Fin 3321 – Fall 2014
Exam 2
Moore
Exam 2 – Fin 3321 – Statement Analysis Fall 2014 (Moore)
Section Time:
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Printed Name:
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Ethical conduct is an important component of any profession. The Texas Tech University Code of
Student Conduct is in force during this exam. Students providing or accepting unauthorized
assistance will be assigned a score of zero (0) for this piece of assessment. Using unauthorized
materials during the exam will result in the same penalty. Ours’ should be a self-monitoring
profession. It is the obligation of all students to report violations of the honor code in this course.
By signing below, you are acknowledging that you have read the above statement and agree to abide
by the stipulated terms.
Student’s Signature:
______________________________
The First 4 Problems must be completed in Class. No extra time will be allowed on these items. The
excel file work and accompanying write-ups are to be done after class are of a take-home nature. Do
not violate the trust I have placed in you. Email me the completed excel file as you did with the
previous exam. You will have until 11pm on Sunday, 26 October to submit the excel file work
associated with the take-home part of the exam.
Download the indicated Excel file with information related for Johnson and Johnson Corp, a
medical equipment and integrated Pharmaceutical manufacturer. You will need this file and the
information to answer much of this exam. Clearly show all inputs to be eligible for credit. Numerical
answers must be taken to 2 decimal places (e.g. 25.42) and percentage based answers must be
taken to the tenth of a percent (e.g. 36.4%). Time measures must be denoted by days, turnover
ratios by turns, and pure numbers should have no suffix. All information (on financials) stated
in thousands except share data.
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Fin 3321 – Fall 2014
Exam 2
Moore
Problem 1 (10 Points) (multiple choice at 2.5 points each)
1. Within the context of forecasting, which of the following ratios best links the income statement to
the balance sheet?
a. Net profit margin
b. Current Ratio
c. Return on Equity
d. Asset Turnover
e. Day’s Sales outstanding
2. You have just computed the Beta of a stock to be 1.5 and the estimate the expected market
return next period is 7.3333%. The estimated cost of equity is 16%. With an estimated long run
market risk premium of 8.0%, what risk free rate supports this cost of equity?
a. 2.00%
b. 3.00%
c. 4.00%
d. 5.00%
e. 6.00%
3. You are trying to value JNJ (financials on the spreadsheet). Today is October 24, 2014. In one
week valuation forecasts will be made. Assume JNJ publishes its 10-K’s no earlier than 6 weeks
after the fiscal year end and 10-Q’s no earlier than 2 weeks after the period end. How many
quarters of activity must you forecast (in one week) when estimating the annual net income that
will be reported on the next published 10-K?
a. 0
b. 1
c. 2
d. 3
e. 4
f. 5
4. Which statistic is assess the whether the estimate of Beta significantly differs from zero in a
statistical sense?
a. Beta
b. T-Statistic of the intercept
c. T-Statistic of the independent variable
d. Adjusted R-squared
e. Correlation coefficient
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Fin 3321 – Fall 2014
Exam 2
Moore
Problem 2 (10 Points) (Regression Results and CAPM)
Provided below is the regression output resulting from using monthly portfolio returns
and the excess return on the S&P 500 (Rm – Rf) to estimate the Beta of the portolio.
Use this information to answer the following question:
SUMMARY OUTPUT
Regression Statistics
Multiple R
69.70%
R Square
48.59%
Adjusted R Square
47.70%
Standard Error
0.07
Observations
60
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
58
59
Coefficients
0.02
1.46
0.2626
0.2779
0.5404
Standard Error
0.01
0.20
MS
0.2626
0.0048
F
54.8120
Significance F
6.1496E-10
t Stat
2.60
7.40
P-value
0.01
0.00
Lower 95%
0.01
1.06
Upper 95%
0.04
1.85
1. What is the estimated Beta of the portfolio?
2. Assume a Long-run Market Risk Premium and a risk-free rate of 2.5%.
What estimated required rate of return for the portfolio is implied by
CAPM?
3. How much of the portfolio’s return is explained by systematic
risk?
4. How much of the return is explained by non-systematic risk?
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Fin 3321 – Fall 2014
Exam 2
Moore
Problem 3 (10 Points) (Short Essay) Company Valued:_________
Briefly comment on the Liquidity, Profitability, Operating Efficiency, and Capital Structure risk or
performance for the firm your group has been tasked with valuing this semester.
Be sure to discuss trends of the firm and the benchmark companies. Also, discuss any identified subindustry (benchmark) segmentation you have observed in the analysis.
Liquidity:
Operating Efficiency:
Profitability and Returns:
Capital Structure, Leverage and Debt Service Capacity:
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Fin 3321 – Fall 2014
Exam 2
Moore
Problem 4 (5 Points) (Short Essay) Company Valued:_________
Choose 1 of the 2 following topics:
Briefly discuss either the cost of equity estimated for your firm that you will have
estimated using regression analysis and assumptions regarding the market risk premium
and the risk-free return.
Does your firm have a Beta greater or less than the market Beta? How good a job does
CAPM do in terms of explaining the volatility of your firm’s returns?
How forecastable are the income statement components of the firm you are valuing?
Comment on structure, trends and stability.
Next, do the same regarding the Balance sheet and the Key elements of the statement of
cash flows.
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