AGEC $424$ Fall 2002 Final Exam
Remove this page from the exam.
The data on this page apply to questions 1 and 2.
2001
2000
Cash
$ 52,000
$ 57,600
AR
402,000
351,200
Inventories
836,000
715,200
Total CA
$1,290,000
$1,124,000
Gross FA
$ 527,000
491,000
Less: Deprec.
166,200
$ 146,200
Net FA
$ 360,000
$ 344,800
Total Assets
$1,650,000
$1,468,800
Accts payable
Notes payable
Accruals
Total CL
Long-term debt
Common stock
Retained earnings
Total equity
Total L&E
Sales
COGS
Other expenses
Deprec.
Tot. op. costs
EBIT
Interest exp.
EBT
Taxes (40%)
Net income
2001
$ 175,200
225,000
140,000
$ 540,200
424,612
460,000
225,988
$ 685,988
$1,650,800
2000
$ 145,600
200,000
136,000
$ 481,600
323,432
460,000
$ 203,768
$ 663,768
$1,468,800
2001
$ 4,350,000
(3,250,000)
(430,300)
(20,000)
($3,700,300)
$ 649,000
(76,000)
$ 573,700
(29,480)
$ 344,220
2000
$ 3,932,000
(2,864,000)
(340,000)
(18,900)
($3,222,900)
$ 709,100
(62,500)
$ 646,600
(58,640)
$ 387,960
Industry Averages
RATIO
Current
Quick
Inventory Turnover
Days Sales Outstanding (DSO)
Fixed Asset Turnover
Total Asset Turnover
Debt Ratio
TIE
Fixed Charge Coverage
Profit Margin
ROA
ROE
2.0x
0.8x
6.0x
32.0 days
10.7x
2.6x
50.0%
2.5x
2.1x
3.5%
9.1%
18.2%
0
Name_________________________
Seat #_____
2002 Final
AGEC $424$
You must show correct work (and/or calculator inputs) on all problems to get credit.
There are 7 pages of questions and 215 points.
1. a. (10 points) What are the company's fixed and total asset turnover ratios for 2000 and 2001?
b. (5 points) Comment on the company's fixed and total asset turnover ratios.
2. a. (10 points) Calculate the company's profitability ratios--profit margin, ROA, and ROE for 2000 and
2001.
b. (10 points) Comment on the company's profitability and compare to the industry using the extended
DuPont Model.
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3. (15 points) Jill's Wigs Inc. had the following balance sheet last year:
Last
Cash
$
800
Accounts receivable
450
Inventory
950
Net fixed assets
34,000
Total assets
$36,200
Mult.
1stPass
Last
mult. 1st Pass
Accounts payable $
350
Accrued wages
150
Notes payable
2,000
Mortgage
26,500
Common stock
3,200
Retained earnings
4,000
Total liabilities
and equity
$36,200
Jill has just invented a non-slip wig for men which she expects will cause sales to double,
increasing after-tax net income to $1,000. She was at 50% of capacity last year.
(a) Will Jill need any outside capital if she pays no dividends?
(b) If so, how much?
Constant growth
4. (12 points) Investors require a 15 percent rate of return on Goulet Company’s stock (k s = 15%). What
will be Goulet’s stock value if the previous dividend was D0 = $6 and if investors expect dividends to grow
at a constant compound annual rate of:
a. –4 percent,
b. 0 percent,
c. 4 percent,
2
One Pass AFN
5. (30 points).
Hogan Inc. generated EBIT of $260,000 this past year using assets of $1,500,000. The interest rate on its
existing long-term debt of $840,000 is 12.5 percent and the firm's tax rate is 40 percent. The firm paid a
dividend of $1.27 on each of its 37,800 shares outstanding from net income of $93,000. The total book
value of equity is $645,000 of which the common stock account equals $335,000. The firm forecasts a
20% increase in sales, assets, and EBIT next year, and a dividend of $1.40 per share. If the firm needs
additional capital funds, it will raise 60% with debt and 40% with equity. Spontaneous liabilities are
estimated at $18,000 for next year, representing an increase of 20% over this year. Except for
spontaneous liabilities, the firm uses no other sources of current liabilities and will continue this policy in
the future. What will be the AFN (broken into the amount of debt and equity) that Hogan will need to
balance its projected balance sheet using the projected balance sheet method through one pass?
Show your work in the table below and in the space beneath the table. Round figures to the nearest
whole dollar. Complete the “last year” column, as well as, the Factor and First Pass columns.
Last Year
EBIT
$
- Interest
Factor
First Pass
$
-__________
EBT
$
- Taxes
$
-__________
NI
$
$
Addition to RE
$
$_________
Total assets
$
$_________
Accruals + AP
$
$
Dividends
Long-term debt
Common Stock
RE
__________
Total liab & OE $
AFN (total)
Debt
_________
$
$_______________
$_______________
Equity $_______________
3
Super Normal Growth
6. Garcia Inc. has a current dividend of $3.00 per share (D0 = $3.00). Analysts expect that the dividend
will grow at a rate of 25 percent a year for the next three years, and thereafter it will grow at a constant
rate of 10 percent a year. The company's cost of equity capital is estimated to be 15 percent.
a. (12 points) What is the current stock price of Garcia Inc.? Include a time line in your answer.
b. (3 points) What are its expected dividend yield and capital gains yield for the first year?
c. (3 points) Now, assume the period of supernormal growth is to last only two years rather than
three years. How would this affect its price, dividend yield, and capital gains yield? Answer in
words only.
7. The risk-free rate of return, kRF, is 5 percent; the required rate of return on the market, k M, is
10.5 percent; and Altman Company’s stock has a beta coefficient () of 0.2.
a.(5 points)Based on the Capital Asset Pricing Model (CAPM), what should be the required return
for Altman Company’s stock?
b.(5 points) If the dividend expected during the coming year, D 1, is $8.00, and if g = a constant
5% at what price should Altman’s stock sell?
4
8. (5 points) You have just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is
8 percent annually, with interest being paid each 6 months. If you expect to earn a 10 percent simple rate
of return on this bond, how much did you pay for it?
9. (5 points) You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6
months. If your simple annual required rate of return is 10 percent with semiannual compounding, how
much should you be willing to pay for this bond?
10. (5 points) Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity.
These bonds will pay $45 interest every 6 months. Current market conditions are such that the bonds will
be sold to net $937.79. What is the YTM of the issue?
11. (15 points) Lorkay Seidens, Inc. just borrowed $200,000. The loan is to be repaid in equal
installments at the end of each month of the next thirty years, and the interest rate is 10%.
What is the monthly payment? ___________
Calculator inputs:
What is the principal portion of the second payment?__________
Show work here:
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12. The Saliford Corporation has an inventory conversion period of 40 days, a receivables collection
period of 26 days, and a payables deferral period of 24 days.
a. (5 points) What is the length of the firm’s cash conversion cycle?
b. (5 points) If Saliford’s annual sales are $3,960,000 and all sales are on credit, what is the average
balance in accounts receivable?
c. (5 points) How many times per year does Saliford turn over its inventory?
13. Green Thumb Garden Centers sells 240,000 bags of lawn fertilizer annually. The optimal safety stock
(which is on hand initially) is 1,200 bags. Each bag costs Green Thumb $4, inventory carrying costs are
20 percent, and the cost of placing an order with its supplier is $25.
a. (5 points) What is the economic ordering quantity?
b (5 points) What is the maximum inventory of fertilizer?
c. (5 points) What will Green Thumb’s average inventory be?
d. (5 points) How often must the company order?
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New Investment
14. (30 points) Mars Inc. is considering the purchase of a new machine that will reduce manufacturing
costs by $12,000 annually. Mars will use the MACRS (3-year class life) method to depreciate the
machine, and it expects to sell the machine at the end of its 4-year operating life for $20,000. The firm
expects to reduce net working capital by $15,000 when the machine is installed. Mars' marginal tax rate
is 40 percent, and it uses a 12 percent required rate of return to evaluate projects of this nature. If the
machine costs $50,000, what is the NPV (and IRR) of the project?
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