January 31, 2017

Question
Question 1 (10 points):

Question 2 (10 points):

What is the difference between Common Stock and Preferred Stock? What are some of the advantages of owning Preferred Stock instead of Common Stock?

Question 3 (10 points)

Explain the difference between the declaration date, record date, and payment date in reference to dividends.

Question 4 (10 points)

On January 1, 20X5, Juan Silvia borrowed \$500,000 to purchase a new office building. The loan is to be repaid in 2 equal annual payments, beginning December 31, 20X5. The annual interest rate on the loan is 9%.

Prepare the appropriate journal entries to record the loan and subsequent payments at the end of 20X5 and 20X6.

Use the following information to answer Question 5 – Question 8

Jacob Joseph has identified five different companies in which he is interested in investing, based upon their products and prospects. However, Jacob is concerned about a general economic downturn and desires to invest in companies with the lowest debt exposure. Following is a list of the data for the five potential investments. Jacob has compiled the data and has ranked the companies based upon total debt. He has requested your help in evaluating the risk profiles for each company.

To complete your evaluation, you need to know that each company faces an income tax rate that is equivalent to 30% of income before taxes (which also means that net income is 70% of income before taxes). In addition, assume that each company incurs an average interest cost that is 8% of total debt.

Total Assets

Total Debt

Net Income

A

\$ 10,000,000

\$ 1,000,000

\$ 200,000

B

20,000,000

3,000,000

1,000,000

C

6,000,000

4,000,000

250,000

D

15,000,000

6,000,000

1,600,000

E

30,000,000

22,000,000

4,000,000

Question 5 (10 points)

Calculate the debt to total asset ratio, and reorder the list from least risky to most risky, based upon that ratio.

Question 6 (10 points)

Calculate the debt to equity ratio, and reorder the list from least risky to most risky, based upon that ratio.

Question 7 (10 points)

Calculate the times interest earned ratio, and reorder the list from least risky to most risky, based upon that ratio.

Question 8 (10 points)

Do the ratios suggest that risk is a function of total debt, or other factors? Do all the ratios produce the same signals?

Question 9 (10 points)

What is the difference between the direct method and indirect method of completing the statement of cash flows? Which method is utilized by most companies?

Use the following information for Question 10 – Question 12

Stanley Corporation has no material problem with uncollectible accounts or obsolete inventory. All sales and purchases are on account. The company provided the following information for the year ending 20X7:

Total sales

\$ 2,600,000

Beginning accounts receivable

700,000

Total purchases of inventory

1,800,000

Beginning inventory

50,000

Collections on accounts receivable

2,400,000

Payments on accounts payable

1,850,000

Cost of goods sold

1,775,000

Question 10 (5 points)

Calculate the accounts receivable turnover ratio.

Question 11 (5 points)

Calculate the inventory turnover ratio.

Question 12 (10 points)

If Stanley’s competitors have a receivables turnover ratio of “6” and an inventory turnover ratio of “4,” would you initially conclude that Stanley is better or worse than its competitors in managing receivables and inventory? Why?

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