Download Exam 1 2008

AGEC $424$ EXAM 1 (146 points)
September 25/26, 2008
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, 2000
Cash
$ 152,000
Accts payable
$
AR
402,000
Notes Payable
Inventories
836,000
Accruals
Total CA
$1,390,000
Total CL
$
275,200
225,000
140,000
640,200
Net FA
$ 360,800
Long-term debt
524,612
Total Assets
$1,750,800
Common stock
Retained earnings
Total Equity
360,000
225,988
$ 585,988
Total L & OE
$ 1,750,800
Computron Industries: Income Statement for Year Ended December 31, 2000
2000
Sales
$4,950,000
COGS
(3,250,000)
Other expenses
(430,300)
Deprec.
(20,000)
Tot. op. costs
($3,700,300)
EBIT
Interest exp.
EBT
Taxes (30%)
Net income
$ 1, 249,700
(176,000)
$ 1, 073,700
(322,110)
$
751,590
Other data for Computron Industries:
Dec. 31 stock price $135
Number of shares outstanding 100,000
Dividends per share $0.52
Lease payments $20,000
You may remove this page, but put your name at the top of page 2.
1
Name___________________________
1. (36 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
average
your statement of by comparing to
the industry average.
Current Ratio
1.6x
Evaluate liquidity:
Quick Ratio
0.6x
Debt ratio
(TL/TA)
50%
Times Interest
Earned
5.1x
Inventory
turnover
5x
Days sales
outstanding
40 days
Total assets
turnover
2.6x
Evaluate debt level:
Evaluate asset management
2
Profit margin
(Return on
Sales)
3.5%
Return on total
assets (ROA)
9.1%
Return on
equity (ROE)
18.2%
Price-Earnings
14.2x
Market to Book
2.2x
Evaluate profitability:
Evaluate market ratios:
Use the above data for questions 2 and 3.
2. (10 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 or asset management? Explain.
3
4. (30 points) Additional Funds needed with financial feedback
It is 2005 and you have been given the attached information on the Crum
Company. Crum expects sales to grow by 50% in 2006, and variable costs should
increase the same percentage. Fixed costs will increase proportionately with
fixed assets. Fixed assets were being operated at 80% of capacity in 2005.
Current assets and spontaneous liabilities should increase at the same rate
as sales during 2006. The company plans to finance any external funds needed
as 50% notes payable and 50% common stock. After taking financing feedbacks
into account, and after the second pass, what are Crum’s additional notes
payable and common stock needed?
The blank worksheet for the projected balance sheet method follows.
Show calculations of capacity and interest on the right side.
Information on the Crum Company:
Capacity:
2006
2006
2005
Factor 1st pass Feedback 2nd pass
Sales
$1,000.00
Variable costs
400.00
Fixed Costs
___400.00
________
EBIT
Interest
$
200.00
16.00
________
_________
EBT
Taxes (40%)
$
184.00
73.60
_________
________
_________
________
_________
________
_________
________
_________
________
_________
Net Income
Dividends (60%)
$
Add'n to R.E.
$
Current Assets
Net fixed Assets
$
110.40
66.24
44.16
700.00
300.00
_________
Total assets
$1,000.00
A/P and Accruals
N/P
8.00%
Common stock
Retained earnings
$
Total Liab & Equity
Interest:
150.00
200.00
150.00
500.00
_________
$1,000.00
Additional Funds needed each pass:
First pass AFN breakdown: Notes Payable___% $_________
Stock
Total AFN (two passes)
___% $_________
$____________
Additional notes payable needed $____________
Additional common stock needed
$____________
4
Additional funds needed
5. (8 points)Jill's Wigs Inc. had the following balance sheet last year:
Last Factor
800
450
950
34,000
Cash
Accounts rec.
Inventory
Net fixed A.
$
Total assets
$36,200
Next
Last Factor
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
Next
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 feels that she can handle the increase without adding any fixed assets.
(1) Will Jill need any outside capital if she pays no dividends? (2) If so, how much?
a.
b.
c.
d.
e.
No; zero
Yes; $7,700
Yes; $1,700
Yes; $700
No; there will be a $700 surplus.
6. (10 points) The Paragon Company has sales of $2,000 with a cost ratio of 60%, current ratio of 1.5,
inventory turnover ratio (based on cost) of 3.0, and average collection period (ACP) of 45 days.
Complete the following current section of the firm's balance sheet. Clearly show/label the calculation
of each component.
Cash
Accts Rec
Inventory
Current Assets
$
$
Accts Payable $
Accruals
Current Liabs
60
$ 750
5
7.
a.
b.
c.
d.
e.
(2 points) Which of the following does not appear on the income statement?
Cost of Goods Sold
Depreciation Expense
Accumulated Depreciation
Earnings Before Interest and Tax
Gross Margin
8.
a.
b.
c.
d.
(2 points) EBIT is also called:
9.
a.
b.
c.
d.
(2 points) Which of the following equations is correct?
10.
a.
b.
c.
d.
(2 points) The net book value of an asset is
net profit
operating profit
pretax profit
gross profit
Dividends = Net income – Change in Retained Earnings
Dividends = Net income + Change in Retained Earnings
Dividends = Change in Retained earnings – Net income
none of the above
original cost less the current year’s depreciation expense.
original cost less accumulated depreciation.
current market value of the asset less associated selling expense.
current market value of the asset.
11. (4 points) Selected accounts are listed below. How much is the firm’s operating income?
Accrued payroll
Sales
Cost of goods sold
Interest expense
Expenses (other than interest)
a.
b.
c.
d.
$ 2,000
45,000
26,000
1,000
8,000
Show work here:
$8,000
$10,000
$9,000
$11,000
12. (4 points) Albert Corp. bought a machine for $10,000 thirteen years ago. It has been depreciated on a
straight-line basis over a 20-year life with no salvage value. The firm just sold the machine for
$6,000. How much gain/loss should be reported on the sale?
a. $4,000 loss
Show work here:
b. $2,500 loss
c. No gain or loss should be recorded.
d. $2,500 gain
e. $4,000 gain
6
13. (4 points) Selected financial statement accounts are as follows. How much is the firm’s ending
equity?
Income for the year
Dividends paid
Beginning equity for the year
Additional stock sold
a.
b.
c.
d.
14.
a.
b.
c.
d.
15.
a.
b.
c.
d.
16.
a.
b.
c.
d.
$25,000 Show work here:
6,000
56,000
22,000
$103,000
$97,000
$19,000
$85,000
(2 points) The ratio group most likely to be used to indicate a firm’s ability to meet short-term
financial obligations would be:
liquidity ratios
financial leverage ratios
activity ratios
profitability ratios
(2 points) Which of the following is not a short-term debt instrument?
Commercial paper
Common stock
Money market securities
Treasury bills
(2 points) Which organization typically helps a company market new securities?
Commercial bank
Insurance company
Investment bank
Mutual fund
17.
a.
b.
c.
d.
(2 points) The ________ has traditionally been called the “over-the-counter” market.
18.
a.
b.
c.
d.
(2 points) Interest rates and stock prices move:
American Stock Exchange
NASDAQ
New York Stock Exchange
money
randomly exhibiting no causal relationship.
in opposite directions.
up and down together.
none of the above
19. (2 points) A 30-year corporate bond pays a higher interest rate than a 30-year federal government
bond. This is due to a higher __________ premium on the corporate bond.
a. inflation
b. default Risk
c. maturity Risk
d. both a & b
e. all of the above
7
20.
a.
b.
c.
d.
e.
(2 points) Which of the following is not associated with federal government debt?
21.
a.
b.
c.
d.
(2 points) The yield curve is:
Liquidity risk
Default risk
Maturity Risk
Both a & b
All of the above
inverted when short-term rates are higher than long-term rates.
normal when it slopes upward to the right
a plot of interest rates versus term, also called the term structure of interest rates.
all of the above
22. (4 points) Nu-Mode Fashions Inc. manufactures quality women’s wear, and needs to borrow money
to get through a brief cash shortage. Unfortunately, sales are down, and lenders consider the firm
risky. The CFO has asked you to estimate the interest rate Nu-Mode should expect to pay on a one
year loan. She’s told you to assume a 3% default risk premium even though the loan is relatively
short, and to assume the liquidity and maturity risk premiums are each ½%. Inflation is expected to
be 4% over the next twelve months. Economists believe the pure interest rate is currently about
3½%.
Show work here:
23.
24. (4 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:
8