAT ARE YOUR MARGINAL AND AVERAGE TAX RATES? ANSWER: MARGINAL TAX RATE IS 28 PERCENT; AVERAGE TAX RATE = $7,969.5/$40,650 = 19.6%. U. ASSUME THAT A CORPORATION HAS $100,000 OF TAXABLE INCOME FROM OPERATIONS PLUS $5,000 OF INTEREST INCOME AND $10,000 OF DIVIDEND INCOME. WHAT IS THE COMPANY'S TAX LIABILITY? ANSWER: CALCULATION OF THE COMPANY'S TAX LIABILITY: TAXABLE OPERATING INCOME $100,000 TAXABLE INTEREST INCOME 5,000 TAXABLE DIVIDEND INCOME (0.3 ? $10,000) 3,000 TOTAL TAXABLE INCOME $108,000 TAX = $22,250 + ($108,000 - $100,000)0.39 = $25,370. TAXABLE DIVIDEND INCOME = DIVIDENDS - EXCLUSION = $10,000 - 0.7($10,000) = $3,000. V. ASSUME THAT AFTER PAYING YOUR PERSONAL INCOME TAX AS CALCULATED IN PART T, YOU HAVE $5,000 TO INVEST. YOU HAVE NARROWED YOUR INVESTMENT CHOICES DOWN TO CALIFORNIA BONDS WITH A YIELD OF 7 PERCENT OR EQUALLY RISKY EXXON BONDS WITH A YIELD OF 10 PERCENT. WHICH ONE SHOULD YOU CHOOSE AND WHY? AT WHAT MARGINAL TAX RATE WOULD YOU BE INDIFFERENT TO THE CHOICE BETWEEN CALIFORNIA AND EXXON BONDS? ANSWER: AFTER-TAX RETURN INCOME AT T = 28%: EXXON = 0.10($5,000) - (0.10)($5,000)(0.28) = $360. CALIFORNIA = 0.07($5,000) - $0 = $350. ALTERNATIVELY, CALCULATE AFTER-TAX YIELDS: A-T YIELDEXXON = 10.0%(1 - T) = 10%(1 - 0.28) = 7.2%. A-T YIELDCALIF. = 7.0%. AT WHAT MARGINAL TAX RATE WOULD YOU BE INDIFFERENT? 7.0% = 10.0%(1 - T). SOLVE FOR T. 7.0% = 10.0% - 10.0%(T) 10.0%(T) = 3% T = 30%. Mini Case: 2 - 30 Harcourt, Inc. items and derived items copyright (c) 2002 by Harcourt, Inc. Harcourt, Inc. items and derived items copyright (c) 2002 by Harcourt, Inc. Mini Case: 2 - 1 ...read more.

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