Assessment #1
Texas Tech University
Rawls College of Business
FIN 5219: Financial Management Tools
Professor Harrison
Spring 2014
Name (Please Print):
Read Carefully:
This assessment exercise is worth 70 points and counts for 15% of your final
course grade. Partial credit is generally not available on most problems,
however, you must show your work to receive any credit for the answers you
provide. If you have any questions concerning the wording of a particular
problem, please do not hesitate to ask me. Any ex-post misinterpretations
will not be accepted. You have 90 minutes to complete this assessment.
Good-luck!
Honor Code:
“It is the aim of the faculty of Texas Tech University to foster a spirit
of complete honesty and a high standard of integrity. The attempt of
students to present as their own any work that they have not honestly
performed is regarded by the faculty and administration as a serious
offense and renders the offenders liable to serious consequences,
possibly suspension.
Answer the following questions by providing the best answer in the space provided to the left of
each question. (5 points each)
1.
What is THE primary goal of the firm?
2.
Which of the following actions are most likely to directly decrease cash as
shown on a firm’s balance sheet?
a.
b.
c.
d.
It issues $3 million of new common stock.
It sells existing plant and equipment at a price of $8 million.
It reports a large net income for the year.
It increases the dividends paid on its common stock.
3.
For 2012, Aaron’s Acoustics reported $35 million of sales and $27.5
million of operating costs (including depreciation). The company has $20
million of investor-supplied operating capital. Its weighted average cost
of capital is 8%, and its federal-plus-state income tax rate was 35%. What
was the firm’s Economic Value Added (EVA), that is, how much value
did management add to stockholders’ wealth during 2012?
4.
K.R. Camping Supply had $75,000 in cash at year-end 2011 and $60,000
in cash at year-end 2012. The firm invested in property, plant, and
equipment totaling $325,000. Cash flow from financing activities totaled
+$225,000. If accruals increased by $40,000, receivables and inventories
increased by $80,000, and depreciation and amortization totaled $35,000,
what was the firm’s net income?
5.
A firm has a profit margin of 3% and an equity multiplier of 2.5. Its sales
are $150 million, and it has total assets of $60 million. What is its ROE?
6.
Kamdon Brothers Automotive has a DSO of 50 days, and its annual sales
are $10,950,000. What is its accounts receivable balance? Assume that is
uses a 365-day year.
7.
Menchaca Inc. recently reported net income of $4 million. It has 800,000
shares of common stock, which currently trades at $50 a share. Menchaca
continues to expand and anticipates that 1 year from now, its net income
will be $8.0 million. Over the next year, it also anticipates issuing an
additional 100,000 shares of stock so that 1 year from now it will have
900,000 shares of common stock. Assuming Menchaca’s price/earnings
ratio remains at its current level, what will be its stock price 1 year from
now?
8.
Dimas Inc. has sales of $500,000, a net income of $40,000, and the
following balance sheet:
Cash
Receivables
Inventories
Net fixed assets
Total assets
$20,000
80,000
300,000
150,000
550,000
=======
Accounts Payable
Other current liabilities
Long-term debt
Common equity
Total liabilities and equity
$40,000
10,000
100,000
400,000
550,000
======
The new owner thinks that inventories are excessive and can be lowered to the
point where the current ratio is equal to the industry average, 4.0x, without
affecting sales or net income. If inventories are sold and not replaced (thus
reducing the current ratio to 4.0x), if the funds generated are used to reduce
common equity (stock can be repurchased at book value), and if no other changes
occur, by how much will the ROE change?
11.
9.
Kinzer Consignment’s ROE last year was only 4%, but its management
has developed a new operating plan that calls for a debt-to-assets ratio of
50%, which will result in annual interest charges of $250,000. The firm
has no plans to use preferred stock. Management projects an EBIT of
$1,200,000 on sales of $10,000,000, and it expects to have a total assets
turnover ratio of 2.4. Under these conditions, the tax rate will be 40%. If
the changes are made, what will be the company’s return on equity?
10.
LJS Incorporated has $2 billion in assets, and its tax rate is 40%. Its basic
earning power (BEP) ratio is 12%, and its return on assets (ROA) is 6%.
What is LJS’s times-interest-earned ratio?
How can financial ratio analysis be effectively used to evaluate firm and managerial
performance? What are the most important rules and caveats associated with ratio
analysis? (10 points)
12.
What are the most important things you learned from the first weekend of FIN5219, and
how will those concepts, skills, and abilities better enable you to succeed in your career?
(10 points)
Extra Credit (1 point):
If you look at a clock and the time is 3:15, what is the angle between the hour and the minute
hands?