FSA 3321 – Spring 2010
Exam 2 – Version 1
Moore
Second Examination – Finance 3321
Spring 2010 (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 Cantel Medical Corp, a medical equipment manufacturer, 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. All information (on financials) stated in thousands except per share data.
1. Compute the Days Sales Outstanding for the year ended July 31, 2007.
2. Compute the Quick Asset Ratio for the year ended July 31, 2009.
3. Compute the Working Capital Turnover for the year ended July 31, 2009.
4. Compute the Debt Service Margin for the year ended July 31, 2009.
-1-
FSA 3321 – Spring 2010
Exam 2 – Version 1
Moore
5. Compute the ratio that measures basic product profitability for year ended July 31, 2008.
6. Compute the Inventory Turnover for the year ended July 31, 2007.
7. Compute the length of the Cash to Cash Cycle for the year ended July 31, 2007.
8. Compute the Dividend Payout Rate for the year ended July 31, 2009.
9. Compute the Sustainable Growth Rate for the year ended July 31, 2009.
10. Compute the Return on Equity for the year ended July 31, 2008.
-2-
FSA 3321 – Spring 2010
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 Cantel Medical (CMN) in 12-16.
Assume an asset turnover ratio of 0.92 in 2009 that will grow by 0.02 turns per year from 20102014. Sales are forecast to grow by 6.6% in 2010, grow by 5.8% in 2011, 8% in 2012, 9% in
2013, and then level at 10% in 2014 forward. Further, assume the forecast current ratio 2.3 in
2010, 2.4 in 2011 and 2.5 from 2012 onward. Non-Current Assets are forecast to be 67% of total
assets in 2010, 66% in 2011 and then 65% thereafter. The 2010 gross profit margin is forecast at
38.8% and is forecast to increase by a half percentage point per year until it reaches 40.8%. Assume
net profit margin in 2009 is 6.0% and that it is forecast to increase by 0.3 percentage points per
year until it levels out in 2014 at 7.5%. Finally, Cantel Medical initiated a dividend policy of $0.05
(5 cents) per share during the 4th quarter of the 2009 fiscal year. Quarterly dividends are forecast
at $0.05 during the 2010 fiscal year and then $0.06 in 2011, $0.07 in 2012, $0.08 in 2013 where it is
expected to remain for the next 7 years.
12. Compute the forecast total assets in 2011 for CMN.
13. Compute the forecast cost of goods sold in 2010.
-3-
FSA 3321 – Spring 2010
Exam 2 – Version 1
Moore
14. Compute Total Shareholder Equity for the 2011 fiscal year end. (5 pts)
15. Compute the forecast total non-current liabilities for the 2010 fiscal year end. (5 pts)
16. Assume that inventory turnover for the 2009 fiscal year was 5.50 turns and that forecasts
assume an increase of .25 turns for each of the next 5 years. Compute the forecast inventory
for the 2011 balance sheet.
-4-
FSA 3321 – Spring 2010
Exam 2 – Version 1
Use the following for questions 17-20
- 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
0.48
10.8
1.02
0.68
11.2
22.68
69
1.52
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. Times Interest Earned
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. Net Sales/Warranty Liabilities
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
-5-
FSA 3321 – Spring 2010
Exam 2 – Version 1
Moore
21. You have just computed the Beta of a stock to be 1.5 and the estimate the expected market
return next period is 7.3333%. The estimated cost of equity is 16%. With an estimated long run
market risk premium of 8.0%, 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 trying to value Cantel (financials at end of exam). Today is March 30, 2010. In one
week valuation forecasts will be made. Assume Cantel publishes its 10-K’s no earlier than 6
weeks after the fiscal year end and 10-Q’s no earlier than 2 weeks after the period end, how
many quarters of activity must you forecast (in one week) when estimating the annual net income
for the 2010 fiscal year?
a. 0
b. 1
c. 2
d. 3
e. 4
23. Which statistic is assess the whether the estimate of Beta significantly differs from zero in a
statistical sense?
a. Beta
b. T-Statistic of the intercept
c. T-Statistic of the independent variable
d. Adjusted R-squared
e. Correlation coefficient
-6-
FSA 3321 – Spring 2010
Exam 2 – Version 1
Moore
Consider the following information for Questions 24 through 26 (4 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 3.69%. Also, you found
the market risk premium over the last 3-years to be 7% and that interest rates are not expected to
change in the next 4 years. The Market Cap is $1,000 million and the tax rate is 30%. Regression
output for XYZ may be found on Page 9 of the exam booklet.
Balance Sheet (Millions)
Total Assets
Published β
1.60
2009
1,200
Current Liabilities
200
2.50%
Long Term Liabilities
Long-term Debt
Pension Liabilities
Capital Leases
Book Value of Equity
140
60
100
700
7.50%
6.00%
9.00%
24. Based on your analysis, compute the appropriate estimate of the cost of equity.
25.
Compute the Before-Tax weighted average cost of debt
26.
Compute the After-Tax Weighted average cost of capital.
-7-
Average
Interest
Rate
FSA 3321 – Spring 2010
Exam 2 – Version 1
Moore
27.
Compute the upper and lower bounds on the cost of equity (95% confidence level). (4-Points)
. Use the information from problems 24-26 and the regression output on the next page.
28.
Compute the stock return for July 2009 using the information below for AIG. Note they had a
reverse split of 1:20 on July 4, 2009. (4 Points)
Date
Open
High
Low
Close
Mar-2010
27.96
38.45
24.5
34.45
Feb-2010
24.38
29.3
21.54
24.77
Jan-2010
30.53
30.54
23.04
24.23
Dec-2010
29.58
32.8
27.4
29.98
Nov-2010
34.42
40.09
28.04
28.4
Oct-2010
43.57
47.42
33.02
33.62
Sep-2010
41.04
54.4
32.66
44.11
Aug-2010
13.29
55.9
12.97
45.33
Jul-2010
19.65
22.96
8.22
13.14
24-Jul-2009 $ 1.00 Dividend
04-Jul-2009 1 : 20 Stock Split
Jun-2009
1.7
1.74
1.08
1.16
29.
Compute the August 2009 stock return AIG. (4 points)
-8-
FSA 3321 – Spring 2010
Exam 2 – Version 1
Moore
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Intercept
X Variable 1
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Intercept
X Variable 1
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Intercept
X Variable 1
SUMMARY OUTPUT
Regression Statistics
Multiple R
R Square
Adjusted R Square
Standard Error
Observations
Intercept
X Variable 1
0.628
0.395
0.386
0.107
72
Coefficients
Standard Error
0.02
0.01
1.98
0.29
t Stat
1.69
6.76
P-value
Lower 95% Upper 95%
0.10
0.00
0.05
0.00
1.40
2.56
0.671
0.451
0.441
0.104
60
Coefficients
Standard Error
0.01
0.01
2.01
0.29
t Stat
1.03
6.90
P-value
Lower 95% Upper 95%
0.31
-0.01
0.04
0.00
1.43
2.59
0.685
0.469
0.457
0.105
48
Coefficients
Standard Error
0.01
0.02
1.92
0.30
t Stat
0.78
6.37
P-value
Lower 95% Upper 95%
0.44
-0.02
0.04
0.00
1.32
2.53
MS
t Stat
0.37
6.18
F
Significance F
P-value
Lower 95% Upper 95%
0.71
-0.03
0.04
0.00
1.29
2.55
0.727
0.529
0.515
0.106
36
df
SS
Coefficients
Standard Error
0.01
0.02
1.92
0.31
-9-
FSA 3321 – Spring 2010
Exam 2 – Version 1
Moore
Cantel Medical Corp. (CMN) - Balance Sheet
PERIOD ENDING
Assets
Current Assets
Cash And Cash Equivalents
Short Term Investments
Net Receivables
Inventory
Total Current Assets
Long Term Investments
Property Plant and Equipment
Goodwill
Intangible Assets
Total Non-Current Assets
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Current Portion of Long Term Debt
Notes Payable - Current
Total Current Liabilities
Long Term Debt
Other Non-Current Liabilities
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
- 10 -
31-Jul-07
31-Jul-08
31-Jul-09
15,860
1,579
31,972
27,320
76,731
1,675
38,577
102,073
44,615
186,940
263,671
18,318
2,560
31,881
31,802
84,561
1,497
37,920
113,958
41,254
194,629
279,190
23,368
3,994
32,348
29,200
88,910
956
35,968
114,995
37,042
188,961
277,871
28,168
6,000
1,803
35,971
51,000
21,630
72,630
108,601
28,002
8,000
2,920
38,922
50,300
21,256
71,556
110,478
26,294
10,000
2,819
39,113
33,300
18,342
51,642
90,755
1,713
77,841
-9,821
76,843
8,494
155,070
263,671
1,752
86,534
-11,340
81,475
10,291
168,712
279,190
1,788
102,103
-12,225
87,169
8,281
187,116
277,871
FSA 3321 – Spring 2010
Exam 2 – Version 1
Moore
Cantel Medical Corp. (CMN) - Income Statement
PERIOD ENDING
Total Revenue
Cost of Revenue
Gross Profit
Operating Expenses
Research Development
Selling General and Administrative
Total Operating Expenses
Operating Income or Loss
Interest Expense
Income Tax Expense
Net Income
31-Jul-07
219,044
140,032
79,012
31-Jul-08
249,374
161,748
87,626
31-Jul-09
260,050
160,571
99,479
4,848
56,212
61,060
17,952
3,508
5,998
8,446
4,010
65,134
69,144
18,482
4,631
5,158
8,693
4,632
67,252
71,884
27,595
2,639
9,387
15,569
15,420
16,840
16,840
31-Jul-07
8,446
-2,479
5,967
31-Jul-08
8,693
9,864
18,557
31-Jul-09
15,569
15,423
30,992
Investing Activities Cash Flows
Capital Expenditures
Investments
Other Cashflows from Investing Activities
Total Cash Flows From Investing Activities
-5,529
0
-36,006
-41,535
-4,983
0
-13,483
-18,466
-4,215
-200
-7,035
-11,450
Financing Activities Cash Flows
Dividends Paid
Sale Purchase of Stock
Net Borrowings
Other Cash Flows from Financing Activities
Total Cash Flows From Financing Activities
0
1,376
19,000
706
21,082
0
148
1,300
434
1,882
-842
0
-15,000
2022
-13,820
Common Shares Outstanding
Cantel Medical Corp. (CMN) - Cash Flow Statement
PERIOD ENDING
Net Income
Accrual Adjustments to compute CFFO
Total Cash Flow From Operating Activities
- 11 -
FSA 3321 – Spring 2010
Exam 2 – Version 1
- 12 -
Moore