AGEC $424$ EXAM 1 Fall 2013 (170 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
AR
402,000
Notes Payable
Inventories
736,000
Accruals
Total CA
$1,290,000
Total CL
$
75,000
325,000
140,000
$ 540,000
Net FA
$ 360,000
Long-term debt
650,000
Total Assets
$1,650,000
Common stock
Retained earnings
Total Equity
260,000
200,000
$ 460,000
Total L & OE
$ 1,650,000
Computron Industries: Income Statement for Year Ended December 31
Sales
COGS
Other expenses
Deprec.
EBIT
Interest exp.
EBT
Taxes (30%)
Net income
$ 6,000,000
(4,500,000)
(1,000,000)
(160,000)
$ 340,000
(78,000)
$ 262,000
(78,600)
$
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.
1
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
Industry Computron Industries
Evaluate briefly and then support
If you don’t show your work in this
average
your statement of by comparing to
column you don’t get the points.
the industry average.
Current Ratio
2.7x
Evaluate liquidity:
Quick Ratio
1.0x
Debt ratio
(TL/TA)
70%
Times Interest
Earned
2.5x
Inventory
turnover
5x
Days sales
outstanding
40 days
Fixed Asset
turnover
4.5x
Total assets
turnover
2.0x
Profit margin
(Return on
Sales)
3.0%
Return on total
assets (ROA)
6%
Return on
equity (ROE)
20%
Price-Earnings
15x
Market to Book
2.2x
Evaluate debt level:
Evaluate asset management
Evaluate profitability:
Evaluate market ratios:
2
Accounts pay.
20 da.
Don’t evaluate.
deferral
Inventory
72 da.
Conv. Period
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 most 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 each component of working capital management for Computron in
comparison to the industry. Indicate if deviations from the industry are good or not.
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 Next
Last
Cash
$ 10
Accounts receivable
10
Inventories
10
Fixed assets
90
Total assets
Accounts payable
Notes payable
Long-term debt
Common stock
Retained earnings
Total liab.& equity
$120
Factor Next__
$ 10
20
40
40
10
$120
Fixed assets are being used at 80 percent of capacity; sales for the year just ended were $200; sales will increase $20 per
year for each of 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. (14 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. Show your work.
UBUS Income Statement
Cost of Goods Sold
330
Depreciation Expense
35
Interest Expense
20
Operating Expense (excl. Dep.)
115
c) What is UBUS Inc.’s tax liability?
Sales
600
Tax rate
40%
UBUS Balance Sheet
Accounts Payable
Accounts Receivable
Accruals
Accumulated Depreciation
Cash
Common Stock
Fixed Assets (gross)
Inventory
Long-Term Debt
Retained Earnings
35
65
30
(175)
35
120
390
135
200
65
a) What was UBUS Inc.’s earnings before
interest and taxes (EBIT)?
d) What was UBUS Inc.’s Net Income?
e) What is UBUS Inc.’s Total Assets?
f) What is UBUS Inc.’s Total Equity?
g) What is UBUS Inc.”s Net Working Capital?
b) What is UBUS Inc.’s EBT?
4
8. (30 points) Forecast AFN with a 40 % sales increase; at 90% of capacity last year; any additiona funds
will come from Notes payable, or a surplus will reduce notes payable. The interest rate is 10%. Round to
the nearest whole dollar.
Show Sales factor _______ And capacity calculation ___________
Last
Sales
-VC
-FC
EBIT
-interest
EBT
-Taxes (40%)
NI
-Div (45%)
Add. RE
Cash
AR
Inv
CA
NFA
TA
AP
Accr.
Notes
CL
Bonds
Stock
RE
TL+E
Factor
1st Pass
Feedback
2nd Pass
40,000
-20,000
-15,000
5,000
-600
4,400
-1,760
2,640
-1188
1452
1,000
6,000
9,000
16,000
13,000
29,000
5,000
2,000
2,000
9,000
4,000
4,000
12,000
29,000
Below show calculations and label: AFN for each pass, total AFN after two passes and additional interest
expense calculation.
5
(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.
9.
Show work here:
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?
Show work here:
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. $100,000
Show work here:
b. $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. $830
b. $840
Show work here:
c. $850
d. $870
6
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. $1,900,000
Show work here:
b. $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 machine
Show work here:
b. 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. $100,000
Show work here:
b. $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. $16.20
Show work here:
b. $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.
a.
b.
c.
d.
(2 points) Which organization typically helps a company market new securities?
Commercial bank
Insurance company
Investment bank
Mutual fund
19.
a.
b.
c.
d.
(2 points) The ________ has traditionally been called the “over-the-counter” market.
American Stock Exchange
NASDAQ
New York Stock Exchange
money
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20.
a.
b.
c.
d.
(2 points) Interest rates and stock prices move:
randomly exhibiting no causal relationship.
in opposite directions.
up and down together.
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 days
Show work here:
b. 60 days
c. 90 days
d. 120 days
23.
a.
b.
c.
d.
(2 points) The cash conversion cycle measures the time:
between the creation of receivables and their collection.
it takes for inventory to be turned into product and sold.
between payment for inventory and collection of cash for its subsequent sale as product.
for a check to clear the banking system.
24. (2 points)Which of the following factors does not directly affect the firm’s investment in working
capital?
a. The firm’s inventory and credit policies
b. The age of the firm’s plant and equipment
c. The firm’s sales level
d. The length of the firm’s operating cycle
25. (3 points) J&J Production Inc. has annual sales of $30 million and accounts receivables of $1.5
million. They have an inventory turnover of 4. How long is J &J's operating cycle? (Assume a 360day year)
a.
18 days
Show work here:
b.
90 days
c.
108 days
d.
72 days
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