Essay 1 - Common Sized Financial Statement

This study unit contains 4 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-3 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Income statements for Bockman Industries, a retailer, are shown below for the past 2
years.
Year 2 Year 1
Revenues $6,400,000 $6,000,000
Cost of goods sold 3,100,000 2,850,000
Gross margin 3,300,000 3,150,000
Selling expenses 950,000 880,000
Administrative expenses 1,120,000 1,050,000
Loss due to strike 20,000 0
Interest expense 30,000 30,000
Income before taxes 1,180,000 1,190,000
Income tax expense 472,000 476,000
Income from continuing operations 708,000 714,000
Discontinued operations, net 72,000 0
Net income $ 780,000 $ 714,000
Earnings per share $ 2.50 $ 2.30

A. Prepare common-size income statements (vertical analysis) for

Bockman Industries for the 2 years presented.
A. Prepare a memo to the controller of Bockman identifying and describing
a possible explanation for each of the following:
a. An increase in sales along with the change in the gross margin
percentage
b. An increase in sales along with the increase in selling expenses
c. An increase in sales along with the increase in administrative
expenses

A. Assume that Bockman has no preferred stock outstanding and that any
change in the number of shares of common stock occurred at the
beginning of Year 2. If the shareholders’ equity at the end of Year 2
totaled $7,363,200, calculate Bockman’s book value per share.
Essay 2 - Liquidity Analysis

This study unit contains 4 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-3 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Atlas Express, established thirty years ago, provides mailing and shipping services worldwide.
The company has 50 office locations in the U.S. A recent economic recession and its lingering
effects, accompanied by the acceptance and growth of major new technological platforms, has
had a significant negative impact on the company’s revenue as mail and shipping volume has
fallen precipitously. Atlas anticipates that volume will decrease for the foreseeable future.
During the past year, the company purchased new equipment worth $41,800. Proceeds from
sales of the old equipment were $11,500 with a net gain of $1,700. Below are the balance sheets
as of December 31, 20X2, and as of December 31, 20X1, and the income statement for the year
ended December 31, 20X2.
Balance Sheets
Dec. 31, 20X2 Dec. 31, 20X1
Cash and cash equivalents $ 81,800 $ 148,800
Receivables, net 87,900 104,100
Advances and prepayments 15,400 12,000
Total current assets 185,100 264,900
Buildings, equipment and land,
net 2,001,400 2,076,400
Total assets $2,186,500 $2,341,300
Compensation and benefits 915,300 360,000
Trade payables and accrued
expenses 420,100 438,800
Deferred revenue-prepaid
postage 386,800 349,700
Short-term portion of debt 744,600 750,000
Total current liabilities 2,466,800 1,898,500
Long-term debt 2,260,100 2,336,800
Total equity (2,540,400) (1,894,000)
Total liabilities and equity $2,186,500 $2,341,300
 Income Statement
Year ended Dec. 31, 20X2
Operating revenue $3,390,400
Compensation and benefits $3,234,500
Transportation 502,500
Depreciation and 107,000
amortization
Other 184,700
Total operating expenses 4,028,700
Loss from operations (638,300)
Interest expense (8,100)
Net loss $ (646,400)

A. Use two financial ratios to analyze the liquidity of the company. Show
your calculations and explain your analysis.

A. Recommend two ways to improve liquidity.

A. Define bankruptcy.
a. Identify one advantage and one disadvantage of declaring
bankruptcy.
b. Do you recommend bankruptcy for Atlas? Explain your answer.
Essay 3 - Financial Risk

This study unit contains 4 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-3 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Knight, Inc., and Day, Ltd., are large firms in the same industry. Each firm has $200 million of
assets and produces $50 million of earnings before interest and taxes (EBIT), and both are
subject to a 40% income tax rate. Knight finances 30% of its assets with debt at a before-tax
cost of 10%. Day finances 60% of its assets with debt at a before-tax cost of 15%.

A. Develop a summary balance sheet and a summary income statement

for each of the two companies based on the information provided.
Round dollar amounts to the nearest million.

A. Based on the information given, identify which company has the higher
level of risk. Explain your answer.

A. Describe and explain four implications (or costs) of financial distress.

Essay 4 - Leverage

This study unit contains 4 essays, each with a unique scenario and multiple relevant
questions.

Suggested
Scenario Question
Time
1 1-3 30 minutes

All questions are required.

Calculations in support of numerical answers must be presented. Credit will not be

awarded for numerical answers for which there are no supporting calculations.

Lever Corporation manufactures fuel injectors and is located in the Midwest. Its
products are used by automobile, truck, boat, and airplane manufacturers. The
president of the company, Lisa McDermott, is considering the assumption of additional
debt to purchase more highly automated equipment in order to expand Lever’s
operations and increase its current productivity.

McDermott has asked the company’s financial team to assemble data and analyze
different alternatives at various levels of operating and financial leverage.
The following three alternatives are being considered by Christian Smith, chief financial
officer: In Alternative 1, Lever would continue to operate with its current equipment and
not incur any debt. In Alternative 2, Lever would assume debt and upgrade some of its
equipment. In Alternative 3, Lever would replace equipment with more highly automated
equipment and increase its debt significantly. The company is subject to an effective
corporate income tax rate of 40%.
Alternative 1 Alternative 2 Alternative 3
Debt $ 0 $ 40,000 $200,000
Equity $200,000 $200,000 $200,000
Interest Rate 10% 10% 10%
Fuel Injector
Selling price per unit $ 50.00 $ 50.00 $ 50.00
Variable costs per unit 35.00 30.00 20.00
Fixed costs 30,000 60,000 90,000
Units sold – prior year 12,000 12,000 12,000
The forecasted range of sales for all three alternatives is 12,000 to 13,200 units.
A. Operating and financial leverage are factors influencing the firm’s
optimum capital structure. Define the following terms:
a. Operating leverage
b. Financial leverage

A. For Alternative 3 being considered by Lever Corporation, calculate the

degree of operating leverage at 12,000 units. Calculate your answer to
three decimal points.

A. Discuss at least two implications to Lever Corporation of increasing

operating and financial leverage.