FSA 3321 – Fall 2008
Exam 2 – Version 1
Moore
Second Examination – Finance 3321
Fall 2008 (Moore) – Version 1
Section Time:
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Use the Financial Statements for Tootsie Roll 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 Supply of Inventory at the end 2007.
2. Compute the Current Ratio for 2006.
3. Compute the Working Capital Turnover for 2006.
4. Compute the Times Interest Earned for 2006.
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FSA 3321 – Fall 2008
Exam 2 – Version 1
5. Compute the Accounts Receivable Turnover for 2007.
6. Compute the Operating Profit Margin for 2006.
7. Compute the Quick Asset Ratio for 2007.
8. Compute the Debt Service Margin for 2006.
9. Compute the Sustainable Growth Rate for 2006.
10. Compute the Cash to Cash Cycle for 2006.
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Moore
FSA 3321 – Fall 2008
Exam 2 – 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
Use the following information (assumptions) to provide forecasts for Tootsie Roll in problems 12-15.
Assume a forecast (stable) asset turnover ratio of 0.5 and projected sales growth of 1% in 2008,
-5.0% in 2009 and then 2% growth per year for the next 5 years after 2009 for Tootsie Roll.
Further, assume the current ratio in 2007 is 2.00 and that it will increase by equal amounts over
the next 5 years to reach a target level of 2.5. The 2007 gross profit margin dropped to 34% and
is assumed to decrease by 1% per year until it reaches a target 30% level. Finally, assume that net
profit margin is forecast to be 10% for the next 5 years.
12. Compute the forecast total assets in 2009 for Tootsie Roll.
a. $955,119
b. $983,772
c. $1,005,388
d. $1,013,286
e. $1,043,684
13. Compute the forecast gross profit in 2009.
a. $151,993
b. $152,485
c. $152,819
d. $156,553
e. $165,889
14. Assume that Roll maintains a 30 day collection period. Forecast the 2010 receivables.
a. $39,251
b. $40,429
c. $40,908
d. $42,317
e. $42,891
15. Assume that current assets represent 25% of total assets. Compute the total current liabilities for
2009 (maintain the assumed asset turnover of 0.5 times).
a. $106,932
b. $108,536
c. $119,390
d. $119,689
e. $125,674
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FSA 3321 – Fall 2008
Exam 2 – Version 1
Use the following for questions 16-19
- CFFO/OI
- Times Interest Earned
- Net Sales/Cash from sales
- CFFO/NOA
- Net Sales/Net Accounts Receivable
- Sales/Unearned Revenues
- Net Sales/Warranty Liabilities
- Asset Turnover (Sales/Total Assets)
- Total Liabilities/Total Equity
Moore
2004
0.88
14.3
0.99
0.35
12.0
11.45
114
1.50
1.92
2005
0.87
15.6
0.98
0.38
11.4
12.55
126
1.49
2.02
2006
0.85
15.1
1.01
0.37
11.0
14.52
118
1.48
1.98
2007
0.98
20.8
0.72
0.15
11.2
22.68
98
2.22
2.42
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. 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
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. Asset Turnover
d. Net Sales/Unearned Revenues
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
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
e. Sales/Unearned Revenues
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FSA 3321 – Fall 2008
Exam 2 – Version 1
Moore
20. Compute Tootsie Roll’s Cash Collections from sales for 2007. (1 point)
21. 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 11%. The estimated cost of equity is
16.8%. What is the appropriate estimate of the long run market risk premium?
a. 7.00%
b. 8.00%
c. 12.80%
d. 15.20%
e. 16.80%
22. You are valuing a company that has a January 31 financial year end. It is now October 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 (today) when estimating the annual net income at
1/31/2009?
a. 1
b. 2
c. 3
d. 4
e. 5
23. Which statistic measures the percent variation of the dependent variable explained by the
independent variable(s)?
a. Beta
b. T-Statistic of the intercept
c. T-Statistic of the independent variable
d. Adjusted R-squared
e. Correlation coefficient
24. Which of the following statements is correct regarding forecast errors.
a. A $1,000 forecast error in 12 years is more expensive in terms of valuation error, today, when
compared to an $300 error in 3 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 5 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 equity than forecast total liabilities.
e. It is normal to expect raw forecast errors in a smooth growing terminal value perpetuity are
relatively lower than intermediate term forecasts.
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FSA 3321 – Fall 2008
Exam 2 – Version 1
Moore
Consider the following information for Questions 25 through 27 (9 points each):
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 10-year Treasury had a yield of 4%. Also, you found the
market risk premium over the last 3-years to be 8% and that interest rates are not expected to
change in the next 4 years. The Market Cap is $250 million and the tax rate is 30%. Regression
output for XYZ may be found on Page 8 of the exam booklet.
Balance Sheet (Millions)
Published β
1.30
2007
Total Assets
300
Current Liabilities
Long Term Liabilities
Long-term Debt
Pension Liabilities
Capital Leases
Book Value of Equity
100
4.00%
40
40
20
100
8.00%
12.00%
10.00%
25. Based on your analysis, compute the appropriate estimate of the cost of equity.
26.
Compute the Before-Tax weighted average cost of debt
27.
Compute the Before Tax Weighted average cost of capital.
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Average
Interest
Rate
FSA 3321 – Fall 2008
28.
Exam 2 – Version 1
Moore
Compute the upper and lower bounds on the cost of equity (95% confidence level). (3-Points)
. Use the information from problems 25-27 and the regression output on the next page.
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FSA 3321 – Fall 2008
Exam 2 – Version 1
Moore
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.517
0.267
0.257
0.062
72
Coefficients
0.01
1.07
Intercept
X Variable 1
SUMMARY OUTPUT
Standard Error
0.01
0.21
t Stat
0.76
5.06
P-value Lower 95% Upper 95%
0.45
-0.01
0.02
0.00
0.65
1.49
Standard Error
0.01
0.28
t Stat
0.44
5.28
P-value Lower 95% Upper 95%
0.66
-0.01
0.02
0.00
0.91
2.03
Standard Error
0.01
0.34
t Stat
0.26
2.91
P-value Lower 95% Upper 95%
0.80
-0.01
0.02
0.01
0.31
1.69
Dow CAPM Regression
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.570
0.324
0.313
0.056
60
Coefficients
0.00
1.47
Intercept
X Variable 1
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Intercept
X Variable 1
0.394
0.155
0.137
0.050
48
Coefficients
0.00
1.00
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FSA 3321 – Fall 2008
Exam 2 – Version 1
Moore
Income Statements for Tootsie Roll Corp
PERIOD ENDING
Total Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Selling General and Administrative
Non Recurring
Total Operating Expenses
Operating Income or Loss
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Income Before Tax
Income Tax Expense
Net Income
31-Dec-05
487,739
299,156
188,583
31-Dec-06
495,990
310,507
185,483
31-Dec-07
497,717
329,044
168,673
96,936
-17,097
79,839
108,744
7,445
116,189
2,537
113,652
36,425
77,227
99,233
97,821
99,233
86,250
8,270
95,441
726
94,715
28,796
65,919
97,821
70,852
6,850
77,702
535
77,167
25,542
51,625
31-Dec-05
31-Dec-06
31-Dec-07
77,227
16,367
-19,445
-327
9,454
3,947
-4,699
82,524
65,919
16,725
-1,670
-8,493
-6,319
-8,451
-2,055
55,656
51,625
16,380
1,335
2,598
10,235
6,506
1,385
90,064
-14,690
29,578
6,984
21,872
-39,207
26,560
23,673
11,026
-14,767
-29,012
434
-43,345
-15,132
-17,248
-59,999
-92,379
-17,264
-30,694
-32,001
-79,959
-17,542
-27,300
Statements of Cash Flow for Tootsie Roll Corp
PERIOD ENDING
Operating Cash Flows
Net Income
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
Investing Cash Flows
Capital Expenditures
Investments
Other Cashflows from Investing Activities
Total Cash Flows From Investing Activities
Financing Cash Flows
Dividends Paid
Sale Purchase of Stock
Net Borrowings
Total Cash Flows From Financing Activities
-9-
-44,842
FSA 3321 – Fall 2008
Exam 2 – Version 1
Moore
Tootsie Roll Balance Sheets
PERIOD ENDING
Assets
Current Assets
Cash And Cash Equivalents
Short Term Investments
Net Receivables
Inventory
Other Current Assets
Total Current Assets
Long Term Investments
Property Plant and Equipment
Goodwill
Intangible Assets
Other Assets
Total Non-Current Assets
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Total Current Liabilities
Long Term Debt
Other Liabilities
Deferred Long Term Liability Charges
Total Non-Current Liabilities
Total Liabilities
Stockholders' Equity
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholder Equity
Total Stockholder Equity
Total Liabilities and Equity
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31-Dec-05
31-Dec-06
31-Dec-07
91,336
54,892
39,496
55,032
5,840
246,596
55,350
178,760
74,194
189,024
69,772
567,100
813,696
55,729
23,531
41,211
63,957
6,489
190,917
61,249
202,898
74,194
189,024
73,357
600,722
791,639
57,606
41,307
36,860
57,402
6,551
199,726
74,393
201,401
73,237
189,024
74,944
612,999
812,725
81,655
32,001
113,656
7,500
43,047
32,088
82,635
196,291
62,211
28,004
90,215
7,500
12,582
78,665
70,743
160,958
57,972
23,228
81,200
7,500
33,270
75,753
93,295
174,495
36,983
164,236
-1,992
426,125
-7,947
617,405
813,696
37,329
169,233
-1,992
438,648
-12,537
630,681
791,639
37,706
156,752
-1,992
457,491
-11,727
638,230
812,725