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 / $ 275,200AR / 402,000 / Notes Payable / 225,000
Inventories / 836,000 / Accruals / 140,000
Total CA / $1,390,000 / Total CL / $ 640,200
Net FA / $ 360,800 / Long-term debt / 524,612
Total Assets / $1,750,800 / Common stock / 360,000
Retained earnings / 225,988
Total Equity / $ 585,988
Total L & OE / $ 1,750,800
Computron Industries: Income Statement for Year Ended December 31, 2000
2000Sales / $4,950,000
COGS / (3,250,000)
Other expenses / (430,300)
Deprec. / (20,000)
Tot. op. costs / ($3,700,300)
EBIT / $ 1, 249,700
Interest exp. / (176,000)
EBT / $ 1, 073,700
Taxes (30%) / (322,110)
Net income / $ 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.
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 / Industryaverage / Computron Industries / Evaluate briefly and then support your statement of by comparing to the industry average.
Current Ratio / 1.6x / Evaluate liquidity:
Quick Ratio / 0.6x
Debt ratio (TL/TA) / 50% / Evaluate debt level:
Times Interest Earned / 5.1x
Inventory turnover / 5x / Evaluate asset management
Days sales outstanding / 40 days
Total assets turnover / 2.6x
Profit margin (Return on Sales) / 3.5% / Evaluate profitability:
Return on total assets (ROA) / 9.1%
Return on equity (ROE) / 18.2%
Price-Earnings / 14.2x / Evaluate market ratios:
Market to Book / 2.2x
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.
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:
2006 2006
2005 Factor 1st pass Feedback 2nd pass
Sales $1,000.00
Variable costs 400.00
Fixed Costs ___400.00 ______
EBIT $ 200.00
Interest 16.00 ______
EBT $ 184.00
Taxes (40%) 73.60
______
Net Income $ 110.40
Dividends (60%) 66.24 ______
Add'n to R.E. $ 44.16
Current Assets $ 700.00
Net fixed Assets 300.00
______
Total assets $1,000.00
A/P and Accruals $ 150.00
N/P 8.00% 200.00
Common stock 150.00
Retained earnings 500.00
______
Total Liab & Equity $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 $______
Additional funds needed
5. (8 points)Jill's Wigs Inc. had the following balance sheet last year:
Last Factor Next Last Factor Next
Cash $ 800 Accounts payable $ 350
Accounts rec. 450 Accrued wages 150
Inventory 950 Notes payable 2,000
Net fixed A. 34,000 Mortgage 26,500
Common stock 3,200
Retained earnings 4,000
Total liabilities
Total assets $36,200 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 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. No; zero
b. Yes; $7,700
c. Yes; $1,700
d. Yes; $700
e. 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 Payable $
Accts Rec Accruals 60
Inventory
Current Assets $ Current Liabs $ 750
7. (2 points) Which of the following does not appear on the income statement?
a. / Cost of Goods Soldb. / Depreciation Expense
c. / Accumulated Depreciation
d. / Earnings Before Interest and Tax
e. / Gross Margin
8. (2 points) EBIT is also called:
a. / net profitb. / operating profit
c. / pretax profit
d. / gross profit
9. (2 points) Which of the following equations is correct?
a. / Dividends = Net income – Change in Retained Earningsb. / Dividends = Net income + Change in Retained Earnings
c. / Dividends = Change in Retained earnings – Net income
d. / none of the above
10. (2 points) The net book value of an asset is
a. / original cost less the current year’s depreciation expense.b. / original cost less accumulated depreciation.
c. / current market value of the asset less associated selling expense.
d. / current market value of the asset.
11. (4 points) Selected accounts are listed below. How much is the firm’s operating income?
Accrued payroll / $ 2,000
Sales / 45,000
Cost of goods sold / 26,000
Interest expense / 1,000
Expenses (other than interest) / 8,000
a. / $8,000
b. / $10,000
c. / $9,000
d. / $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 lossb. / $2,500 loss
c. / No gain or loss should be recorded.
d. / $2,500 gain
e. / $4,000 gain
13. (4 points) Selected financial statement accounts are as follows. How much is the firm’s ending equity?
Income for the year / $25,000Dividends paid / 6,000
Beginning equity for the year / 56,000
Additional stock sold / 22,000
a. / $103,000
b. / $97,000
c. / $19,000
d. / $85,000
14. (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 ratiosb. / financial leverage ratios
c. / activity ratios
d. / profitability ratios
15. (2 points) Which of the following is not a short-term debt instrument?
a. / Commercial paperb. / Common stock
c. / Money market securities
d. / Treasury bills
16. (2 points) Which organization typically helps a company market new securities?
a. / Commercial bankb. / Insurance company
c. / Investment bank
d. / Mutual fund
17. (2 points) The ______has traditionally been called the “over-the-counter” market.
a. / American Stock Exchangeb. / NASDAQ
c. / New York Stock Exchange
d. / money
18. (2 points) Interest rates and stock prices move:
a. / randomly exhibiting no causal relationship.b. / in opposite directions.
c. / up and down together.
d. / 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. / inflationb. / default Risk
c. / maturity Risk
d. / both a & b
e. / all of the above
20. (2 points) Which of the following is not associated with federal government debt?
a. / Liquidity riskb. / Default risk
c. / Maturity Risk
d. / Both a & b
e. / All of the above
21. (2 points) The yield curve is:
a. / inverted when short-term rates are higher than long-term rates.b. / normal when it slopes upward to the right
c. / a plot of interest rates versus term, also called the term structure of interest rates.
d. / 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%.
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.
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