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Discuss all the reasons that might explain an increase or decrease in gross profit.

OMM 622  Financial Decision-Making

Please answer each of the questions with a response of at least 75 words.  Please provide at least one reference for each question.  

Week 2

Question 1

Referencing this week’s readings and lecture, what information is provided in the balance sheet? What is a common-sized balance sheet and how do you create one? For your final project company, (My final weeks project company is Kindred Healthcare.)  I will provide you with my statement I made earlier in the week.) does anything stand out on the balance sheet? 

Question 2

Your friend, Liz, loves to shop at Target and is now interested in investing in the company.  Tom, another friend, has told her that Target’s debt structure is risky with obligations of nearly 74% of total assets.  Liz sees that debt on the balance sheet is 65% of total assets and is confused by Tom’s comment. 

Write an explanation to Liz discussing the debt structure of Target and why Tom thinks Target is risky.  Be sure to explain clearly what information appears on financial statements, as well as what information does not appear directly on the financial statements. Use the information below in your discussion. 

At fiscal year-end February 2, 2008, Target Corporation had the following assets and liabilities on its balance sheet (in millions):

Current liabilities    $11,782

Long-term debt    15,126

Other liabilities    2,345

Total assets    44,560

Target reported the following information on leases in the notes to the financial statements:

Total rent expense was $165 million in 2007, $158 million in 2006, and $154 million in 2005, including percentage rent expense of $5 million in 2007, 2006, and 2005.  Most long-term leases include one or more options to renew, with renewal terms that can extend the lease term to more than 50 years. Certain leases also include options to purchase the leased property.

Future minimum lease payments required under non-cancellable lease agreements existing at February 2, 2008, were: 

Future Minimum Lease Payments (in Millions)    Operating Leases    Capital Leases

2008    $ 239    $ 12

2009      187       16

2010       173      16

2011       129      16

2010       123      17

After 2010    2, 843      155

Total future minimum lease payments    $3694 (a)    $232

Less: Interest (b)         (105)

Present value of minimum capital lease payments         $127 (c)

a) Total contractual lease payments include $1,721 million related to options to extend lease terms that are reasonably assured of being exercised, and also include $98 million of legally binding minimum lease payments for stores that will open in 2008 or later.

(b) Calculated using the interest rate at inception of each lease.

(c) Includes current portion of $4 million.

Week 3 

Question  1

Referencing this week’s readings and lecture, address the following: 

•    What are the two causes of an increasing or decreasing sales number? 

•    Discuss all the reasons that might explain an increase or decrease in gross profit. 

Question 2

Income statements are presented in the table below for the Elf Corporation for the years ending December 31, 2010, 2009, and 2008. Write a one-paragraph analysis of Elf Corporation’s profit performance for the period.  Create a common-sized income statement for the three years. What conclusions can you draw from the different parts of the statement? What are the causes and effects of Elf’s performance for those three years? 


Elf Corporation Income Statements for the Years Ending December 31 

(in millions)    2010    2009    2008

Sales    $700    $650    $550

Cost of goods sold     350     325     275

Gross profit    350    325    275

Operating Expenses:

Administrative    100    100    100

Advertising and marketing        50        75         75

Operating profit    $200    $150    $100

Interest expense        70        50       30

Earnings before tax    $130    $100    $ 70

Tax expense (50%)         65        50         35

Net income    $   65    $   50    $   35

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