(Evaluating McGraw Industries Capital Structure) McGraw Industries, an established producer of printing equipment, expects its sales to remain flat

McGraw Industries, an established producer of printing equipment, expects its sales to remain flat for the next 3 to 5 years because of both a weak economic outlook and an expectation of little new printing technology development over that period. On the basis of this scenario, the firm’s management has been instructed by its board to institute programs that will allow it to operate more efficiently, earn higher profits, and, most important, maximize share value.

In this regard, the firm’s chief financial officer (CFO), Ron Lewis, has been charged with evaluating the firm’s capital structure. Lewis believes that the current capital structure, which contains 10% debt and 90% equity, may lack adequate financial leverage. To evaluate the firm’s capital structure, Lewis has gathered the data summarized in the following table on the current capital structure (10% debt ratio) and two alternative capital structures—A (30% debt ratio) and B (50% debt ratio)—that he would like to consider.
Capital structure*

Source of capital Current (10% debt) A (30% debt) B (50% debt)
Long-term debt $1,000,000 $3,000,000 $5,000,000
Coupon interest rate** 9% 10% 12%
Common stock 100,000 shares 70,000 shares 40,000 shares
Required return on equity*** 12% 13% 18%

*These structures are based on maintaining the firm’s current level of $10,000,000 of total financing.
**Interest rate applicable to all debt.
***Market-based return for the given level of risk.

Lewis expects the firm’s earnings before interest and taxes (EBIT) to remain at its current level of $1,200,000. The firm has a 40% tax rate.

Use the current level of EBIT to calculate the times interest earned ratio for each capital structure. Evaluate the current and two alternative capital structures using the times interest earned and debt ratios.


Click here for the solution: (Evaluating McGraw Industries Capital Structure) McGraw Industries, an established producer of printing equipment, expects its sales to remain flat

On April 1 Flint Hills Travel Agency Inc. was established

P3-1A On April 1 Flint Hills Travel Agency Inc. was established. These transactions were completed during the month
• 1. Stockholders invested $25,000 cash in the company in exchange for common stock.
• 2. Paid $900 cash for April office rent.
• 3. Purchased office equipment for $2,800 cash.
• 4. Purchased $200 of advertising in the Chicago Tribune, on account.
• 5. Paid $500 cash for office supplies.
• 6. Earned $10,000 for services provided: Cash of $1,000 is received from customers, and the balance of $9,000 is billed to customers on account.
• 7. Paid $400 cash dividends.
• 8. Paid Chicago Tribune amount due in transaction (4).
• 9. Paid employees’ salaries $1,200.
• 10. Received $9,000 in cash from customers billed previously in transaction (6).

Check: (a) Cash $29,000; Ret. Earnings $ 7,300

• (a) Prepare a tabular analysis of the transactions using these column headings: Cash, Accounts Receivable, Supplies, Office Equipment, Accounts Payable, Common Stock, and Retained Earnings (with separate columns for Revenues, Expenses, and Dividends). Include margin explanations for any changes in Retained Earnings.
• (b) From an analysis of the Retained Earnings columns, compute the net income or net loss for April.


Click here for the solution: On April 1 Flint Hills Travel Agency Inc. was established

On April 1, 2012, Kathleen Alvarez established an interior decorating business, Intrex Designs

Problem 2-3A Journal Entries and Trial Balance

On April 1, 2012, Kathleen Alvarez established an interior decorating business, Intrex Designs. During the month, Kathleen completed the following transactions related to the business:

Apr. 1. Kathleen transferred cash from a personal bank account to an account to be used for the business, $17,000.
2. Paid rent for period of April 2 to end of month, $3,400.
6. Purchased office equipment on account, $10,000.
8. Purchased a used truck for $21,000, paying $2,000 cash and giving a note payable for the remainder.
10. Purchased supplies for cash, $1,800.
12. Received cash for job completed, $13,000.
Apr. 15. Paid annual premiums on property and casualty insurance, $1,800.
23. Recorded jobs completed on account and sent invoices to customers, $9,000.
24. Received an invoice for truck expenses, to be paid in April, $1,000.

Enter the following transactions on Page 2 of the two-column journal.
29. Paid utilities expense, $1,500.
29. Paid miscellaneous expenses, $750.
30. Received cash from customers on account, $7,800.
30. Paid wages of employees, $4,000.
30. Paid creditor a portion of the amount owed for equipment purchased on April 6, $2,500.
30. Withdrew cash for personal use, $2,000.

AND SO ON

Check: 3. Total of Credit Column: $66,500


Click here for the solution: On April 1, 2012, Kathleen Alvarez established an interior decorating business, Intrex Designs

Green Mountain Water Testing Service was established on November 16, 2012

PR 5-4A (Purchases and cash payments journals; accounts payable and general ledgers) Green Mountain Water Testing Service was established on November 16, 2012. Green Mountain uses field equipment and field supplies (chemicals and other supplies) to analyze water for unsafe contaminants in streams, lakes, and ponds. Transactions related to purchases and cash payments during the remainder of November are as follows:

Nov. 16. Issued Check No. 1 in payment of rent for the remainder of November, $1,700.
16. Purchased field supplies on account from Hydro Supply Co., $4,380.
16. Purchased field equipment on account from Test-Rite Equipment Co., $16,900.
17. Purchased office supplies on account from Best Office Supply Co., $375.
19. Issued Check No. 2 in payment of field supplies, $2,560, and office supplies, $300.
Post the journals to the accounts payable subsidiary ledger.
23. Purchased office supplies on account from Best Office Supply Co., $580.
23. Issued Check No. 3 to purchase land, $45,000.
24. Issued Check No. 4 to Hydro Supply Co. in payment of invoice, $4,380.
26. Issued Check No. 5 to Test-Rite Equipment Co. in payment of invoice, $16,900.
Post the journals to the accounts payable subsidiary ledger.
30. Acquired land in exchange for field equipment having a cost of $8,000.
30. Purchased field supplies on account from Hydro Supply Co., $5,900.
30. Issued Check No. 6 to Best Office Supply Co. in payment of invoice, $375.
30. Purchased the following from Test-Rite Equipment Co. on account: field supplies, $900, and field equipment, $3,700.
30. Issued Check No. 7 in payment of salaries, $22,400.
Post the journals to the accounts payable subsidiary ledger.

Instructions
1. Journalize the transactions for November. Use a purchases journal and a cash payments journal, similar to those illustrated in this chapter, and a two-column general journal. Use debit columns for Field Supplies, Office Supplies, and Other Accounts in the purchases journal. Refer to the following partial chart of accounts:
11 Cash 19 Land
14 Field Supplies 21 Accounts Payable
15 Office Supplies 61 Salary Expense
17 Field Equipment 71 Rent Expense
At the points indicated in the narrative of transactions, post to the following accounts in the accounts payable subsidiary ledger:
Best Office Supply Co.
Hydro Supply Co.
Test-Rite Equipment Co.
2. Post the individual entries (Other Accounts columns of the purchases journal and the cash payments journal and both columns of the general journal) to the appropriate general ledger accounts.
3. Total each of the columns of the purchases journal and the cash payments journal, and post the appropriate totals to the general ledger. (Because the problem does not include transactions related to cash receipts, the cash account in the ledger will have a credit balance.)
4. Sum the balances of the accounts payable subsidiary ledger.
5. Why might Green Mountain consider using a subsidiary ledger for the field equipment?

Check: 1. Total cash payments, $93,615

Click here for the solution: Green Mountain Water Testing Service was established on November 16, 2012

Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation

Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation, a young firm with a high growth rate of earnings. The acquisitions analysis group at DM has produced the following table of relevant data:

Dublin Medical Arlington
Earnings per share $3.00 $2.00
Dividend per share $3.00 $.80
Number of shares 200 million 10 million
Stock price $30 $20

DM's analysts estimate that investors currently expect growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington, its growth rate would be 10% per year beginning one year from now with no additional investment outlays beyond those already expected.

1. What is the expected gain from the acquisition?
2. What is the net present value (NPV) of the acquisition to DM shareholders if it costs an average $30 per share to acquire all of the outstanding shares?
3. Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?

Click here for the solution: Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation