AGEC $424$ EXAM 1 Spring 2014 (156 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 ($ thousands)
Cash
$ 50
Accts payable
$ 175
AR
400
Notes Payable
225
Inventories
840
Accruals
140
Total CA
$1,290
Total CL
$ 540
Net FA
$ 360
Long-term debt
324
Total Assets
$1,650
Common stock
Retained earnings
Total Equity
560
226
$ 786
Total L & OE
$ 1,650
Computron Industries: Income Statement for Year Ended December 31($ thousands)
Sales
COGS
Other expenses
Deprec.
EBIT
Interest exp.
EBT
Taxes (30%)
Net income
$ 4,100
(3,250)
(430)
(20)
$ 400
(76)
$ 324
(97)
$
227
Other data for Computron Industries:
Dec. 31 stock price: $25
Number of shares outstanding 100 thousand (the numbers above are also in thousands)
Dividends per share $0.52
Lease payments $20 (Thousand)
You may remove this page, but put your name at the top of page 2.
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Name_______________________
1. (51 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 by comparing to
column you don’t get the points.
the industry average. 5 pts each
2 points each
Current Ratio
1.6x
Evaluate liquidity:
Quick Ratio
0.8x
Debt ratio
(TL/TA)
50%
Times Interest
Earned
2.5x
Inventory
turnover
5x
Days sales
outstanding
40 days
Fixed Asset
turnover
7.5x
Total assets
turnover
2.0x
Profit margin
(ROS)
3.5%
Return on total
assets (ROA)
7%
Return on
equity (ROE)
14%
Price-Earnings
10x
Market to Book
2.2x
Acts pay. Def.
20 da.
Evaluate debt level:
Evaluate asset management
Evaluate profitability:
Evaluate market ratios:
19 da.
Don’t evaluate.
Use the above data for questions 2 through 5.
2
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. (3 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. (6 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 something about each component). Say which is best and why?
5. (3 points) Based on the ratios and information in questions 1-4, point out red flags and major successes
for Computron.
3
6. (10 points). Jill’s Wigs Inc. had the following balance sheet last year:
Last
Cash
Accounts rec.
Inventory
Fixed assets
Total assets
$
800
450
950
34,000
$36,200
Factor 1stPass
Last
Fact. 1st Pass
Accounts payable $
350
Accrued wages
150
Notes payable
2,000
Mortgage
26,500
Common stock
3,200
Retained earnings
4,000
Total liabilities
and equity
$36,200
Jill has just invented a non-slip wig for men which she expects will cause
sales to double, increasing after-tax net income to $1,000. She was at 80% of
capacity last year. Will Jill need any outside capital if she pays no
dividends? If so, how much? Show the forecast balance sheet above and your
final answer and supporting calculations below.
7. (12 points) You are given the following selected financial information for The Blatz Corporation.
Income Statement
Balance Sheet
Ratios
COGS $750
Cash
$250
ROS
10%
Net Income $160
Net Fixed Assets $850
Current Ratio 2.3
Inventory Turnover
6.0
ACP
45 days
Debt Ratio 49.12%
Calculate the following items and show your work in the space provided below.
Sales:
Total Liab.:
Inventory:
LT Debt:
Accts Rec:
Equity:
Current Assets:
ROA:
Total Assets:
Current Liabilities:
ROE:
4
8. (30 points) You have been given the following information on the Crum Company.
Crum expects sales to grow by 50% next year, and variable costs should
increase at the same percentage. Fixed assets were being operated at 80% of
capacity last year. Fixed costs will increase with fixed assets.
Underutilized fixed assets cannot be sold. Current assets and spontaneous
liabilities should increase at the same rate as sales. 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 AFN using the projected balance sheet method?
Sales factor ____________
Capacity factor____________
Last
factor
$1,000.00
600.00
___200.00
Sales
variable costs
Fixed costs
EBIT
Interest
$
EBT
Taxes (40%)
$
200.00
16.00
1st pass
110.40
66.24
_________
2nd pass
_________
_________
________
_________
184.00
73.60
_________
Net Income
Dividends (60%)
feedback
________
_________
$
Add'n to R.E.
$
Current Assets
Net fixed Assets
$
________
________
_________
________
________
44.16
700.00
300.00
_________
Total assets
$1,000.00
A/P and Accruals
N/P
8.00%
Common stock
Retained earnings
$
Total Liab & Equity
________
150.00
200.00
150.00
500.00
_________
$1,000.00
AFN1: ________
AFN2: ________
Show Interest expense calculation:
Financing Breakdown 1st pass
2nd pass
Total
New N/P needed ________
_________
__________
New C.Stock needed ________
_________
__________
5
9. (5 points) Inflation is expected to be 5% next year and a steady 7% each year thereafter. Maturity risk
premiums are zero for one year debt but have an increasing value for longer debt. One-year
government debt yields 9% whereas two-year debt yields 11%.
a. What is the real risk-free rate and the maturity risk premium for two-year debt?
b. Forecast the nominal yield on one- and two-year government debt issued at the beginning of the
second year.
Show work here for a and b:
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. (2 points) Which of the following ratios would probably not be used to assess the profitability of a
firm?
a.
Return on stockholders’ equity
b.
Return on total assets
c.
Times interest earned
d.
A and c only
12. (2 points) Under the DuPont system, the return on assets is equal to:
a.
the product of the gross profit margin and inventory turnover
b.
the sum of the debt-equity ratio and the return on sales
c.
the product of the return on sales and total asset turnover
d.
the product of the return on sales, total asset turnover, and equity multiplier
e.
none of the above
13. (2 points) Which of the following is not affected by a change in interest expense?
a.
Gross margin
b.
EBIT
c.
ROE
d.
A and b
e.
All of the above
14. (2 points) Management is prone to overstate:
a.
accounts receivable and inventory
b.
accounts receivable, but not inventory
c.
inventory, but not accounts receivable
d.
neither accounts receivable nor inventory
6
15. (2 points) The tax schedule for married couples filing jointly:
a.
results in less tax than would be paid by a single person if only one spouse works.
b.
saves on taxes regardless of whether one or both spouses work
c.
results in most two income families paying more tax than if they were single
d.
both a & c
16. (2 points) In order to compare the yields on municipal and corporate bonds, the investor must
restate the yield of either the taxable corporate bond to an after-tax basis or the municipal bond to
a pretax equivalent because
a.
corporate bonds are tax free
b.
municipal bonds are tax free and investors must compare rates on an equal basis
c.
a municipal bond is typically safer than a taxable corporate bond
d.
such restatements are not necessary for most taxpayers
17. (2 points) The cash conversion cycle measures the time:
a.
between the creation of receivables and their collection.
b.
it takes for inventory to be turned into product and sold.
c.
between payment for inventory and collection of cash for its subsequent sale as product.
d.
for a check to clear the banking system.
18. (2 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 360-day
year) Show work.
a.
18 days
b.
90 days
c.
108 days
d.
72 days
19. (2 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)
Show work.
a.
30 days
b.
60 days
c.
90 days
d.
120 days
20. (2 points) CVD, Inc. has an equity multiplier of 2. What is CVD’s stockholders’ equity if total liabilities
are $100,000? Show work.
a.
$100,000
b.
$150,000
c.
$200,000
d.
$50,000
21. (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? Show work.
a.
The firm has a taxable gain of $4,000 on the sale of the machine
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
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AGEC $424$ EXAM 1 (125 points)