AGEC $424$ EXAM 1 Fall 2015 (173 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
$ 200
Accts payable
$ 100
AR
400
Notes Payable
300
Inventories
600
Accruals
200
Total CA
$1,200
Total CL
$ 600
Net FA
$ 400
Long-term debt
600
Total Assets
$1,600
Common stock
Retained earnings
Total Equity
200
200
$ 400
Total L & OE
$ 1,600
Computron Industries: Income Statement for Year Ended December 31($ thousands)
Sales
COGS
Other expenses
Deprec.
EBIT
Interest exp.
EBT
Taxes (40%)
Net income
$ 3,000
(2,500)
(200)
(100)
$ 200
(50)
$ 150
(60)
$
90
Other data for Computron Industries:
Dec. 31 stock price: $10
Number of shares outstanding 100 thousand (the numbers above are also in thousands)
Dividends per share $0.40
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
work
in
this
average
your statement by comparing to the
column you don’t get the points.
industry average. 5 pts each
2 points each
Current Ratio
1.6x
Quick Ratio
0.8x
Debt ratio
(TL/TA)
50%
Times Interest
Earned
10x
Inventory
turnover
5x
Days sales
outstanding
40 days
Fixed Asset
turnover
4.5x
Total assets
turnover
2.0x
Profit margin
(ROS)
3%
Return on total
assets (ROA)
6%
Return on
equity (ROE)
12%
Price-Earnings
20x
Market to Book
3x
Acts pay. Def.
20 da.
Evaluate liquidity:
Evaluate debt level:
Evaluate asset management
Evaluate profitability:
Evaluate market ratios:
14 da.
Don’t evaluate.
Use the above data for questions 2 through 5.
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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 which is best and why (say something about each component).
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 55% of capacity last year. Will Jill need any outside capital if
she pays $500 of dividends? If so, how much? Show the forecast balance sheet above and your final
answer and supporting calculations below.
7. (4 points) Sweet Tooth Cookies, Inc. has the following ratios
ROE = 15% ; T/A turnover = 1.2 ; ROS = 10%
What percentage of its assets are financed by equity?
8. (8 points) The Paragon Company has sales of $2,000 with a cost ratio of 60%, current ratio of 1.5,
inventory turnover ratio (based on cost) of 3.0, and average collection period (ACP) of 45 days.
Complete the following current section of the firm's balance sheet. Show work for every item.
Cash
Accts Rec
Inventory
Current Assets
$
$
Accts Payable $
Accruals
Current Liabs
60
$ 750
4
9. (30 points) Additional Funds needed with financial feedback
Forecast AFN with a 40 % sales increase; at 80% of capacity last year; any additional 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 work in the space provided.
Sales Factor____________ Capacity factor__________________
Last
Factor
1st Pass
Feedback
2nd Pass
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
36,000
-17,440
-15,000
3,560
-560
3,000
-1,200
1,800
-810
990
1,080
6,480
9,000
16,560
12,600
29,160
4,320
2,880
2,100
9,300
3,500
3,500
12,860
29,160
Show AFN calculations for each iteration and total AFN after two iterations?
Show interest calculation.
5
10. (4 points) Use the following information to calculate the interest rate on an eight-year bond just
issued by Becher Inc.
Inflation: next two years = 2.5%; year 3 and beyond = 4.5%
Pure Rate = 2.0%; Maturity Risk Premium = zero for a 1-year maturity, increasing by .1% each year
thereafter; Default Risk Premium = 1.5%; Liquidity Risk Premium = 0.0% for treasuries; 0.5% for
Corporate bonds
a. 7.7%
Show work here:
b. 8.2%
c. 8.7%
d. 9.2%
e. 9.4%
11. (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.
b.
c.
d.
$16.20
$10.80
$7.20
None of the above
Show work here:
12. (3 points) Jill and Bobbi worked together on the Abercrombie assignment. To calculate the retention
rate, Jill found net income of $100 on the income statement and Bobbi found retained earnings of
$500 in the equity section of the balance sheet. Since retention rate is retained earnings divided by
net income, they report the retention rate is 5.0 = 500%. Is their calculation correct, explain?
13. (3 points) Sam is presenting his company for the AGEC 424 term project. He shows that the industry
debt ratio is 60% and his company has a debt ratio of 50%. When he gets to the DuPont equation, he
shows his company has an equity multiplier of 10 and the industry with an EM of 20. Do you see
anything wrong? Explain.
14.
a.
b.
c.
d.
e.
(2 points) Which of the following is not associated with federal government debt?
Liquidity risk
Default risk
Maturity Risk
Both a & b
All of the above
15. (2 points) A 30-year corporate bond pays a higher interest rate than a 30-year federal government
bond. This is due to a higher __________ premium on the corporate bond.
a. inflation
b. default Risk
c. maturity Risk
d. both a & b
e. all of the above
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16.
a.
b.
c.
d.
17.
a.
b.
c.
d.
e.
18.
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
(2 points) Which of the following is not affected by a change in interest expense?
Gross margin
EBIT
ROE
A and b
All of the above
(2 points) The ratio group most likely to be used to indicate a firm’s ability to meet short-term
financial obligations would be:
liquidity ratios
financial leverage ratios
activity ratios
profitability ratios
19. (3 points) Wessel Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 each. Cost of
goods sold will be 40% of the sale price. Depreciation expense will be $3,000, interest expense
$2,500, and other expenses will be $4,000. Wessel’s tax rate is 20%. What will Wessel Corp.’s net
income be for 2005?
a. $3,500
Show work here:
b. $6,800
c. $14,000
d. $16,400
e. $28,400
20. (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
21. (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
Show work here:
b. $840
c. $850
d. $870
22. (2 points) Managers whose bonuses are based on the income of the firm tend to overstate the value of
accounts receivable and inventory with the following result:
a.
The firm’s value is less than it is held out to be.
b.
Profit is more than it is held out to be.
c.
The firm’s value is more than it is held out to be.
d.
Liabilities are less than they are held out to be.
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23. (2 points) Which of the following will increase equity?
a.
An increase in dividends paid
b.
Issuance of new stock
c.
An increase in retained earnings from net income or EAT
d.
Both b & c
e.
All of the above
24. (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
25. (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
26. (3 points) Which of the following describes the cash conversion cycle?
a.
From the purchase of inventory to the collection of cash from the sale of that inventory
b.
From the payment for inventory to the sale of that inventory
c.
From the payment for inventory to the collection of cash from the sale of that inventory
d.
From the purchase of inventory to the sale of that inventory
e.
None of the above describes the cash conversion cycle.
27. (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
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