FSA 3321 – Summer 2008
Exam 3 – Version 1
Moore
Third Examination – Finance 3321
Summer 2008 (Moore) – Version 1
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:
______________________________
Use the Financial Statements for AVERY DENNISON CORPORATION at the end of the exam
booklet to answer the following 10 questions (no partial credit) – 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%)
1. Compute the Days Sales Outstanding for 2007.
2. Compute the Current Ratio for 2006.
3. Compute the Debt Service Margin for 2007.
4. Compute the Operating Profit Margin for 2007.
-1-
FSA 3321 – Summer 2008
Exam 3 – Version 1
5. Compute the Working Capital Turnover for 2007.
6. Compute the Gross Profit Margin for 2006.
7. Compute the Quick Asset Ratio for 2007.
8. Compute Return on Equity for 2006.
9. Compute the Sustainable Growth Rate for 2006.
10. Compute Times Interest Earned for 2006.
-2-
Moore
FSA 3321 – Summer 2008
Exam 3 – Version 1
Moore
11. 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
11. 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
Use the following information (assumptions) to provide forecasts for Avery Denison (Attached
Financials) in problems 12-15.
Assume a forecast (stable) asset turnover ratio of 1.5 and projected sales growth of 7% per
year for the next 5 years for CVS Drugs. Further, assume the current ratio in 2007 is 0.80 and that
it will increase by equal amounts over the next 5 years to reach a target level of 1.80. The 2007
gross profit margin dropped to 27% and is assumed to increase by 1% per year until it returns to
its normal 30% level. Finally, assume that net profit margin is forecast to be 5% for the next 5 years.
12. Compute the forecast total assets in 2010 for Avery Dennison.
a. $5,151.55
b. $5,512.16
c. $5,898.01
d. $11,590.99
e. $12,402.36
13. Compute the forecast gross profit in 2008.
a. $1,889
b. $2,351
c. $3,367
d. $4,383
e. $5,703
14. Assume that Avery Dennison maintains a 50 day supply of inventory. Forecast 2009 inventory.
-3-
FSA 3321 – Summer 2008
Exam 3 – Version 1
Moore
15. Assume that non-current assets represent 67% of total assets. Compute the total current
liabilities for 2008 (maintain the assumed asset turnover of 1.5 times and sales growth).
Use the following for questions 16-19
- CFFO/OI
- Times Interest Earned
- Net Sales/Cash from sales
- CFFO/NOA
- Net Sales/Net Accounts Receivable
- Current Ratio
- Net Sales/Warranty Liabilities
- Asset Turnover (Sales/Total Assets)
- Total Liabilities/Total Equity
2004
0.88
14.3
0.99
0.35
12.0
1.45
114
1.50
1.92
2005
0.87
15.6
0.98
0.38
11.4
1.55
126
1.49
2.02
2006
0.85
15.1
1.01
0.37
11.0
1.52
118
1.48
1.98
2007
0.98
20.8
1.40
0.35
11.2
2.68
98
1.22
1.42
16. 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 2007?
a. Current Ratio
b. Total Liabilities/Total Equity
c. CFFO/OI (Cash Flow from Operating Activities)/(Operating Income)
d. CFFO/NOA (Cash Flow from Operating Activities)/(Net Operating Assets)
e. Asset Turnover
17. Which of the revenue diagnostic ratios would provide a “red flag” raising concerns that
revenues may have been understated for the purpose of understating net income in 2007?
a. Net Sales/Cash from sales
b. Net Sales/Net Accounts Receivable
c. Total Liabilities/Total Equity
d. Net Sales/Warranty Liabilities
e. Times Interest Earned
18. Which of the expense diagnostic ratios would provide a “red flag” raising concerns that
expenses may have been overstated for the purpose of understating net income in 2007?
a. Net Sales/Cash from sales
b. Total Liabilities/Total Equity
c. CFFO/OI (Cash Flow from Operating Activities)/(Operating Income)
d. CFFO/NOA (Cash Flow from Operating Activities)/(Net Operating Assets)
e. Asset Turnover
-4-
FSA 3321 – Summer 2008
Exam 3 – Version 1
Moore
19. 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 2007?
a. Net Sales/Cash from sales
b. Net Sales/Net Accounts Receivable
c. Asset Turnover
d. Net Sales/Warranty Liabilities
20. Compute AVERY DENNISON CORPORATION’s Cash Collections from sales for 2007. (4 points)
21. You are valuing a company that has a September 30 financial year end. It is now June 2008.
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 annual net income at 9/30/2008?
a. 1
b. 2
c. 3
d. 4
e. 5
22. Compute AVERY DENNISON CORPORATION’s Cash to Cash cycle for 2006. (4 points)
23. 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 $300 error in 4 years. (assume a 15% discount rate)
b. Raw (undiscounted) forecasts errors are expected to diminish in time
c. A $1,000 forecast error in 10 years is more expensive in terms of valuation error, today, when
compared to an $400 error in 3 years. (assume a 15% discount rate).
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.
-5-
FSA 3321 – Summer 2008
Exam 3 – Version 1
Moore
24. Compute the percentage of the productive workweek that Avery Dennison spends having its
operations cover interest expense in2006. (4 points)
25. Which of the following statements is absolutely incorrect when applying the philosophy and art
of forecasting financial statements that will become the inputs to equity valuation models? (per
class lecture) (4 points)
a. Don’t forecast stupidity
b. It is possible and acceptable that forecast non-current liabilities may become negative
c. There will be a choice between providing distorted forecast liability balances and distorted
forecast total shareholder equity balances.
d. Forecast Retained Earnings must take into account forecast net income and forecast total
dividends paid.
e. None of the above is absolutely incorrect.
-6-
FSA 3321 – Summer 2008
Exam 3 – Version 1
Moore
AVERY DENNISON CORPORATION
Fiscal Year End of December 31.
Income Statement
(In millions, except per share amounts)
Net sales
Cost of products sold
Gross profit
Marketing, general and administrative expense
Operating Income
Interest expense
Other expense, net
Income from continuing operations before taxes
Taxes on income
Income from continuing operations
Income (loss) from discontinued operations (net of tax)
Net income
2005
2007
$5,473.50 $5,575.90 $6,307.80
3,996.60 4,037.90 4,585.40
1,476.90 1,538.00 1,722.40
987.90 1,011.10 1,182.50
489.00
526.90
539.90
57.90
55.50
105.20
63.60
36.20
59.40
367.50
435.20
375.30
75.30
76.70
71.80
292.20
358.50
303.50
(65.40)
14.70
$226.80
-7-
2006
$373.20
$303.50
FSA 3321 – Summer 2008
Exam 3 – Version 1
Moore
AVERY DENNISON CORPORATION
Balance Sheet (Fiscal Year end of December 31)
(Dollars in millions)
2005
2006
2007
Assets
Current assets:
Cash and cash equivalents
Trade accounts receivable, less allowances
Inventories, net
Current deferred and refundable income taxes
Other current assets
Total current assets
Property, plant and equipment, net
Goodwill
Other intangibles resulting from business acquisitions
Non-current deferred and refundable income taxes
Other assets
Total Non-current assets
Total Assets
98.50
863.20
439.70
78.10
78.80
1,558.30
1,295.70
673.10
98.70
39.80
538.30
2,645.60
$4,203.90
58.50
910.20
496.90
101.40
119.70
1,686.70
1,309.40
715.90
95.50
42.70
474.70
2,638.20
$4,324.90
71.50
1,113.80
631.00
128.10
113.90
2,058.30
1,591.40
1,683.30
314.20
59.90
537.70
4,186.50
$6,244.80
Liabilities and Shareholders Equity
Current liabilities:
Short-term and current portion of long-term debt
Accounts payable
Accrued payroll and employee benefits
Accrued trade rebates
Current deferred and payable income taxes
Other accrued liabilities
Total current liabilities
Long-term debt
Long-term retirement benefits and other liabilities
Non-current deferred and payable income taxes
Total Non-current liabilities
Total liabilities
364.70
577.90
161.70
145.90
62.40
213.00
1,525.60
723.00
356.80
86.60
$1,166.40
$2,692.00
466.40
630.10
179.40
142.80
48.40
231.70
1,698.80
501.60
334.20
94.10
$929.90
$2,628.70
1110.80
679.20
204.70
150.30
31.40
301.20
2,477.60
1,145.00
391.50
241.30
$1,777.80
$4,255.40
Shareholders equity:
Common stock, $1 par value, authorized
Capital in excess of par value
Retained earnings
Cost of unallocated ESOP shares
Employee stock benefit trust (shares)
Treasury stock at cost
Accumulated other comprehensive income (loss)
124.10
729.50
1,945.30
(7.70)
(552.00)
(638.20)
(89.10)
124.10
881.50
2,155.60
(5.70)
(602.50)
(806.70)
(50.10)
124.10
781.10
2,290.20
(3.80)
(428.80)
(858.20)
84.80
Total shareholders equity
$1,511.90
$1,696.20
$1,989.40
Total Liabilities and shareholders equity
$4,203.90
$4,324.90
$6,244.80
-8-
FSA 3321 – Summer 2008
Exam 3 – Version 1
Moore
AVERY DENNISON CORPORATION
Statement of Cash Flows (December 31 end of year)
(In millions)
2005
2006
2007
$226.80
$373.20
$303.50
155.70
45.80
(12.30)
154.30
43.60
(7.30)
184.10
50.50
(37.50)
108.10
(7.50)
(7.80)
24.10
(6.50)
44.00
21.60
(15.40)
(43.90)
(12.40)
(4.30)
30.40
(31.90)
(12.90)
(2.30)
(24.60)
(45.60)
8.90
12.60
(11.80)
1.00
(5.30)
18.80
(87.10)
6.10
15.10
Net cash provided by operating activities
$441.60
$510.80
$499.40
Investing Activities
Net cash used in investing activities
(167.60)
(154.90)
(1,543.20)
Financing Activities (partial information)
Dividends paid
Net cash provided by (used in) financing activities
(168.70)
(260.50)
(171.80)
(397.80)
(171.80)
1,055.40
0.20
1.90
1.40
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
13.70
84.80
(40.00)
98.50
13.00
58.50
Cash and cash equivalents, end of year
98.50
58.50
71.50
Operating Activities
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation
Amortization
Deferred taxes
Asset impairment and net loss (gain) on sale and
disposal of assets
Stock-based compensation
Other non-cash items, net
Changes in assets and liabilities, net of the effect of
business acquisitions and divestitures:
Trade accounts receivable
Inventories
Other current assets
Accounts payable and accrued liabilities
Taxes on income
Long-term retirement benefits and other liabilities
Effect of foreign currency translation on cash balances
-9-