AGEC $424$ EXAM 1 Spring 2013 (167 points)
Name___________________________
Show your work for all questions (even if I forgot to put a reminder on the question).
Logically correct work must be shown to receive credit for your answers.
I. Computron Industries: Balance Sheet as of December 31 ($ thousands)
Cash
$ 100
Accts payable
$ 150
AR
400
Notes Payable
150
Inventories
600
Accruals
100
Total CA
$1,100
Total CL
$ 400
Net FA
$ 500
Long-term debt
500
Total Assets
$1,600
Common stock
Retained earnings
Total Equity
400
300
$ 700
Total L & OE
$ 1,600
Computron Industries: Income Statement for Year Ended December 31($ thousands)
Sales
COGS
Other expenses
Deprec.
EBIT
Interest exp.
EBT
Taxes (30%)
Net income
$ 5,000
(3,500)
(1,000)
(250)
$ 250
(50)
$ 200
(60)
$
140
Other data for Computron Industries:
Dec. 31 stock price: $15
Number of shares outstanding 140 thousand (the numbers above are also in thousands)
Dividends per share $0.50
Lease payments $20 (Thousand)
You may remove this page, but put your name at the top of page 2.
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Name_______________________
1. (38 points) Calculate ratios for Computron Industries for use in comparison to the following
industry averages. Show your work in the Computron Industries box.
Ratio
Industry Computron Industries
Evaluate briefly and then support
If you don’t show your work in this
average
your statement by comparing to
column you don’t get the points.
the industry average.
Current Ratio
1.6x
Evaluate liquidity:
Quick Ratio
0.6x
Debt ratio
(TL/TA)
50%
Times Interest
Earned
7.5x
Inventory
turnover
8x
Days sales
outstanding
40 days
Fixed Asset
turnover
5x
Total assets
turnover
2.0x
Profit margin
(ROS)
Return on total
assets (ROA)
3.0%
Return on
equity (ROE)
12%
Price-Earnings
13x
Market to Book
2.0x
Acts pay. Def.
20 da.
Evaluate debt level:
Evaluate asset management
Evaluate profitability:
6%
Evaluate market ratios:
15.4 da.
Don’t evaluate.
Use the above data for questions 2 through 5.
2
2. (12 points) Construct the extended Du Pont equation for both Computron and for the industry. Then
analyze the component breakdown of the company's ROE in comparison to the industry (say something
about each component).
3. (4 points) Which is more responsible for the deviation of Computron’s ROE from the industry average:
cost control, asset management, or debt management? Explain.
4. (8 points) Show a side by side comparison of the cash conversion cycle for Computron with the
industry. Use the CCC to analyze working capital management for Computron in comparison to the
industry (say something about each component). Say which is best and why?
5. (4 points) Based on the ratios and information in questions 1-4, point out red flags and major successes
for Computron.
3
6. (10 points). Jill’s Wigs Inc. had the following balance sheet last year:
Last
Cash
Accounts rec.
Inventory
Fixed assets
Total assets
$
800
450
950
34,000
$36,200
Factor 1stPass
Last
Fact. 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 80% of
capacity last year. Will Jill need any outside capital if she pays no
dividends? If so, how much? Show the forecast balance sheet above and your
final answer and supporting calculations below.
7. (12 points) You are given the following selected financial information for The Blatz Corporation.
Income Statement
Balance Sheet
Ratios
COGS $750
Cash
$250
ROS
10%
Net Income $160
Net Fixed Assets $850
Current Ratio 2.3
Inventory Turnover
6.0
ACP
45 days
Debt Ratio 49.12%
Calculate the following items and show your work in the space provided below.
Sales:
Total Liab.:
Inventory:
LT Debt:
Accts Rec:
Equity:
Current Assets:
ROA:
Total Assets:
Current Liabilities:
ROE:
4
8. (30 points) Forecast AFN with a 40 % sales increase; at 90% of capacity last year; any additional funds
will come from Notes payable, or a surplus will reduce notes payable. The interest rate is 10%. Round to
the nearest whole dollar.
Show Sales factor _______ And capacity calculation ___________
Last
Sales
-VC
-FC
EBIT
-interest
EBT
-Taxes (40%)
NI
-Div (45%)
Add. RE
Cash
AR
Inv
CA
NFA
TA
AP
Accr.
Notes
CL
Bonds
Stock
RE
TL+E
Factor
1st Pass
Feedback
2nd Pass
40,000
-20,000
-15,000
5,000
-600
4,400
-1,760
2,640
-1188
1452
1,000
6,000
9,000
16,000
13,000
29,000
5,000
2,000
2,000
9,000
4,000
4,000
12,000
29,000
Below show calculations and label: AFN for each pass, total AFN after two passes and additional interest
expense calculation.
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9.
(5 points) Inflation is expected to be 5% next year and a steady 7% each year thereafter. Maturity
risk premiums are zero for one year debt but have an increasing value for longer debt. One-year
government debt yields 9% whereas two-year debt yields 11%.
a. What is the real risk-free rate and the maturity risk premium for two-year debt?
b. Forecast the nominal yield on one- and two-year government debt issued at the beginning of the
second year.
Show work here for a and b:
10. (3 points) Adams Inc. recently borrowed money for one year at 9%. The pure rate is 3%, and Adams’
financial condition warrants a default risk premium of 2% and a liquidity risk premium of 1%. There
is little or no maturity risk in one-year loans. What inflation rate do lenders expect next year?
Show work here:
11. (2 points) The income statement is intended to inform the reader of:
a.
the overall financial condition of the firm at a point in time
b.
how much the firm has earned during an accounting period
c.
how much income has been distributed to shareholders
d.
the cash flow generated by the firm over a period of time
12. (2 points) Which of the following does not appear on the income statement?
a.
Cost of Goods Sold
b.
Depreciation Expense
c.
Accumulated Depreciation
d.
Earnings Before Interest and Tax
e.
Gross Margin
13. (2 points) Holding all other variables constant, an increase in EAT can be caused by a decrease in:
a.
depreciation expense
b.
the cost ratio
c.
the tax rate
d.
both a & c
e.
a, b, & c are correct.
14. (2 points) The income statement line item that shows the performance of operating activities
without consideration of financing is
a.
Net Income
b.
EBIT
c.
EBT
d.
Total Assets
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15. (2 points) Which of the following does not appear on the right hand side of the balance sheet?
a.
Current Liabilities
b.
Accounts Receivable
c.
Retained Earnings
d.
Long-Term Debt
e.
Total Equity
16. (2 points) ________ indicate the firm’s capacity to meet its debt obligations, both short term and
long term.
a.
Liquidity ratios
b.
Asset management ratios
c.
Debt management ratios
d.
Profitability ratios
17. (2 points) The ratio group most likely to be used to indicate a firm’s ability to meet short-term
financial obligations would be:
a.
liquidity ratios
b.
financial leverage ratios
c.
activity ratios
d.
profitability ratios
18. (2 points) Under the DuPont system, the return on assets is equal to:
a.
the product of the gross profit margin and inventory turnover
b.
the sum of the debt-equity ratio and the return on sales
c.
the product of the return on sales and total asset turnover
d.
the product of the return on sales, total asset turnover, and equity multiplier
e.
none of the above
19. (2 points) Which of the following is not a short-term debt instrument?
a.
Commercial paper
b.
Common stock
c.
Money market securities
d.
Treasury bills
20. (2 points) Which organization typically helps a company market new securities?
a.
Commercial bank
b.
Insurance company
c.
Investment bank
d.
Mutual fund
21. (3 points) Find the debt ratio of a firm with total liabilities equal to $800,000 and net worth equal to
$2,400,000. Show work below:
a.
.33
b.
.50
c.
.75
d.
.25
e.
.67
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22. (3 points) CVD, Inc. has an equity multiplier of 2. What is CVD’s stockholders’ equity if total
liabilities are $100,000? Show work below:
a.
b.
c.
d.
$100,000
$150,000
$200,000
$50,000
23. (3 points) How much cash does Gray Computer Co. have if the firm has a current ratio of 2.5, a quick
ratio of 1.2, and current liabilities of $12,000? Gray’s sales are $98,000 and its average collection
period is 40 days. (Assume 365 days per year.) Show work below:
a.
b.
c.
d.
$3,660
$14,440
$10,740
None of the above
24. (3 points) Three years ago a piece of equipment was purchased for $10,000. Assuming an eight-year
life and straight-line depreciation, financial statements for the third year would show: Show work
below:
a.
depreciation expense of $3,000 on the income statement and accumulated depreciation of
$3,000 on the balance sheet
b.
depreciation expense of $1,250 on the income statement and accumulated depreciation of
$3,000 on the balance sheet
c.
depreciation expense of $1,250 on the income statement and accumulated depreciation of
$3,750 on the balance sheet
d.
depreciation expense of $1,250 on the income statement and accumulated depreciation of
$1,250 on the balance sheet
25. (3 points) Selected accounts are listed below. How much is the firm’s operating income? Show work
below:
Accrued payroll $ 2,000
Sales 45,000
Cost of goods sold
26,000
Interest expense
1,000
Expenses (other than interest) 8,000
a.
b.
c.
d.
$8,000
$10,000
$9,000
$11,000
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26. (3 points) Wessel Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 each. Cost of
goods sold will be 40% of the sale price. Depreciation expense will be $3,000, interest expense
$2,500, and other expenses will be $4,000. Wessel’s tax rate is 20%. What will Wessel Corp.’s net
income be for 2005? Show work below:
a.
b.
c.
d.
e.
$3,500
$6,800
$14,000
$16,400
$28,400
27. (3 points) The following items are components of a firm’s balance sheet. How much is the firm’s
working capital (net working capital)? Show work below:
Cash
$ 2,000
Long-term debt $ 10,000
Inventory
$ 12,000
Owners’ equity $ 62,000
Accounts payable $ 8,000
Accruals
$ 1,500
Accumulated depreciation $ 6,000
Accounts receivable
$ 14,000
a.
$14,500
b.
$2,500
c.
$18,500
d.
$12,500
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