AGEC $424$ Fall 2003 Final Exam
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The data on this page apply to questions 1 and 2.
Computron Industries is a manufacturer of electronic components. The board of directors has replaced the retiring president of the firm with a new president, Elizabeth Brannigan, who has asked you to make an analysis of the firm’s financial position. The most recent Computron financial statements are as follows:
Computron Industries: Balance Sheet as of December 31, 2000
Cash / $ 52,000 / Accts payable / $ 175,200AR / 402,000 / Notes Payable / 225,000
Inventories / 836,000 / Accruals / 140,000
Total CA / $1,290,000 / Total CL / $ 540,200
Net FA / $ 360,800 / Long-term debt / 424,612
Total Assets / $1,650,800 / Common stock / 460,000
Retained earnings / 225,988
Total Equity / $ 685,988
Total L & OE / $1,650,800
Computron Industries: Income Statement for Year Ended December 31, 2000
2000Sales / $ 3,850,000
COGS / (3,250,000)
Other expenses / (430,300)
Deprec. / (20,000)
Tot. op. costs / ($3,700,300)
EBIT / $ 149,000
Interest exp. / (76,000)
EBT / $ 73,700
Taxes (40%) / (29,480)
Net income / $ 44,220
Name______2003 Final
Seat #_____ AGEC $424$
You must show correct work (and/or calculator inputs) on all problems to get credit.
There are 8 pages not counting the cover sheet and 200 points.
1. (25 points) Calculate ratios for Computron Industries for use in comparison to the following industry averages. In the third column indicate if Computron Industries’ performance is weak, OK, or strong for that particular ratio and state why. Show your work on the right side of the table.
Ratio / Industry / Computron Industries / Indicate weak, OK, or strong and briefly state why.Current Ratio / 2.7x
Quick Ratio / 1.0x
Debt ratio (TL/TA) / 50%
Times-interest-earned / 2.5x
Inventory turnover / 6x
Days sales outstanding / 32 days
Fixed assets turnover / 10.7x
Total assets turnover / 2.6x
Profit margin / 3.5%
Return on total assets / 9.1%
Return on equity / 18.2%
2. Extended Du Pont Equation
a. (7 points) Construct the extended Du Pont equation for Computron, and analyze the component breakdown of the company's ROE in comparison to the industry average.
b. (3 points) Would you say that cost control or asset management is primarily responsible for the deviation of Computron’s ROE from the industry average? Explain.
3. (15 points) Jill's Wigs Inc. had the following balance sheet last year:
Last Mult. 1stPass Last mult. 1st Pass
Cash $ 800 Accounts payable $ 350
Accounts receivable 450 Accrued wages 150
Inventory 950 Notes payable 2,000
Net fixed assets 34,000 Mortgage 26,500
Common stock 3,200
Retained earnings 4,000
Total liabilities
Total assets $36,200 and equity $36,200
Jill has just invented a non-slip wig for men which she expects will cause sales to double, increasing aftertax net income to $1,000. She was at 70% of capacity last year.
(a) Will Jill need any outside capital if she pays no dividends?
(b) If so, how much?
Constant growth
4. (12 points) Investors require a 15 percent rate of return on Goulet Company’s stock (ks = 15%). What will be Goulet’s stock value if the previous dividend was D0 = $6 and if investors expect dividends to grow at a constant compound annual rate of:
a. –4 percent,
b. 0 percent,
c. 4 percent,
5. (30 points).
Financing feedback and ROE
You have been given the attached information on the Crum Company. Crum expects sales to grow by 50% in 2001, and operating costs should increase at the same rate. Fixed assets were being operated at 80% of capacity in 2000, but all other assets were used to full capacity. Underutilized fixed assets cannot be sold. Current assets and spontaneous liabilities should increase at the same rate as sales during 2001. The company plans to finance any external funds needed as 35% notes payable and 65% common stock. After taking financing feedbacks into account, and after the second pass, what is Crum's projected ROE using the projected balance sheet method (use data from the 2nd pass column for the calculation of ROE)?
The blank worksheet for the projected balance sheet method follows.
Information on the Crum Company:
2001 2001
2000 Factor 1st pass Feedbk 2nd pass
Sales $1,000.00
Operating costs 800.00 ______
EBIT $ 200.00
Interest 16.00 ______
EBT $ 184.00
Taxes (40%) 73.60 ______
Net Income $ 110.40
Dividends (60%) 66.24 ______
Add'n to R.E. $ 44.16
Current Assets $ 700.00
Net fixed Assets 300.00 ______
Total assets $1,000.00
A/P and Accruals $ 150.00
N/P 8.00% 200.00
Common stock 150.00
Retained earnings 500.00 ______
Total Liab & Equity $1,000.00 ______
AFN ______
Interest
AFN Financing: Weights: Dollars: Expense:
N/P 0.3500
Common Stock 0.6500
______
1.0000
ROE =______
Super Normal Growth
6. Garcia Inc. has a current dividend of $3.00 per share (D0 = $3.00). Analysts expect that the dividend will grow at a rate of 25 percent a year for the next three years, and thereafter it will grow at a constant rate of 10 percent a year. The company's cost of equity capital is estimated to be 15 percent.
a. (12 points) What is the current stock price of Garcia Inc.? Include a time line in your answer.
b. (3 points) What are its expected dividend yield and capital gains yield for the first year?
c. (3 points) Now, assume the period of supernormal growth is to last only two years rather than three years. How would this affect its price, dividend yield, and capital gains yield? Answer in words only.
7. The risk-free rate of return, kRF, is 5 percent; the required rate of return on the market, kM, is
10.5 percent; and Altman Company’s stock has a beta coefficient (b) of 0.2.
a.(5 points)Based on the Capital Asset Pricing Model (CAPM), what should be the required return for Altman Company’s stock?
b.(5 points) If the dividend expected during the coming year, D1, is $8.00, and if g = a constant 5% at what price should Altman’s stock sell?
8. (5 points) You have just purchased a 10year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid each 6 months. If you expect to earn a 10 percent simple rate of return on this bond, how much did you pay for it?
9. (5 points) You intend to purchase a 10year, $1,000 face value bond that pays interest of $60 every 6 months. If your simple annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?
10. (5 points) Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity. These bonds will pay $45 interest every 6 months. Current market conditions are such that the bonds will be sold to net $937.79. What is the YTM of the issue?
11. (15 points). George Jones just borrowed $28,000. The loan is to be repaid in equal installments at the end of each MONTH for the next 4 years, and the interest rate is 12% percent (annual).
a. (5 points) What is the monthly payment?
b. (10 points) Set up an amortization schedule for the first two months of the loan in the table below. Show your work at the sides and bottom of the table.
Month / BeginningPrincipal
Balance /Payment
/Interest
/Principal
/ EndingPrincipal
Balance
1
2
12. The Saliford Corporation has an inventory conversion period of 40 days, a receivables collection period of 26 days, and a payables deferral period of 24 days.
a. (5 points) What is the length of the firm’s cash conversion cycle?
b. (5 points) If Saliford’s annual sales are $3,960,000 and all sales are on credit, what is the average balance in accounts receivable?
c. (5 points) How many times per year does Saliford turn over its inventory?
13. (35 points) Work this problem on the next page.
Replacement Investment
The Boyd Bottling Company is contemplating the replacement of one of its bottling machines, with a newer and more efficient one. The old machine has a book value of $360,000 and a remaining life of three years. The firm expects to realize $150,000 from scrapping the old machine in three years, but it can sell it now to another firm in the industry for $250,000. The old machine is being depreciated toward a zero salvage value, or by $120,000 per year, using the straight line method.
The new machine has a purchase price of $1,175,000, an estimated useful life and MACRS class life of three years, and an estimated market value of $400,000 at the end of three years. It is expected to economize on electric power usage, labor, and repair costs, which will save Boyd $300,000 each year. In addition, the new machine is expected to reduce the number of defective bottles, which will save an additional $50,000 annually. The company will be able to reduce inventory by $20,000 if it buys the new machine. The company’s marginal tax rate is 40 percent and it has a 12 percent required rate of return.
a. What initial investment outlay is required for the new machine?
b. Calculate the annual depreciation allowances for both machines, and compute the change in the annual depreciation expense if the replacement is made.
c. What are the incremental operating cash flows in Years 1 through 3?
d. What is the terminal cash flow in Year 3?
e. Should the firm purchase the new machine? Support your answer.
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