AGEC $424$ EXAM 1 Fall 2011 (161 points)
Name______
Show your work for all questions (even if I forgot to put a reminder on the question). Logically correct work must be shown to receive credit for your answers.
I. Computron Industries: Balance Sheet as of December 31
Cash / $ 152,000 / Accts payable / $ 75,000AR / 402,000 / Notes Payable / 325,000
Inventories / 736,000 / Accruals / 140,000
Total CA / $1,290,000 / Total CL / $ 540,000
Net FA / $ 360,000 / Long-term debt / 650,000
Total Assets / $1,650,000 / Common stock / 260,000
Retained earnings / 200,000
Total Equity / $ 460,000
Total L & OE / $ 1,650,000
Computron Industries: Income Statement for Year Ended December 31
Sales / $ 6,000,000COGS / (4,500,000)
Other expenses / (1,000,000)
Deprec. / (160,000)
EBIT / $ 340,000
Interest exp. / (78,000)
EBT / $ 262,000
Taxes (30%) / (78,600)
Net income / $ 183,400
Other data for Computron Industries:
Dec. 31 stock price $14
Number of shares outstanding 100,000
Dividends per share $0.44
Lease payments $20,000
You may remove this page, but put your name at the top of page 2.
3
Name______
1. (45 points) Calculate ratios for Computron Industries for use in comparison to the following industry averages. Show your work in the Computron Industries box.
Ratio / Industryaverage / Computron Industries
If you don’t show your work in this column you don’t get the points. / Evaluate briefly and then support your statement of by comparing to the industry average.
Current Ratio / 2.7x / Evaluate liquidity:
Quick Ratio / 1.0x
Debt ratio (TL/TA) / 70% / Evaluate debt level:
Times Interest Earned / 2.5x
Inventory turnover / 5x / Evaluate asset management
Days sales outstanding / 40 days
Fixed Asset turnover / 4.5x
Total assets turnover / 2.0x
Profit margin (Return on Sales) / 3.0% / Evaluate profitability:
Return on total assets (ROA) / 6%
Return on equity (ROE) / 20%
Price-Earnings / 15x / Evaluate market ratios:
Market to Book / 2.2x
Accounts pay. deferral / 20 da. / Don’t evaluate.
Inventory Conv. Period / 72 da.
Use the above data for questions 2 through 5.
2. (10 points) Construct the extended Du Pont equation for both Computron and for the industry. Then analyze the component breakdown of the company's ROE in comparison to the industry (say something about each component).
3. (4 points) Which is more responsible for the deviation of Computron’s ROE from the industry average: cost control, asset management, or debt management? Explain.
4. (8 points) Show a side by side comparison of the cash conversion cycle for Computron with the industry. Use the CCC to analyze working capital management for Computron in comparison to the industry. Say which is best and why?
5. (4 points) Based on the ratios and information in questions 1-4, point out any red flags or major successes that you see for Computron.
3
6. (10 points). A firm has the following balance sheet:
Last Factor 1stPass Last Factor 1st Pass
Cash $ 10 Accounts payable $ 10
Accounts receivable 10 Notes payable 20
Inventories 10 Longterm debt 40
Fixed assets 90 Common stock 40
Retained earnings 10
Total assets $120 Total liab.& equity $120
Fixed assets are being used at 80 percent of capacity; sales for the year just ended were $200; sales will increase $10 per year for the next 4 years; the profit margin is 5 percent; and the dividend payout ratio is 60 percent. Assume that fixed assets cannot be sold. Show the projected balance sheet above and other calculations below. What are the total external financing requirements for the entire 4 years, i.e., the total AFN for the 4-year period?
7. (12 points) The following question(s) refer to the year-end account balances for UBUS Inc. The accounts are listed in alphabetical order, NOT in the order they appear on the financial statements. The applicable tax rate is 40%.
5
UBUS Income Statement
Cost of Goods Sold / 330Depreciation Expense / 35
Interest Expense / 20
Operating Expense (excl. Dep.) / 115
Sales / 600
Tax rate / 40%
UBUS Balance Sheet
Accounts Payable / 35Accounts Receivable / 65
Accruals / 30
Accumulated Depreciation / (175)
Cash / 35
Common Stock / 120
Fixed Assets (gross) / 390
Inventory / 135
Long-Term Debt / 200
Retained Earnings / 65
a) What was UBUS Inc.’s earnings before interest and taxes (EBIT)?
b) What is UBUS Inc.’s tax liability?
c) What was UBUS Inc.’s Net Income?
d) What is UBUS Inc.’s Total Assets?
e) What is UBUS Inc.’s Total Equity?
f) What is UBUS Inc.’s Net Working Capital?
5
5
8. (30 points) Additional Funds needed with financial feedback
Hogan Inc. generated EBIT of $240,000 this past year using assets of $1,100,000. The interest rate on its existing long-term debt of $640,000 is 12.5 percent and the firm's tax rate is 40 percent. The firm paid a dividend of $1.27 on each of its 37,800 shares outstanding from net income of $96,000. The total book value of equity is $446,364 of which the common stock account equals $335,000. The firm's shares sell for $28.00 per share in the market. The firm forecasts a 10% increase in sales, assets, and EBIT next year, and a dividend of $1.40 per share. If the firm needs additional capital funds, it will raise 60% with debt and 40% with equity. The cost of any new debt will be 13%. Spontaneous liabilities are estimated at $15,000 for next year, representing an increase of 10% over this year. Except for spontaneous liabilities, the firm uses no other sources of current liabilities and will continue this policy in the future. What will be the cumulative AFN Hogan will need to balance its projected balance sheet using the projected balance sheet method through the first two passes?
Last Year Factor First Pass Feedback Second Pass
EBIT $ 240,000
- Interest 80,000
EBT $ 160,000
- Taxes 64,000
EAT = NI $ 96,000
- Div. 48,006
Addition to RE $ 47,994
Total assets $1,100,000
Accruals & AP $ 13,636
Long-term debt 640,000
Stock 335,000
Retained Earnings 111,364
Total liab. & equity $1,100,000
AFN $______$______
Cumulative AFN $______
Show calculations of capacity, dividends, debt, interest, etc.:
5
9. (4 points) You have been assigned to estimate the interest rates that your company may have to pay when borrowing money in the near future. The following information is available.
kPR = 2%
MR = .1% for a 1 year loan increasing by .1% for each additional year
LR = .05% for a 1 year loan increasing by .05% for each additional year
DR = 0 for a 1 year loan, .2% for a 2-year loan, increasing.1% for each additional year
Expected Inflation Rates
Year 1 = 7%
Year 2 = 5%
Year 3 and thereafter = 3%
a. / Calculate the inflation adjustment (INFL) for a 5-year loan.b. / Calculate the appropriate interest rate for a 5-year loan.
10. (3 points). Adams Inc. recently borrowed money for one year at 9%. The pure rate is 3%, and Adams’ financial condition warrants a default risk premium of 2% and a liquidity risk premium of 1%. There is little or no maturity risk in one-year loans. What inflation rate do lenders expect next year?
11. (3 points) Gowen Inc. began the year with equity of $1,000,000 and 100,000 shares of stock outstanding. During the year the firm paid a dividend of $1.50 per share. Year-end equity was $1,100,000. Assuming no other factors impacted equity, what was Gowen Inc.’s net income for the year?
a. / $100,000b. / $150,000
c. / $200,000
d. / $250,000
e. / $300,000
12. (3 points) During the last year, Alpha Co had Net Income of $150, paid $20 in dividends, and sold new stock for $40. Beginning equity for the year was $700. Ending equity was
a. / $830b. / $840
c. / $850
d. / $870
13. (3 points) Grass Enterprises just closed a good year. It had Sales of $10 million, EBIT of $1 million, and Net Income of $500,000. The firm also paid dividends of $150,000 during the year. If Grass started the year with equity of $900,000, what will its year ending equity be?
a. / $1,900,000b. / $1,400,000
c. / $1,250,000
d. / $850,000
14. (3 points) A firm had a piece of machinery that cost $7,000 when new and has accumulated $4,500 in depreciation. If the machine is sold for $4,000, which of the following is true?
a. / The firm has a taxable gain of $4,000 on the sale of the machineb. / The firm has a taxable gain of $1,500 on the sale of the machine
c. / The firm has a deductible loss of $3,000 on the sale of the machine
d. / The firm has a taxable gain of $7,000 on the sale of the machine
15. (3 points) CVD, Inc. has an equity multiplier of 2. What is CVD’s stockholders’ equity if total liabilities are $100,000?
a. / $100,000b. / $150,000
c. / $200,000
d. / $50,000
16. (3 points) What is the market price per share of Whopie, Inc. if the firm had net income of $200,000, earnings per share of $2.70, total equity of $800,000, and a market to book value ratio of 1.5?
a. / $16.20b. / $10.80
c. / $7.20
d. / None of the above
17. (2 points) The initial public offerings, or IPOs:
a. / do not require the SEC’s final approval of the prospectus.b. / always result in immediate wealth for the executives of the company who have divested most of their ownership through the offering.
c. / represent a very risky subdivision of the general stock market.
d. / all of the above
18. (2 points) Which organization typically helps a company market new securities?
a. / Commercial bankb. / Insurance company
c. / Investment bank
d. / Mutual fund
19. (2 points) The ______has traditionally been called the “over-the-counter” market.
a. / American Stock Exchangeb. / NASDAQ
c. / New York Stock Exchange
d. / money
20. (2 points) Interest rates and stock prices move:
a. / randomly exhibiting no causal relationship.b. / in opposite directions.
c. / up and down together.
d. / none of the above
21. (2 points) The increased volatility of longer term bonds in response to interest rate movements is reflected in the:
a. / pure interest rate.b. / default risk premium.
c. / liquidity risk premium.
d. / maturity risk premium.
22. (3 points) Marshall Manufacturing has an ACP of 60 days, an inventory turnover of 6, and turns its payables over once a month. How long is Marshall’s cash conversion cycle? (Assume a 360-day year)
a. / 30 daysb. / 60 days
c. / 90 days
d. / 120 days
5