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The Menendez Corporation expects to have sales of $12 million. Costs other than depreciation are expected to be 75 percent of sales, and depreciation is expected to be $1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Menendez's federal-plus-state tax rate is 40 percent.

a. PLEASE set up an income statement. What is Menendez's expected net cash flow?

Answer: $2,400,000.
[Please show the computing steps by which the answer to this problem was derived].

b. Suppose Congress changed the tax laws so that Menendez's depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?

Answer: NI = 0; NCF = $3,000,000.
[Please show the computing steps by which the answer to this problem was derived].

c. Now suppose that Congress, instead of doubling Menendez's depreciation, reduced it by 50 percent. How would profit and net cash flow be affected?
Answer: NI = $1,350,000; NCF = $2,100,000.
[Please show the computing steps by which the answer to this problem was derived].

d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why? [Briefly explain].

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Daniel-James Financial Services Regression

1. Mr. James McWhinney, president of Daniel-James Financial Services, believes there is a relationship between the number of client contacts and the dollar amount of sales. To document this assertion, Mr. McWhinney gathered the following sample information. The X column indicates the number of client contacts last month, and the Y column shows the value of sales ($ thousands) last month for each client sampled.

(See attached file for chart)

a. Determine the regression equation.
b. Determine the estimated sales if 40 contacts are made.

2. Refer to Exercise 1.
a. Determine the standard error of estimate.
b. Suppose a large sample is selected (instead of just 10). About 95 percent of the predictions regarding sales would occur between what two values?
(Complete problem set found in attachment)

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