Fin 3321 – Fall 2015
Exam 2
Moore
Exam 2 – Fin 3321 – Statement Analysis Fall 2015 (Moore)
Section Time:
____________________
Printed Name:
____________________
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:
______________________________
Company Valued by Group:
______________________________
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 10pm on Sunday, 8 November 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.
Problem 1 (max = 20): __________
Problem 6 (max = 5): __________
Problem 2 (max = 20): __________
Problem 7 (max = 5): __________
Problem 3 (max = 20): __________
Problem 1 (max =10): __________
Problem 4 (max = 10): __________
Problem 5 (max = 10): __________
Exam Total (max = 100): __________
-1-
Fin 3321 – Fall 2015
Exam 2
Moore
Problem 1 (20 Points) (multiple choice at 4 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 Caterpillar, Inc (financials attached the spreadsheet). Today is November
3, 20143 In one week valuation forecasts will be made. Assume CAT publishes its 10-K’s no
earlier than 8 weeks after the fiscal year end and 10-Q’s no earlier than 6 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. Coefficient of Determination (R-squared)
e. Correlation coefficient
5. Which of the following was NOT the name of a ship used by Columbus to find the new world?
a. San Marcos
b. Santa Maria
c. Nina
d. Pinta
e. All of the above were ships used by Christopher Columbus
-2-
Fin 3321 – Fall 2015
Exam 2
Moore
Problem 2 (20 Points) (Regression Results and CAPM)
Provided below is the regression output resulting from using monthly stock returns for
Caterpillar, Inc. and the excess return on the S&P 500 (Rm – Rf) to estimate the Beta of
the portfolio. Rf was based on the 30-year treasury bond.
Use this information to answer the following question:
SUMMARY OUTPUT
Regression Statistics
Multiple R
69.70%
R Square
55.01%
Standard Error
0.07
Observations
120
ANOVA
df
Regression
Residual
Total
Intercept
X Variable 1
SS
1
118
119
0.6364
0.5205
1.1569
Coefficients
0.01
1.68
Standard Error
0.01
0.14
MS
0.6364
0.0044
F
144.2600
t Stat
0.96
12.01
P-value
0.34
< .0001
Significance F
< .0001
Lower 95%
Upper 95%
0.01
0.04
1.42
1.94
1. What is the estimated Beta of Caterpillar?
2. Assume a Long-run Market Risk Premium of 8%and a risk-free rate of
3.25%. What required rate of return for CAT is implied by CAPM?
3. How much of CAT’s return is explained by nonsystematic risk?
4. Construct the 95% confidence interval for CAT’s cost of equity
-3-
Fin 3321 – Fall 2015
Exam 2
Moore
Problem 3 (20 Points) (Key Ratios)
Attached to the back of the exam are the 3 most recent years financial statements for
Caterpillar, Inc. Your mission is to compute the Sustainable Growth Rate (SGR) and
Altman’s Z-Score for 2014. (You must show all work, inputs and main elements of your
work and computations)
Sustainable Growth Rate (10 Points)
Altman’s Z-Score (10-Points)
 Working Capital 
 Retained Earnings 
Z  score  1.2 

1.4
 Total Assets 
 Total Assets 
 Earnings Before Interest and Taxes 
 3.3

Total Assets

 Market Value of Equity 
 0.6 
 Book Value of Liabilitie s 
 Sales

 1.0 
 Total Assets 
 Evaluate the credit score for CAT
-4-
Fin 3321 – Fall 2015
Exam 2
Moore
Problem 4 (10 Points) (Assumptions underlying Key Ratios)

Compare and Contrast the underlying assumptions used in the determination of
the Sustainable Growth Rate and the Internal Growth Rate (4 Points)

How does the constant leverage assumption impact the capital budgeting process
and how realistic is the dividend payout ratio assumption? (3 Points)

How does SGR translate into CEO and Corporate business activities (strategies) the
lead to Value Creation? Make sure you identify the 3 main policy (activity)
categories that can be managed via SGR. (3 Points)
-5-
Fin 3321 – Fall 2015
Exam 2
Moore
Problem 5 (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:
-6-
Fin 3321 – Fall 2015
Exam 2
Moore
Problem 6 (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.
-7-
Fin 3321 – Fall 2015
Exam 2
Moore
Problem 7 (5 Points) (Short Essay)
In class, last week, we discussed the history of accounting and the state of its development in the
late 1400’s. An argument (probable reason) was presented to explain why there were only balance
sheets prepared during that period of history and not income statements.
Very Briefly, explain the reason and condition that led to the need for balance sheets but not income
statements at that point in history.
-8-
Fin 3321 – Fall 2015
Exam 2
Moore
Problem 8 (10 Points) (Weighted average cost of capital)
At the end of this exam, I have attached the most recent 3 years of financial statements for
Caterpillar Tractor, Inc. (CAT). Your mission is to use this data an the following market data to
determine CAT’s before tax WACC.
Google Finance reports CAT’s Beta to be equal to 1.59
Assume a market risk premium of 8% and the relevant risk free rate for CAPM to be 3.75%
The average interest rate on CAT’s current debt is 3.08%
The average interest rate on CAT’s non-current debt is 5.56%
Assume all level 1,2 and 3 financial assets and liabilities are appropriately marked to market (fair
value).
Compute WACC (before Tax) for CAT
-9-
Fin 3321 – Fall 2015
Caterpillar Incorporated
Exam 2
Moore
Income Statement for the Year Ending
(Measured in Thousands (000's)) (except per share data)
Period Ending
Total Revenue
Less: Cost of Revenue
Gross Profit
Operating Expenses
Research Development
Selling General and Administrative
Non Recurring
31-Dec-2012
65,875,000
47,852,000
18,023,000
31-Dec-2013
55,656,000
41,454,000
14,202,000
31-Dec-2014
55,184,000
40,391,000
14,793,000
2,466,000
6,404,000
580,000
2,046,000
6,528,000
-
2,135,000
7,330,000
-
Total Operating Expenses
Operating Income or Loss
9,450,000
8,573,000
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Less: Interest Expense
Income Before Tax
Less: Income Tax Expense
Less: Minority Interest
130,000
8,703,000
467,000
8,236,000
2,528,000
-41,000
-35,000
5,593,000
465,000
5,128,000
1,319,000
-14,000
239,000
5,567,000
484,000
5,083,000
1,380,000
-16,000
Net Income
5,681,000
3,789,000
3,695,000
645,200
$90.81
$1.72
617,200
$91.53
$2.60
Common Shares Outstanding (000's)
Closing Share Price per share
Annual Dividends Per Share
652,600
$89.61
$2.44
- 10 -
8,574,000
5,628,000
9,465,000
5,328,000
Fin 3321 – Fall 2015
Caterpillar Incorporated
Exam 2
Moore
Balance Sheet Measured At (Measured in Thousands ('000's)
(except per share data)
Period Ending
31-Dec-2012
31-Dec-2013
31-Dec-2014
Assets
Current Assets
Cash And Cash Equivalents
Net Receivables
Inventory
Other Current Assets
Total Current Assets
5,490,000
20,113,000
15,547,000
988,000
42,138,000
6,081,000
18,729,000
12,625,000
900,000
38,335,000
7,341,000
18,503,000
12,205,000
818,000
38,867,000
Long Term Investments
Property Plant and Equipment
Goodwill
Intangible Assets
Other Assets
Deferred Long Term Asset Charges
Total Non-Current Assets
15,617,000
16,461,000
6,942,000
4,016,000
1,785,000
2,011,000
46,832,000
16,595,000
17,075,000
6,956,000
3,596,000
1,745,000
594,000
46,561,000
16,265,000
16,577,000
6,694,000
3,076,000
1,798,000
1,404,000
45,814,000
88,970,000
84,896,000
84,681,000
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
Total Current Liabilities
14,969,000
12,391,000
2,055,000
29,415,000
14,417,000
11,031,000
1,849,000
27,297,000
14,622,000
11,501,000
1,754,000
27,877,000
Long Term Debt
Other Liabilities
Minority Interest
Total Liabilities
27,752,000
14,221,000
50,000
71,438,000
26,719,000
10,002,000
67,000
64,085,000
27,784,000
12,194,000
80,000
67,935,000
4,481,000
29,558,000
(10,074,000)
(6,433,000)
17,532,000
4,709,000
31,854,000
(11,854,000)
(3,898,000)
20,811,000
5,016,000
33,887,000
(15,726,000)
(6,431,000)
16,746,000
Total Assets
Liabilities
Stockholders' Equity
Common Stock
Retained Earnings
Treasury Stock
Other Stockholder Equity
Total Stockholder Equity
Total Liabilities and Equity
88,970,000
- 11 -
84,896,000
84,681,000
Fin 3321 – Fall 2015
Exam 2
Caterpillar Incorporated
Moore
Statement of Cash Flows for the Year Ending
(Measured in Thousands (000's))
Period Ending
Net Income
Operating Activities, Cash Flows Provided By (Used In)
Depreciation
Adjustments To Net Income
Changes In Accounts Receivables
Changes In Liabilities
Changes In Inventories
Changes In Other Operating Activities
Total Cash Flow From Operating Activities
31-Dec-2012
5,681,000
31-Dec-2013
3,789,000
31-Dec-2014
3,695,000
2,813,000
389,000
(15,000)
(2,828,000)
(1,149,000)
252,000
5,184,000
3,087,000
482,000
835,000
(625,000)
2,658,000
(49,000)
10,191,000
3,163,000
553,000
163,000
666,000
101,000
(300,000)
8,057,000
Investing Activities, Cash Flows Provided By (Used In)
Capital Expenditures
Investments
Other Cash flows from Investing Activities
Total Cash Flows From Investing Activities
(5,076,000)
(2,979,000)
1,865,000
(6,190,000)
(4,446,000)
(1,588,000)
988,000
(5,046,000)
(3,379,000)
(1,275,000)
1,027,000
(3,627,000)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid
Sale Purchase of Stock
Net Borrowings
Other Cash Flows from Financing Activities
Total Cash Flows From Financing Activities
(1,623,000)
(397,000)
5,434,000
3,606,000
(1,124,000)
(1,872,000)
(1,611,000)
(4,511,000)
(1,627,000)
(3,995,000)
2,444,000
(2,996,000)
Effect Of Exchange Rate Changes
Change In Cash and Cash Equivalents
(167,000)
2,433,000
(43,000)
591,000
(174,000)
1,260,000
- 12 -