1. What are the advantages and disadvantages of a partnership?

   Advantages:

   • combines skills of two or more people
   • ease of formation, compared to a corporation
   • freedom from government regulation
   • ease of decision making, compared to a corporation
   • more capital available than a proprietorship
   • taxed once

   Disadvantages:

   • mutual agency
   • limited life
   • unlimited liability
   • harder to form than a proprietorship
   • harder to make decisions than a proprietorship
   • harder to raise capital than a corporation

2. Define:
   • mutual agency

     each partner can bind other partners to contracts if within the scope of the partnership, even if the partner acted outside of his authority

   • general partner

     a partner who has unlimited liability for debts of the firm

   • limited liability partnership

     a partnership where each partner has total liability for his/her actions but limited liability for for actions of partners - e.g. doctors office

   • limited partnership

     a partnership where there is at least one general partner with unlimited liability and at least one partner with limited liability

1. What are the advantages and disadvantages of a corporation?

   Advantages:

   • limited liability
   • unlimited life
   • ease of transfer
   • easy to raise capital
   • professional management

   Disadvantages:

   • government regulation
   • taxed twice
   • managers and owners may have different goals

2. Define:
   • authorized

     amount of stock a company is allowed to sell, as stated in its charter

   • issued

     the number of stocks ever sold

   • outstanding

     the number of stocks being held by stockholders (number issued minus number bought back)

   • additional paid-in-capital

     amount paid for stock, above par value also called capital in excess of par

   • treasury stock

     a corporation's own stock that was issued, then bought back and held in treasury for future reissuance

   • cumulative dividend

     a preferred stock feature entitling holders to receive dividends from prior years not paid, before common stockholders receive any

   • stated value

     the amount per share assigned by the board to no par value stock, which becomes legal capital per share

   • legal capital

     amount per share that legally has to be kept in assets

   • par value

     an assigned value to stock, determined in the corporate charter

   • market value

     the price for which stock is bought/sold

1. Define:
   • cash dividend

     money distributed by a corporation to its stockholders

   • earnings per share

     net income earned for each share of common stock

   • retained earnings

     the cumulative net income retained in the business

   • discontinued operations

     disposal of a significant segment of a business

   • extraordinary items

     events and transactions that are both unusual in nature and infrequent in occurrence

2. Xtreme Sports has 1,000 shares of $50 par value, 4.5% cumulative preferred stock and 10,000 shares of $10 par value common stock outstanding. The previous year, the company paid total dividends of $1,000. The amount that must be paid to the preferred stockholders in the current year before any dividend is paid to common stockholders is:
   1. $1,000
   2. $1,250
   3. $2,250
   4. $3,500
   5. $4,500

Chapter 16

Chapter 17

1. Why do companies invest?
   • have excess cash
   • to generate earnings (investment income)
   • for speculative reasons, e.g. expect stock to increase in value
   • for strategic reasons, e.g. Ford wants to own stock in Firestone that supplies tires

2. Define:
   • short term investments

     investments expected to be converted into cash within the next year or operating cycle, whichever is longer

   • long term investments

     investments NOT expected to be converted into cash within the next year or operating cycle

1. What is the purpose of a cash flow statement?

   To provide information about a company's cash payments and cash receipts in a given time period

2. In order, what are the three classifications on the CFS?

   operating
   investing
   financing

3. Which classification is the most important?

   operating

4. In which category would you find the following:
   • interest paid to bank

     operating

   • dividends paid out to stockholders

     financing

   • cash received for sale of piece of machinery used to make your product

     investing

   • purchase of treasury stock

     financing

   • receipt of money due to loan from a bank

     financing

   • interest received from note

     operating

   • sale of stock of another company

     investing

   • dividends received from stock held in another company

     operating

5. Differentiate between a direct and indirect CFS.

   The indirect method begins with net income and adjusts for noncash items to determine net cash provided by operations. The direct method keeps track of cash received from customers, cash paid to suppliers etc.

1. Define:
   • intracompany

     within a company

   • intercompany

     between one or more competing companies

   • horizontal analysis

     evaluation of financial statement data over a time period using 100% for the earliest year

   • vertical analysis

     evaluation of financial statement data within one time period

   • ratio analysis

     relationship between two or more financial statement data

   • industry averages

     the norms for an industry

   • trend analysis

     another name for horizontal analysis

   • percentage change

     calculated by most recent year - previous year (or base year) divided by previous year (or base year) We've been doing this all semester.

   • common size analysis

     another name for vertical analysis

2. In vertical analysis, what is used as the base amount on the:
   • income statement

     sales

   • balance sheet

     total assets

3. In horizontal analysis, what is used as the base amount on the:
   • income statement

     the earliest year data in each account

   • balance sheet

     the earliest year data in each account

1. What types of stock have been authorized and what is the par value?

   Preferred stock - no par value, stated value of $600 per share
   Common stock - $0.50 par value
   

2. List how many stocks have been authorized and how many are outstanding.

   		Authorized		Outstanding
   Common stock		1,250M shares		269M shares
   Preferred stock		25 million shares		0.6 million shares

3. Determine dividends paid for as many years as possible. Comment.

   		2002		$161M
   		2001		$161M
   		2000		$294M

   Dividends paid fell 45% from 2000 to 2001 and stayed the same in 2002.

4. If I owned one share of common stock, how much would I have received in dividends each year, for the last 3 years? Comment.

   Not given. You do not need to calculate.

5. Calculate return on common stock holders’ equity ratio for as many years as possible. Comment.

   		2002		6.41%
   		2001		1.19%
   		2000		-11.68%

   Improved each year. 2002 was more than 500% more than 2001.

6. List how much earnings per share is, for as many years as possible. Comment.

   		2002		$1.41
   		2001		$0.26
   		2000		($2.81)

   Improved each year. 2002 is more than 500% more than 2001.

7. Calculate debt to total assets ratio for as many times as possible. Comment.

   1/25/2003		.644
   1/26/2002		.660

   J C Penney's debt to total asset ratio decreased from 1/26/2002 to 1/25/2003, making the company less risky to creditors.

8. Calculate the times interest earned for as many years as possible. Comment.

   
   

   2002		2.59
   2001		1.484
   2000		0.016

   J C Penney's TIE has improved each year.

9. How much was cash flow from:
   • Operating activities

     2002 $1,329M inflow

   • Investing activities

     2002 $620M outflow

   • Financing activities

     2002 $1,075M outflow

   in the most recent year.

10. Calculate dividends as a % of cash flow from operating activities for as many years as possible. Comment.

    		2002		12.1%
    		2001		16.3%
    		2000		19.2%

    J C Penney's dividends as a % of cash flow from operating activities has fallen each year. 2002 was 37% lower than in 2000.

11. Was any treasury stock purchased over the last 3 years? If so, how much?

    None

12. Calculate cash flow from operations as a % of net income, for as many years as possible. Comment.

    		2002		328%
    		2001		951%
    		2000		-213%

    J C Penney's cash flow from operations as a % of net income is best in 2001. However, 2002 also shows a high quality of earnings as it is over 100%.

13. Calculate cash received from customers for the most recent year.

    32,347 - 7 = $32,340M

14. Calculate cash paid to suppliers for the most recent year.

    22,573 + 15 - 326 = $22,262M

15. Do horizontal analysis on the balance sheet for:

    		1/25/2003		1/26/2002
    TCA		96.3		100
    TA		99.0		100
    TCL		92.4		100
    TL		96.5		100
    T S/HE		103.9		100

    Comment on your findings.

    Although assets fell, liabilities fell more, resulting in a higher proportion of stockholder equity.

16. Do vertical analysis, for the two most recent years only, on the income statement for:

    		2002		2001
    Net sales		100		100
    Gross profit		30.2		28.8
    Income before income taxes		1.8		0.6
    Net income		1.3		0.31

17. Calculate the acid test ratio for as many years as possible. Comment.

    		1/25/2003		.764
    		1/26/2002		.786

    J C Penney's acid test ratio has decreased slightly since 1/26/2002. This is not good because we want it to be over 1.0.

18. Calculate profit margin for as many years as possible. Comment.

    		2002		1.3%
    		2001		0.311%
    		2000		-2.21%

    J C Penney's profit margin has improved over time. However, 1.3% doesn't appear to be a great return on sales.

19. Calculate return on assets for as many years as possible. If the industry average is 8%, how is this company doing?

    2.3%
    Bad

20. Calculate the PE ratio, if the market price when the last reporting period ended was $16.

    11.35

21. Calculate the payout ratio for as many years as possible. Comment.

    		2002		39.8%
    		2001		164.3%
    		2000		-41.7% (meaningless, if your payout is negative are you asking your stockholders to pay you dividends?)

    J C Penney's payout ratio fell from 164.3% to 39.8%. This is good because a company cannot continue to pay out more in dividends than they earned in profit. Eventually they'd run out of money.

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