1.   Williams Furniture Compan

1.   Williams Furniture Company has thefollowing data:



      December 31, 201x


Cash                                               $50,000

Marketable Securities           80,000

Accounts Receivable       3,000,000

Inventory                               1,000,000

Gross plant &

                 Equipment          6,000,000

                 Less Accum

                 Depreciation       2,000,000

TotalAssets                           8,130,000

Liabilities And Equity

AccountsPayable              $2,200,000

Accrued Expense                      150,000

Notes Payable (current)       400,000

BondsPayable                         2,500,000

Common Stock (1.7

Million shares, par $1)     1,700,000

RetainedEarnings                 1,180,000

Total Liabilities &

   Equity                                      8,130,000


          Income Statement

          Year ended Dec 31, 201x

Sales(credit)                                           $7,000,000

Fixedcosts*                                            2,100,000

Variable costs(.60)                             4,200,000

Earnings before interest and

                 Taxes                                               700,000

Lessinterest                                                  250,000

Earnings beforetaxes                              450,000

Less Taxes(35%)                                         157,500

Earnings aftertaxes                                  292,500

Dividends (40%payout)                        117,000

Increased retainedearnings                175,500

*Fixed costs include a) lease expense of $200,000 and 9b)depreciation of $500,000.

Williams Furniture has a $65,000 per year sinking fundobligation associated with its bond issues. The sinking fundrepresents an annual repayment of the principal amount of the bond.It is not tax deductible.

a. Calculate the following and compare to industry average. Bethorough and specific with weak points, strong points and yourrecommendation on how to improve the company’s performance.

                                                     Williams                                 Industry

ProfitMargin                                                                             5.75%

Return onAssets                                                                      6.90%

Return onEquity                                                                     9.20%

ReceivablesTurnover                                                            4.35x

InventoryTurnover                                                                6.50x

Fixed AssetTurnover                                                             1.85x    

CurrentRatio                                                                             1.45x

QuickRatio                                                                                 1.10x

InterestCoverage                                                                    5.35x

Debt to totalassets                                                                25.05%

b. Calculate break even in sales dollars. Calculate DOL .

2. Litten Oil and Gas Company is a largecompany with common stock listed on the New York Stock Exchange andbonds traded over the counter.

The vice president of finance is planning to sell $75 million ofbonds this year. Present market yields are 12.1%. Litten has $90million of 7.5% non callable preferred stock outstanding and has nointentions of selling any preferred stock at any time in thefuture. The preferred stock is currently priced at $80 per shareand its dividend per share is $7.80.

The company has had volatile earnings but its dividend per sharehad had 8% growth and this will continue. The expected dividend is$1.90 per share and common stock is selling for $40 per share. Thecompany’s flotation costs are $2.50 per share preferred stock and$2.20 per share for common stock.

Litten keeps its debt at 50% of assets and its equity at 50%.Litten sees no need to sell common or preferred stock in the nearfuture as is has generated enough internal funds for investmentneeds. The tax rate for the company is 40%

Calculated the following cost of capital:

a. bond

b. preferred stock

c. common stock in retained earnings

d. new common stock

e. weighted average cost of capital.

3. Smith Corporation is considering two newinvestments. Project A and Project B are listed below

Project A will cost $20,000 and has the following cash flow

Yr 1 5,000

Yr 2 6,000

Yr 3 7,000

Yr 4 10,000

Project B will also cost $20,000 has the following cash flow

Yr 1 16000

Yr 2    5000

Yr 3    4000

Calculate specific payback for each

Calculate NPV of each. Use the weighted cost of capital of8%.





In the books of Williams FurnitureCompany

Profit Margin = Net Income / Sales = $292,500 / $7,000,000 =4.18%Return on Assets = Net Income / Sales = $292,500 / $ 8,130,000 =3.60%Return on Equity = Net Income / Share holders’ equity = $292,500 /($1,700,000 +  1,180,000) = 10.15%Receivables Turnover = Credit Sales / Receivables = $7,000,000 /$3,000,000 = 2.33xInventory Turnover = Sales / Inventory = $7,000,000 / $1,000,000 =7xFixed Asset Turnover = Sales / (Gross Fixed Asset – AccumulatedDepreciation) = $7,000,000 / (6,000,000 – 2,000,000) = 1.75xCurrent Ratio = Current Asset / Current Liability = ($50,000+$80,000 + 3,000,000 + 1,000,000) / ($2,200,000 + $ 150,000 + $400,000) = 1.50xQuick Ratio = (Cash + Marketable Securities + Accounts Receivable)/ Current Liabilities = ($50,000 + $ 80,000 + $3,000,000) /($2,200,000 + $ 150,000 + $ 400,000) = 1.14xInterest Coverage = EBIT / Interest = $700,000 / $250,000 =2.8xDebt to total assets = Total Liabilities / Total Asset = (2,200,000+ 150,000 + 400,000 + 2,500,000) / 8,130,000 = 64.58%

Ratio Williams        Industry Remarks
Profit Margin    4.18% 5.75% Weak Point
Return on Assets 3.60% 6.90% Weak Point
Return on Equity 10.15% 9.20% Strong Point
ReceivablesTurnover    2.33 4.35 Weak Point
Inventory Turnover   7 6.50x Almost Same
Fixed Asset Turnover 1.75 1.85x   Almost Same
Current Ratio 1.5 1.45x Almost Same
Quick Ratio 1.14 1.10x Almost Same
Interest Coverage 2.8 5.35x Weak Point
Debt to total assets 64.58% 25.05% Weak Point

Recommendation –

From above analysis we can see that due to poor recovery ofaccounts receivables, Company’s debt fund has increased whichresults high interest expense and reduced Profit margin.So, It is Advisible to revise company’s credit policy and Improveits in collection function.


Particulars Amount
Sales $           7,000,000.00
Less ; Variable Cost $           4,200,000.00
Contribution $           2,800,000.00
PV ratio (Contribution / Sales) $                           0.40
Fixed Cost $           2,100,000.00
Break even in sales $           5,250,000.00 Fixed Cost / PV Ratio

DOL = Contribution / EBIT = $2,800,000 / $700,000 = 4

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