Solution and Marking Guide
Solution and marking guide
Fall 2005, Dec 12 Final Exam
Question 1
Statement of Cash FlowsSuck This Inc. / 1 mark for all three components
For the year ended Dec 31/05
Net income / 5,704 / 1 mark
Add back amortization / 32,875 / 1 mark
Changes in WC
AR / (14,600) / 1 mark
Inventory / 7,070 / 1 mark
Ppd / (2,000) / 1 mark
AP / 13,085 / 1 mark
Income tax payable / 3,071 / 1 mark
Cash flow from operations / 45,205 / 1 mark for identifying the section
Capital asset purchases / (27,000) / 1 mark
Cash from investing / (27,000) / 1 mark for identifying the section
Financing
Mortgage repayment / (20,000) / 2 marks (1 mark for -25,000, 1 mark for +5,000)
Shares issued / 24,029 / 1 mark
Dividends / (18,000) / 1 mark
Cash from financing / (13,971) / 1 mark for identifying the section
Total change in CCE / 4,234
CCE BO period / 15,250 / 1 mark
CCE EO period / 19,484 / 1 mark
Scott formula - Suck This Inc.
Average tax rate / 35.0% / 1 mark
ATI / 12,723.01 / 2 marks (1 for $19,573, 1 for multiplying by (1-tax rate))
Sales return (ATI) / 10.1% / 3 marks (1 mark for each of: net income + ATI in the numerator, total revenue in the denominator)
AT / 89.5% / 2 marks (1 for total revenue in numerator, 1 for total assets in the denominator)
ROA(ATI) / 9.0% / 3 marks (1 mark for each of: net income + ATI in the numerator, total assets in the denominator)
IN / 7.8% / 2 marks (1 for ATI in the numerator, 1 for total debt in the denominator)
D/E / 3.94 / 2 marks (1 for total debt in the numerator, 1 for total equity in the denominator)
Scott Formula=SR(ATI)*AT+(ROA(ATI)-IN(ATI))*D/E
ROE= / Op return / Lev return
13.8% / 9.0% / 4.8%
1 mark for calculating ROE separately as a check
Three ways to improve Vera's ROE:
1) pick a better project (increase ROA)
2) find cheaper borrowing (decrease IN)
3) borrow more or decrease equity (increase the D/E ratio)
Five points for Vera about her mortgage:
Balance sheet points
1) she only owes $25,000 for the next year
2) she has almost $20,000 in cash right now
3) current ratio is still >1
Income statement points
4) interest coverage ratio is 1.3 suggesting all required interest is reasonably able to be paid
Statement of cash flow points
5) Suck This Inc. is generating positive cash flows from operations
6) Vera could stop paying dividends if she is worried about cash flow
7) Vera could issue more shares (to herself?) similar to 2005 to raise more cash
8) Vera could not purchase new equipment next year to conserve cash flow
1 mark for each point BUT the student must have at least one point from each category (B/S/, I/S, CFS)
to get full marks [maximum three points for each category]