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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