What would justify a decision by cookie and coffee creations

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Reference no: EM13859176

Question 1

The comparative balance sheet of Cookie and Coffee Creations Inc. at October 31, for the years 2015 and 2014, and the income statements for the years ended October 31, 2014 and 2015, are presented below.

                COOKIE & COFFEE CREATIONS INC
                              
Balance Sheet
                                 October 31

Assets

2015

2014

Cash

$34,324

$13,050

Accounts receivable

3,250

2,710

Inventory

7,897

7,450

Prepaid expenses

6,300

6,050

Equipment

96,500

75,500

Accumulated depreciation

(25,200)

(9,100)

Total assets

$123,071

$95,660

Liabilities and Stockholders' Equity

 

 

Accounts payable

$3,650

$2,450

Income taxes payable

10,251

11,200

Dividends payable

28,000

25,000

Salaries payable

2,250

1,280

Interest payable

188

0

Note payable - current portion

3,000

0

Note payable - long-term portion

4,500

0

Preferred stock, no par, $6 cumulative - 3,000 and 2,500 shares

15,000

12,500

Issued, respectively

 

 

Common stock, $1 par - 23,180 shares issued

23,180

23,180

Additional paid in capital - Treasury stock

250

250

Retained earnings

32,802

19,800

Total liabilities and stockholders' equity

$123,071

$95,660

               COOKIE & COFFEE CREATIONS INC
                          
Income Statement
                        Year Ended October 31

 

2015

2014

Sales

$485,625

$462,500

Cost of goods sold

222,694

208, 125

Gross profit

262,931

254,375

Operating expenses

 

 

Depreciation expense

17,850

9,100

Salaries and wages expense

147,979

146,350

Other operating expenses

43,186

42,925

Total operating expenses

209,015

198,375

 

Income from operations

53,916

56,000

Other expenses

 

 

Interest expense

413

0

Loss on sale of computer equipment

2,250

0

Total other expenses

2,663

0

Income before income tax

51,253

56,000

Income tax expense

10,251

11,200

Net income

$41,002

$44,800

Additional information:

 

 

The management are thinking about borrowing an additional $20,000 to buy more kitchen equipment. The loan would be repaid over a 4-year period. The terms of the loan provide for equal semi-annual payments of $2,500 on May 1 and November 1 of each year, plus interest of 5% on the outstanding balance.

Required

(a) Calculate the following ratios for 2014 and 2015.

1. Current ratio

2. Debt to total assets

3. Gross profit rate

4. Profit margin

5. Return on assets (Total assets at November 1, 2013, were $33,180)

6. Return on common stockholders' equity (Total common stockholder's equity at November 1, 2013 was $23,180)

7. Payout ratio

(b) Prepare a horizontal analysis of the income statement for Cookie & Coffee Creations

Inc. using 2014 as a base year.

(c) Prepare a vertical analysis of the income statement for Cookie & Coffee Creations

Inc. for 2015 and 2014.

(d) Comment on your findings from parts (a) to (c).

(e) What impact would borrowing an additional $15,000 to buy more equipment have on each of the ratios in (a) above, assuming that no changes are expected on the income statement and balance sheet? Comment on your findings.

(f) What would justify a decision by Cookie & Coffee Creations Inc. to buy the additional equipment? What alternatives are thee instead of bank financing?

Question 2

Currently Hambleton Ales dividends are growing by 10% pa and this is expected to continue for another two years. After that time they are expected to grow by 8% pa for the next two years, and then by 6% every year. Next year's dividend is expected to be $0.80, and the appropriate discount rate is 12%. If you have $20,700 to invest, how many shares can you buy in Hambleton Ales?

Question 3

Three years ago, Batlow Ltd. issued 10 year $1,000 bonds with a 7% coupon rate paid semi-annually, at par value. The market currently requires a 9% yield.

i. What was the price of the bond at issue?

ii. What is the current price of the bond?

iii. If the market yield falls to 6% in two years time, what will the bond's price be at that time?

iv. Explain your results in (i) - (iii).

Second Part

Question 1 

 

What is the project's net present value (NPV)? Explain the economic rationale behind the NPV. Could the NPV of this particular project be different for SRC than for one of Wang's other potential customers? Explain.

Question 2

 

Calculate the proposed project's internal rate of return (IRR). Explain the rationale for using the IRR to evaluate capital investment projects. Could the IRR for this project be different for SRC than for another customer? Explain.

Question 3

Suppose one of SRC executives uses the payback method as a primary capital budgeting decision tool and wants some payback information.

a.         What is the project's payback period?

b.        What is the rationale behind the use of payback period as a project evaluation tool?

c.         What deficiencies does payback have as a capital budgeting decision method?

 

d.        Does payback provide any useful information regarding capital budgeting decisions?

Question 4

 

Under what conditions do NPV, IRR, and PI all lead to the same accept/reject decision? When can conflicts occur? If a conflict arises, which method should be used, and why?

Reference no: EM13859176

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