FSA 3321 – Summer 2009
Exam 3 – Version 1
Moore
Third Examination – Finance 3321
Summer 2009 (Moore)
Section Time:
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Printed Name:
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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
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by the stipulated terms.
Student’s Signature:
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Use the Financial Statements for PITTSBURGH PAINT AND GLASS 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 for 2008.
2. Compute the Current Ratio for 2007.
3. Compute the Debt Service Margin for 2007.
4. Compute the Quick Asset Ratio (Acid Test) for 2007.
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FSA 3321 – Summer 2009
Exam 3 – Version 1
5. Compute the Working Capital Turnover for 2007.
6. Compute the Times Interest Earned for 2008.
7. Compute the Accounts Receivable Turnover for 2007.
8. Compute Return on Assets for 2007.
9. Compute the Sustainable Growth Rate for 2008.
10. Compute Earnings Retention Rate for 2008.
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FSA 3321 – Summer 2009
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 Pittsburgh Paint and Glass
(Attached Financials for PPG) in problems 12-15.
Assume a forecast (stable) asset turnover ratio of 1.2 and projected sales growth of -20% for
2009 and then 5% sales growth per year for 2010-2013 for PPG. Further, assume the current ratio
in 2008 is 1.4 and that it will increase by equal amounts over the next 5 years to reach a target level
of 1.80. The 2008 gross profit margin dropped to 35% and is assumed to increase by .5% per
year until it returns to its normal 37.5% level. Finally, assume that net profit margin is 3.0% in 2008
and that it will also increase by 0.5% for the next 5 years until it stabilizes at 5.5%.
12. Compute the forecast total assets in 2011 for PPG.
13. Compute the forecast gross profit in 2012.
14. Assume that PPG maintains 91.25 days sales outstanding policy. Forecast 2010 receivables.
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FSA 3321 – Summer 2009
Exam 3 – Version 1
Moore
15. Assume that non-current assets represent 55% of total assets. Compute the total non-current
liabilities for 2009 (maintain the assumed asset turnover of 1.2 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
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Exam 3 – Version 1
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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 PPG’s Cash Collections from sales for 2008. (4 points)
21. You are valuing a company that has an October 31 financial year end. It is now June 15, 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 when estimating the annual net income at 10/31/2009?
a. 1
b. 2
c. 3
d. 4
e. 5
22. Compute PPG’s Cash to Cash cycle for 2008. (4 points)
23. Which of the following statements is correct regarding forecast errors.
a. A $1,000 forecast error in 10 years is less expensive in terms of valuation error, today, when
compared to an $2,000 error in 5 years. (assume a 12% discount rate)
b. Raw (undiscounted) forecasts errors are expected to diminish in time
c. A $1,000 forecast error in 5 years is more expensive in terms of valuation error, today, when
compared to an $3,000 error in 15 years. (assume a 12% 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.
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FSA 3321 – Summer 2009
Exam 3 – Version 1
Moore
24. Compute the percentage of the productive workweek that PPG Dennison spends having its
operations cover interest expense in 2008. (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.
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FSA 3321 – Summer 2009
Exam 3 – Version 1
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Income Statement - Pittsburgh Paint and Glass (PPG)
PERIOD ENDING
Total Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Research Development
Selling General and Administrative
Non Recurring
Others
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
Minority Interest
Net Income From Continuing Ops
Discontinued Operations
Net Income
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Stated in (000's)
31-Dec-06
11,037,000
7,036,000
4,001,000
31-Dec-07
11,206,000
7,087,000
4,119,000
31-Dec-08
15,849,000
10,155,000
5,694,000
318,000
1,980,000
322,000
380,000
3,000,000
1,001,000
108,000
1,143,000
83,000
1,060,000
278,000
-71,000
339,000
2,136,000
83,000
380,000
2,938,000
1,181,000
155,000
1,336,000
93,000
1,243,000
355,000
-73,000
451,000
3,432,000
190,000
563,000
4,636,000
1,058,000
101,000
1,162,000
254,000
908,000
284,000
-86,000
711,000
0
711,000
815,000
19,000
834,000
538,000
0
538,000
FSA 3321 – Summer 2009
Exam 3 – Version 1
Moore
Balance Sheet - Pittsburgh Paint and Glass (PPG)
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 NonCurrent Assets
Total Assets
Stated in (000's)
31-Dec-06
31-Dec-07
31-Dec-08
455,000
0
2,562,000
1,390,000
185,000
4,592,000
352,000
2,496,000
1,396,000
586,000
599,000
5,429,000
10,021,000
526,000
1,706,000
2,816,000
1,856,000
232,000
7,136,000
360,000
2,426,000
1,476,000
612,000
619,000
5,493,000
12,629,000
1,045,000
0
3,319,000
1,702,000
282,000
6,348,000
509,000
2,798,000
2,641,000
1,472,000
930,000
8,350,000
14,698,000
2,090,000
65,000
75,000
557,000
2,787,000
1,155,000
2,561,000
136,000
148,000
4,000,000
6,787,000
2,150,000
75,000
1,744,000
692,000
4,661,000
1,201,000
2,319,000
164,000
133,000
3,817,000
8,478,000
2,816,000
100,000
803,000
491,000
4,210,000
3,009,000
3,565,000
425,000
156,000
7,155,000
11,365,000
Stockholders' Equity
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholder Equity
Total Stockholder Equity
484,000
7,453,000
-4,101,000
408,000
-1,010,000
3,234,000
484,000
7,963,000
-4,267,000
553,000
-582,000
4,151,000
484,000
8,156,000
-4,259,000
580,000
-1,628,000
3,333,000
Total Liabilities and Equity
10,021,000
12,629,000
14,698,000
Liabilities
Current Liabilities
Accounts Payable
Notes Payable
Current Maturities of Long Term Debt
Other Current Liabilities
Total Current Liabilities
Long Term Debt
Other Liabilities
Deferred Long Term Liability Charges
Minority Interest
Total NonCurrent Liabilities
Total Liabilities
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FSA 3321 – Summer 2009
Exam 3 – Version 1
Moore
Statement of Cash Flows - Pittsburgh Paint & Glass (PPG)
PERIOD ENDING
CFFO
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
Stated in (000's)
31-Dec-06
31-Dec-07
31-Dec-08
711,000
380,000
18,000
-87,000
253,000
-78,000
-67,000
1,130,000
834,000
380,000
-14,000
-237,000
76,000
-55,000
12,000
996,000
538,000
563,000
228,000
-4,000
-39,000
79,000
-7,000
1,358,000
CFFI
Capital Expenditures
Investments
Other Cashflows from Investing Activities
Total Cash Flows From Investing Activities
-372,000
0
-290,000
-662,000
-353,000
-1,716,000
-138,000
-2,207,000
-383,000
0
508,000
125,000
CFFF
Dividends Paid
Sale Purchase of Stock
Net Borrowings
Total Cash Flows From Financing Activities
-316,000
-98,000
-87,000
-501,000
-335,000
-80,000
1,698,000
1,283,000
-343,000
6,000
-641,000
-978,000
Effect Of Exchange Rate Changes
Change In Cash and Cash Equivalents
22,000
($11,000)
11,000
$83,000
-10,000
$495,000
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