FSA 3321 – Spring 2009 Exam 2 – Version 1 Moore
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Use the Financial Statements for Precision Cast Parts 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%). Time measures must be denoted by days, turnover ratios by turns, and pure numbers should have no suffix.
1.
Compute the Days Sales Outstanding for the year ended March 31, 2007.
2. Compute the Current Ratio for the year ended March 31, 2008.
3.
Compute the Working Capital Turnover for the year ended March 31, 2006.
4. Compute the Debt Service Margin for the year ended March 31, 2007.
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FSA 3321 – Spring 2009 Exam 2 – Version 1 Moore
5. Compute the Inventory Turnover for the year ended March 31, 2008.
6.
Compute the Operating Profit Margin for the year ended March 31, 2006.
7.
Compute the Quick Asset Ratio for the year ended March 31, 2008.
8.
Compute the Earnings Retention Rate for the year ended March 31, 2006.
9. Compute the Sustainable Growth Rate for the year ended March 31, 2008.
10. Compute the Cash to Cash Cycle for the year ended March 31, 2007.
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FSA 3321 – Spring 2009 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 Precision Cast Parts in 12-15.
Assume an asset turnover ratio of 1.0 in 2009 that will grow by 0.1 per year from 2010-2013.
Forecast sales growth of is 2.5% in 2009, 4.0% in 2010, 6% in 2011, 8% in 2012 and then 10% in
2013. Further, assume the forecast current ratio in 2009 is 1.5 and that it will increase by equal amounts over the next 4 years to reach a target level of 1.9. The 2009 gross profit margin is forecast at 23% and is expected to increase by 1 percentage point in each of the next 4 years until it reaches a target 27% level. Finally, assume that net profit margin is forecast to be 12% for the next
5 years.
12. Compute the forecast total assets in 2010 for PCP.
a. $6,640,308
b. $7,038,726
c. $7,304,339
d. $8,034,772
e. $8,516,859
13. Compute the forecast gross profit in 2012.
a. $1,753,041
b. $1,858,224
c. $1,935,650
d. $2,090,502
e. $2,174,122
14. Assume that PCP maintains a DSI of 70 days. Forecast the 2011 inventory.
a. $1,113,661
b. $1,186,718
c. $1,287,749
d. $1,400,832
e. $,1484,882
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FSA 3321 – Spring 2009 Exam 2 – Version 1 Moore
15. Assume that current assets represent 40% of total assets. Compute the total current liabilities for
2010.
a. $1,639,609
b. $1,759,682
c. $1,947,824
d. $2,815,491
e. $2,921,735
16. Maintain the initial assumptions. The forecast dividend payout ratio is 1.5% for 2009, 1.6% for
2010, 1.7% for 2011, 1.8% for 2012, and 1.9% for 2013. Given this information and the capital structure assumptions used for the projects, the forecast Shareholder Equity in 2010 is:
a. $4,692,484
b. $4,875,166
c. $4,887,808
d. $5,737,662
e. $5,751,687
Use the following for questions 17-20 2004 2005 2006 2007
-
CFFO/OI 0.88 0.87 0.85 0.68
- Times Interest Earned 14.3 15.6 15.1 20.8
- Net Sales/Cash from sales 0.99 0.98 1.01 0.82
-
CFFO/NOA 0.35 0.38 0.37 0.38
- Net Sales/Net Accounts Receivable 12.0 11.4 11.0 11.2
- Sales/Unearned Revenues 11.45 12.55 14.52 22.68
- Net Sales/Warranty Liabilities 114 126 118 98
-
Asset Turnover (Sales/Total Assets) 1.50 1.49 1.48 2.22
-
Total Liabilities/Total Equity 1.92 2.02 1.98 2.42
17. 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
18. 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
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FSA 3321 – Spring 2009 Exam 2 – Version 1 Moore
19. 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
20. 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
21. You have just computed the Beta of a stock to be 1.5 and the estimate the expected market return next period is 11%. The estimated cost of equity is 13.2%. With an estimated long run market risk premium of 6.8%, what risk free rate supports this cost of equity? a.
2.00% b.
3.00% c.
4.00% d.
5.00% e.
6.00%
22. You are valuing a company that has a March 31 financial year end. It is now March 24, 2009.
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
3/31/2009?
a. 0
b. 1
c. 2
d. 3
e. 4
23. Which statistic is used to test whether the estimated Beta significantly differs from zero? 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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FSA 3321 – Spring 2009 Exam 2 – Version 1 Moore
24. Which of the following statements is correct regarding forecast errors. a. A $4,000 forecast error in 14 years is more expensive in terms of valuation error, today, when compared to an $1000 error in 5 years. (assume a 15% discount rate)
b. Raw (undiscounted) forecasts errors are expected to diminish in time c. A $2,000 forecast error in 10 years is less expensive in terms of valuation error, today, when compared to an $4000 error in 15 years. (assume a 15% discount rate). d. When forecasting balance sheets in an equity valuation project, one is more concerned with maintaining a constant debt to equity ratio than the accuracy of forecast total equity. e. It is normal to expect raw forecast errors in a smooth growing terminal value perpetuity are relatively lower than intermediate term forecasts.
Consider the following information for Questions 25 through 27 (7 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 $500 million and the tax rate is 30%. Regression output for XYZ may be found on Page 8 of the exam booklet.
Balance Sheet (Millions) 2007
Average
Interest
Rate
Total Assets
700
Long Term Liabilities
Long-term Debt 140
Published β
1.30
Pension Liabilities
Capital Leases
80
80
Book Value of Equity 300
25. Based on your analysis, compute the appropriate estimate of the cost of equity.
26. Compute the Before-Tax weighted average cost of debt
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Current Liabilities 100 4.00%
6.00%
8.00%
10.00%

FSA 3321 – Spring 2009 Exam 2 – Version 1
27. Compute the Before Tax Weighted average cost of capital.
Moore
28. 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 – Spring 2009
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Exam 2 – Version 1
0.517
0.267
0.257
0.062
72
Intercept
X Variable 1
Moore
Coefficients
0.01
1.07
Standard Error
0.01
0.21
t Stat
0.76
5.06
P-value Lower 95% Upper 95%
0.45
0.00
-0.01
0.65
0.02
1.49
SUMMARY OUTPUT PCP CAPM Regression
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
0.570
0.324
0.313
0.056
60
Intercept
X Variable 1
Coefficients
0.00
1.47
Standard Error
0.01
0.28
t Stat
0.44
5.28
P-value Lower 95% Upper 95%
0.66
0.00
-0.01
0.91
0.02
2.03
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Intercept
X Variable 1
0.494
0.455
0.414
0.050
48
Coefficients
0.034
1.60
Standard Error
0.01
0.34
t Stat
0.26
6.91
P-value Lower 95% Upper 95%
0.80
-0.01
0.02
0.01
1.31
1.69
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FSA 3321 – Spring 2009
Exam 2 – Version 1
PERIOD ENDING
Total Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Research Development
Selling General and Administrative
Total Operating Expenses
Operating Income or Loss
Moore
31-Mar-06 31-Mar-07 31-Mar-08
3,546,400 5,361,200 6,852,100
2,739,100 4,051,000 4,982,300
807,300 1,310,200 1,869,800
2,300 0 6,100
250,700 337,200 358,900
253,000 337,200 365,000
554,300 973,000 1,504,800
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Income Before Tax
Income Tax Expense
Minority Interest
Net Income From Continuing Ops
Non-recurring Events
Discontinued Operations
Net Income
554,300 973,000 1,504,800
41,400 52,200 42,300
512,900 920,800 1,462,500
162,200 304,700 495,400
-1,600 -1,400 -1,200
349,100 614,700 965,900
1,500 18,400 21,400
350,600 633,100 987,300
PERIOD ENDING
Net Income
Operating Activities Cash Flows
Total Cash Flow From Operating Activities
31-Mar-06 31-Mar-07 31-Mar-08
350,600 633,100 987,300
230,800 865,500 913,700
Investing Activities Cash Flows
Capital Expenditures
Other Cashflows from Investing Activities
Total Cash Flows From Investing Activities
Financing Activities Cash Flows
Dividends Paid
Sale Purchase of Stock
Net Borrowings
Other Cash Flows from Financing Activities
Total Cash Flows From Financing Activities
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-99,200 -221,500 -226,300
-85,000 -849,100 -203,000
-184,200 -1,070,600 -429,300
-11,900 -16,300 -16,600
47,900 49,300 53,600
-166,400 208,300 -518,300
-1,400 32,700 43,200
-131,800 274,000 -438,100

FSA 3321 – Spring 2009
PERIOD ENDING
Assets
Current Assets
Cash And Cash Equivalents
Short Term Investments
Net Receivables
Inventory
Total Current Assets
Exam 2 – Version 1
31-Mar-06
59,900
33,100
568,400
572,400
1,233,800
Non-Current Assets
Property Plant and Equipment
Goodwill
Intangible Assets
Other Assets
Total Non-Current Assets
Total Assets
698,400
1,655,300
4,500
159,200
2,517,400
3,751,200
Moore
31-Mar-07
150,400
53,600
956,700
876,200
2,036,900
1,001,200
2,088,800
10,800
121,000
3,221,800
5,258,700
31-Mar-08
221,300
45,400
1,112,700
992,900
2,372,300
1,126,200
2,282,400
55,400
213,800
3,677,800
6,050,100
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
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
Capital Surplus
Cumulative Comprehensive Income Adjustment
Total Stockholder Equity
Total Liabilities and Stockholders' Equity
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686,400
76,800
5,200
768,400
599,800
236,900
5,600
842,300
1,610,700
1,083,500
553,800
20,900
1,658,200
319,200
418,400
26,700
764,300
2,422,500
135,100
1,290,500
780,200
-65,300
2,140,500
3,751,200
137,200
1,903,200
878,500
-82,700
2,836,200
5,258,700
1,175,000
20,100
9,700
1,204,800
334,900
418,900
46,500
800,300
2,005,100
139,000
2,873,400
1,016,600
16,000
4,045,000
6,050,100

FSA 3321 – Spring 2009 Exam 2 – Version 1 Moore
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