FSA 3321 – Spring 2008
Exam 2 – Version 1
Moore
Second Examination – Finance 3321
Spring 2008 (Moore) – Version 1
Section Time:
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Student’s Signature:
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Use the Financial Statements for CVS Caremark Drugs at the end of the exam booklet to answer the
following 17 questions (no partial credit) – clearly show all inputs to be eligible for credit.
1. Compute the Accounts Receivable Turnover for 2006.
2. Compute the Current Ratio for 2004.
3. Compute the Debt Service Margin for 2005.
4. Compute the Debt to Equity Ratio for 2006.
5. Compute the Gross Profit Margin for 2004.
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FSA 3321 – Spring 2008
Exam 2 – Version 1
6. Compute the Internal Growth Rate for 2006.
7. Compute the Days Supply of Inventory for 2005.
8. Compute the Net Profit Margin for 2006.
9. Compute the Operating Profit Margin for 2005.
10. Compute the Quick Asset Ratio for 2004.
11. Compute Return on Assets for 2006.
12. Compute Return on Equity for 2005.
13. Compute the Sustainable Growth Rate for 2006.
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FSA 3321 – Spring 2008
Exam 2 – Version 1
Moore
14. Compute percent Sales Growth for 2005.
15. Compute Times Interest Earned for 2005.
16. Compute the Days Investment (supply) of Working Capital for 2006
17. Compute the length of the Cash to Cash Cycle (days) for 2005.
18 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
19. Within the context of forecasting, which foundation of the forecast financial statements?
a. Sales forecast.
b. Net profit margin
c. Cash to cash cycle
d. Current ratio
e. Asset Turnover
20. In terms of confidence and degree of accuracy, which financial statement is the most difficult to
forecast?
a. Income Statement.
b. Balance Sheet.
c. Statement of Cash Flows
d. Cash flow from operating activities
e. Cash flow from financing activities
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FSA 3321 – Spring 2008
Exam 2 – Version 1
Moore
Use the following information(assumptions) to provide forecasts for Deans Foods in problems 21-23.
Assume a forecast (stable) asset turnover ratio of 1.5 and projected sales declining by 3% per year
for the next 4 years for Deans Foods. Further, assume the current ratio in 2006 is 1.03 and that it
will increase by equal amounts over the next three years to reach a target level of 1.30. Finally,
assume that net profit margin is forecast to be 3% for the next 5 years.
21. Compute the forecast total assets in 2009 for Deans Foods.
22. Compute the forecast current ratio in 2008.
23. Compute forecast profits (net income) for 2008.
Use the following for questions 24-25
- Net Sales/Cash from sales
- Net Sales/Net Accounts Receivable
- Net Sales/Warranty Liabilities
- CFFO/OI
- CFFO/NOA
- Asset Turnover (Sales/Total Assets)
2003
0.99
12.0
104
0.88
0.35
1.50
2004
0.98
11.4
106
0.87
0.38
1.49
2005
1.01
11.0
118
0.85
0.37
1.48
2006
1.40
11.2
108
0.68
0.35
1.72
24. Which of the expense diagnostic ratios would provide a “red flag” raising concerns that
expenses may have been understated for the purpose of overstating net income in 2006?
a. Net Sales/Cash from sales
b. Net Sales/Warranty Liabilities
c. CFFO/OI (Cash Flow from Operating Activities)/(Operating Income)
d. CFFO/NOA (Cash Flow from Operating Activities)/(Net Operating Assets)
e. Asset Turnover
25. Which of the revenue diagnostic ratios would provide a “red flag” raising concerns that revenues
may have been overstated for the purpose of overstating net income in 2006?
a. Net Sales/Cash from sales
b. Net Sales/Net Accounts Receivable
c. Asset Turnover
d. CFFO/OI (Cash Flow from Operating Activities)/(Operating Income)
e. CFFO/NOA (Cash Flow from Operating Activities)/(Net Operating Assets)
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FSA 3321 – Spring 2008
Exam 2 – Version 1
Moore
26. Compute Dean Food’s Cash Collections from sales for 2006.
27. You have just computed the Beta of a stock to be 1.6 and the estimate of the relevant risk-free
rate is 4%. The expected market return next period is 12% and your estimate of K e is 18%.
What is the appropriate long-run market risk premium?
a. 4.00%
b. 8.00%
c. 8.50%
d. 8.75%
e. 10.0%
28. Which statistic measures the percent variation of the dependent variable that is explained by the
variation in the independent variable?
a. Beta
b. T-Statistic
c. The estimation period
d. Adjusted R-squared
e. Correlation coefficient
29. You are valuing a company that has a June 30 financial year end. It is now October 2007.
Assuming your company publishes its 10-Q within 2 weeks of the end of the quarter, how many
quarters of activity must you forecast when estimating the end of 2008 net income?
a. 1
b. 2
c. 3
d. 4
e. 5
30. Which of the following statements is correct regarding forecast errors.
a. A $1,000 forecast error in 10 years is more expensive in terms of valuation error, today, when
compared to an $800 error in 3 years. (assume a 15& discount rate)
b. Raw (undiscounted) forecasts errors are expected to grow in time
c. One would expect that forecast operating cash flows are more accurate than forecast net
income.
d. When forecasting balance sheets in an equity valuation project, one is more concerned with
the accuracy of forecast total liabilities than forecast total equity.
e. It is normal to expect forecast errors in a smooth growing terminal value perpetuity are
relatively lower than intermediate term forecasts.
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FSA 3321 – Spring 2008
Exam 2 – Version 1
Moore
Consider the following information for Questions 31 through 33:
You have just estimated β for XYZ Corp. using the Capital Asset Pricing Model. Your regression
results follow. In addition, you also have performed research on the 10-K to get the balance sheet
information below. Your goal is to estimate the relevant costs of capital for XYZ Corp. Assume that
last year’s market return was 12% and the 5-year Treasury had a yield of 5%. Also, you found the
market risk premium over the last 3-years to be 6% and that interest rates are not expected to
change in the next 4 years. The Market Cap is $80 million and the tax rate is 30%
Balance Sheet (Millions)
Estimation
R
2
Period
β
5-Year
2.00
5.25%
3-Year
2-Year
1.50
1.30
28.45%
18.55%
Published β
1.30
2006
Average
Interest
Rate
Total Assets
120
Current Liabilities
Long Term Liabilities
Long-term Debt
Pension Liabilities
10
4.00%
30
40
8.00%
12.00%
Book Value of Equity
40
31. Based on your analysis, compute the appropriate estimate of the cost of equity.
32.
Compute the Before-Tax weighted average cost of debt
33.
Compute the After Tax Weighted average cost of capital.
34.
Which cost of capital should be used to value the free cash flow to the firm being forecast in
this semester’s project (1-Point)
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FSA 3321 – Spring 2008
Exam 2 – Version 1
Moore
CVS CAREMARK CORP
Balance Sheet (In Millions of Dollars)
31-Dec-04
31-Dec-05
31-Dec-06
31-Dec-07
392.30
513.40
530.70
1,764.20
5,453.90
243.10
66.00
1,839.60
5,719.80
241.10
78.80
2,381.70
7,108.90
274.30
100.20
1,056.60
27.50
4,579.60
8,008.20
329.40
148.10
7,919.50
3,505.90
1,898.50
867.90
137.60
217.40
6,627.30
8,392.70
3,952.60
1,789.90
802.20
122.50
223.50
6,890.70
10,395.80
5,333.60
3,195.20
1,318.20
90.80
240.50
10,178.30
14,149.40
5,852.80
23,922.30
10,429.60
$14,546.80
$15,283.40
20,574.10
54,721.90
$2,275.90
$2,467.50
1,666.70
885.60
30.60
1,521.40
253.40
341.60
2,521.50
346.30
1,950.20
1,842.70
344.30
3,593.00
2,484.30
2,556.80
2,085.00
47.20
4,858.80
4,583.90
7,005.00
10,766.30
1,925.90
1,594.10
2,870.40
Total non-current liabilities
774.90
2,700.80
774.20
2,368.30
781.10
3,651.50
8,349.70
3,426.10
857.90
12,633.70
Total liabilities
7,559.60
6,952.20
10,656.50
23,400.00
228.40
8.30
(385.90)
222.60
8.40
(356.50)
213.30
8.50
(314.50)
(140.90)
1,687.30
5,645.50
(55.50)
(114.00)
1,922.40
6,738.60
(90.30)
(82.10)
2,198.40
7,966.60
(72.60)
203.00
15.90
(5,620.40)
(301.30)
(44.50)
26,831.90
10,287.00
(49.70)
6,987.20
8,331.20
9,917.60
31,321.90
$14,546.80
$15,283.40
20,574.10
54,721.90
Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories
Deferred income taxes
Other current assets
Total current assets
Property and equipment, net
Goodwill
Intangible assets, net
Deferred income taxes
Other assets
Total non-current assets
Total assets
367.80
40,572.50
Liabilities:
Accounts payable
Claims and discounts payable
Accrued expenses
Short-term debt
Current portion of long-term debt
Total current liabilities
Long-term debt
Deferred income taxes
Other long-term liabilities
Shareholders equity:
Preference stock, series one ESOP convertible,
Common stock, par value $0.01: authorized
Treasury stock, at cost: 153,682,000 shares
Shares held in trust, 9,224,000 shares
Guaranteed ESOP obligation
Paid in Capital in excess of par value
Retained earnings
Accumulated other comprehensive loss
Total shareholders equity
Total liabilities and shareholders equity
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FSA 3321 – Spring 2008
Exam 2 – Version 1
Moore
CVS CAREMARK CORP
Income Statement (In Millions)
31-Dec-05
31-Dec-06
31-Dec-07
37,006.70
27,312.10
43,821.40
32,079.20
76,329.50
60,221.80
Gross profit
Total operating expenses
9,694.60
7,675.10
11,742.20
9,300.60
16,107.70
11,314.40
Operating profit
Interest expense, net
2,019.50
110.50
2,441.60
215.80
4,793.30
434.60
Earnings before income tax provision
Income tax provision
1,909.00
684.30
2,225.80
856.90
4,358.70
1,721.70
Net earnings
1,224.70
1,368.90
2,637.00
Net revenues
Cost of revenues
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FSA 3321 – Spring 2008
Exam 2 – Version 1
Moore
CVS CAREMARK CORP
Statement of Cash Flows (In Millions of Dollars)
31-Dec-05
31-Dec-06
31-Dec-07
1,224.70
1,368.90
2,637.00
589.10
13.50
733.30
69.90
98.20
1,094.60
78.00
40.10
Change in operating assets and liabilities
providing/(requiring) cash
Accounts receivable, net
Inventories
Other current assets
Other assets
Accounts payable
Accrued expenses
Other long-term liabilities
-83.10
-265.20
-13.20
-0.10
192.20
-43.80
-2.00
-540.10
-624.10
-21.40
-17.20
396.70
328.90
-50.70
279.70
-448.00
-59.20
-26.40
-181.40
-168.20
-16.50
Net cash provided by operating activities
1,612.10
1,742.40
3,229.70
Net cash provided by operating activities
1,612.10
1,742.40
3,229.70
-1,495.40
539.90
12.10
-1,805.30
601.30
-1,983.30
31.80
-1,768.90
1,375.60
-4,224.20
-5.30
29.60
-911.60
-4,593.20
-3,081.70
-632.20
16.50
-10.50
-131.60
178.40
1,589.30
1,500.00
-310.50
-140.90
187.60
42.60
242.30
6,000.00
-821.80
-322.40
552.40
97.80
-5,370.40
-579.40
2,868.10
377.90
Cash flows from operating activities:
Net earnings
Adjustments to reconcile CFFO
Depreciation and amortization
Stock based compensation
Deferred income taxes and other non-cash items
Cash flows from investing activities:
Additions to property and equipment
Proceeds from sale-leaseback transactions
Acquisitions (net of cash acquired) and other investments
Cash outflow from hedging activities
Proceeds from sale or disposal of assets
Net cash used in investing activities
Cash flows from financing activities:
Additions to/ (reductions in) short-term debt
Additions to long-term debt
Reductions in long-term debt
Dividends paid
Proceeds from exercise of stock options
Excess tax benefits from stock based compensation
Repurchase of common stock
Net cash provided by (used in) financing activities
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105.60
FSA 3321 – Spring 2008
Exam 2 – Version 1
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Moore