Chapter 4, Problem 4.29C

Case 4.29LO 6, 7Capstone analytical review of Chapter 2-4. Calculate liquidity and profitability measures and explain various financial statement relationships for a realty firm DeBauge Realtors, Inc., is a realty firm owned by Jeff and Kristi DeBauge. The DeBauge family owns 100% of the corporation’s

stock. The following summarized data (in thousands) are taken from the December 31, 2016, financial statements: For the Year Ended December 31, 2016: Commissions revenue $426 Cost of services provided 177 Advertising expense 84 Operating income $165 Interest expense 15 Income tax expense 48 Net income $102 At December 31, 2016: Assets Cash and short-term investments $ 90 Accounts receivable, net 120 Property, plant, and equipment, net 375 Total assets $535 Liabilities and Stockholders’ Equity Accounts payable $270 Income taxes payable 15 Notes payable (long term) 150 Paid-in capital 60 Retained earnings 90 Total liabilities and stockholders' equity $585

At December 31, 2015, total assets were $615 and total stockholders’ equity was $150. There were no changes in notes payable or paid-in capital during 2016.

Required:

1. What particular expense do you suppose accounts for the largest portion of the $ 177 cost of services provided?
2. The cost of services provided amount includes all operating expenses (i.e., selling, general, and administrative expenses) except advertising expense. What do you suppose the primary reason was for DeBauge Realtors, Inc., to separate advertising from other operating expenses?
3. Calculate the effective interest rate on the notes payable for DeBauge Realtors, Inc.
4. Calculate the company’s average income tax rate. (Hint: You must first determine the earnings before taxes.)
5. Calculate the amount of dividends declared and paid to Jeff and Kristi DeBauge during the year ended December 31, 2016. (Hint: Do a T-account analysis of retained earnings.) What is the company’s dividend policy? (What proportion of the company’s earnings are distributed as dividends?)
6. DeBauge Realtors, Inc., was organized and operates as a corporation rather than a partnership. What is the primary’ advantage of the corporate form of business to a realty’ firm? What is the primary’ disadvantage of the corporate form?
7. Explain why the amount of income tax expense is different from the amount of income taxes payable.
8. Calculate the amount of working capital and the current ratio at December 31, 2016. Assess the company’s overall liquidity.
9. Calculate ROI (including margin and turnover) and ROE for the year ended December 31, 2016. Explain why' these single measures may’ not be very’ meaningful for this firm.