Dr. Sudhakar Raju
FN 3000, Fall 2010
QUIZ 1
I. Using the information below, construct a balance sheet and income statement for years 2009
and 2010. Assume that the tax rate is 34 percent.
2009
2010
Sales
$4,018
$4,312
Depreciation
577
578
Cost of goods sold
1,382
1,569
Administrative Expenses
328
274
Interest
269
309
Cash
2,107
2,155
Accounts receivable
2,789
3,142
Notes payable
407
382
Long-term debt
7,056
8,232
Net Fixed Assets
17,669
18,091
Accounts payable
2,213
2,146
Inventory
4,959
5,096
Dividends
490
539
Common Stock (100 shares
?
?
outstanding)
Retained Earnings
$1000
$1505
Note: The average stock price in 2010 was $52.
II. Compute the following values for 2010: Net Working Capital, Retention Ratio, P/E Ratio, Total
Debt Ratio; Operating Cash Flow; Cash Flow to Creditors; Cash Flow to Stockholders; Cash Flow
to Assets.
III. During 2009, Belyk Paving Co. had Sales of $3,100,000. Cost of goods sold; Administrative
expenses and Depreciation expenses were $1,940,000; $475,000; and $530,000 respectively. In
addition, the company had an interest expense of $210,000 and a tax rate of 35 percent.
(Ignore tax loss carry back or carry forward provisions).
a. What is Belyk’s net income for 2009?
b. What is its operating cash flow?
c. Is this company bankrupt? Can this company meet its interest expense payments? Why or
why not?
IV. True or False
a. ) From the perspective of investors, bonds are generally a more risky investment than
common stock
b.) Common stockholders get preference over bond holders in the event of liquidation
c.) Market value and book values generally tend to be the same for most companies
d.) Dividends paid to common stockholders is tax deductible for the corporation
e.) A corporation that redeems its long term debt will decrease cash flow to debt holders
V. See Answer sheet for question.
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ANSWERS TO QUIZ 1
Cash
Accounts receivable
Inventory
Current assets
Net fixed assets
Total assets
Balance sheet as of Dec. 31, 2009
$2,107
Accounts payable
2,789
Notes payable
4,959
Current liabilities
$9,855
Long-term debt
$17,669
Common Stock
R.E.
Total Liab. &
Equity
$27,524
$2,213
407
$2,620
$7,056
$16,848
$1000
$27,524
Note that Common Stock = $27,524 - $2620 -$7056 - $1000 = $16,848
Cash
Accounts receivable
Inventory
Current assets
Net fixed assets
Total assets
Balance sheet as of Dec. 31, 2010
$2,155
Accounts payable
3,142
Notes payable
5,096
Current liabilities
$10,393
Long-term debt
Common Stock
$18,091
R.E.
Total Liab. &
$28,484
Equity
$2,146
382
$2,528
$8,232
$16,219
$1505
$28,484
2009 Income Statement
Sales
$4,018.00
COGS
1,382.00
Admn. Expenses
328.00
Depreciation
577.00
EBIT
$1,731.00
Interest
269.00
EBT
$1,462.00
Taxes (34%)
497
Net income
$ 965
2010 Income Statement
Sales
$4,312.00
COGS
1,569.00
Admn. Expenses
274.00
Depreciation
578.00
EBIT
$1,891.00
Interest
309.00
EBT
$1,582.00
Taxes (34%)
538
Net income
$1,044
Dividends
Additions to RE
Dividends
Additions to RE
$490.00
$475
Note: Addition to R.E. = NI – Dividends = $965 - $490 = $475
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$539
$505
II.
a. NWC = [CA – CL] = [10,393 – 2,528] = $7,865
b. Retention Ratio = [ARE / NI] = [$505.12 / $1044.12] = 48.38%
c. P/E Ratio = [Price per share / Earnings per share] = (Stock price per share) / [Net Income /
Number of shares] = ($52) / [$1044 /100] = $52 /$10.44 = 4.98
d. Total Debt Ratio = [TD / TA] = [C.L. + LT Debt] = [$2528 + $8232] / [$28484] =
37.78%
e. OCF = EBIT + Depreciation – Taxes = $1,891 + $578 – $538 = $1,931
f. Cash flow to Creditors = Interest – Change in LT Debt
= $309 – ($8,232 – 7,056)
= –$867
g. Cash Flow to stockholders = Dividends – Change in Common Stock
= $539 – (14,914 – 15,543)
= $539 + $629
= $1168
h. Cash Flow to Assets = Cash flow to Creditors + Cash flow to stockholders
= –$867 + 1,168 = $301
III a.)
Income Statement
Sales
$3,100,000
Cost of goods sold
1,940,000
Other expenses
475,000
Depreciation
530,000
EBIT
$155,000
Interest
210,000
Taxable income
–$55,000
Taxes (35%)
0
Net income
–$55,000
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b. The operating cash flow for the year was:
OCF = EBIT + Depreciation – Taxes
OCF = $155,000 + 530,000 – 0
OCF = $685,000
c. This company is not bankrupt and can easily meet its interest payments. Net income was
negative because of the tax deductibility of depreciation and interest expense. Notice that
depreciation – a non-cash cost – is very high at $530,000. In fact, the cash flow situation for this
company is actually quite healthy. Notice that OCF is $685,000 and NCF = NI + Dep. is also high
at -$55,000 + $530,000 = $475,000.
IV.
a.)
b.)
c.)
d.)
e.)
False
False
False
False
False
V. The U.S. government did not want to buy the bonds of troubled companies like AIG since
bonds would not give the government any control in running the companies. Purchasing common
stock would expose the government to excessive risk if the troubled companies went bankrupt
despite government assistance. The middle course for the government was to purchase the
preferred stock of the troubled companies. Preferred stock would give the government some
control over running the companies while at the same time limiting the government’s investment
risk.
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