Question 1-Conceptual questions
Part A: What should be the primary objective of management?
Part B: Briefly explain the term "free-cash flow"
Part C: Briefly explain the term "weighted average cost of capital"
Part D: Briefly explain the term "fundamental value or intrinsic value"
Question 2- Financial Statements
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FINANCIAL STATEMENTS FOR BigRed INC. (MILLIONS OF DOLLARS)
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Balance Sheet
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2008
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2007
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Income Statement
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2008
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Assets
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Sales
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10,000
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Cash
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330
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300
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Operating costs
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8,700
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Accounts receivable
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550
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500
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EBITDA
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1,300
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Inventory
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925
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1,000
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Depreciation
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200
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Total current assets
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1,805
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1,800
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EBIT
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1,100
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Net plant and equipment
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2,300
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2,000
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Interest expense
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300
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EBT
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800
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Total assets
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4,105
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3,800
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Taxes
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250
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Net Income
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550
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Liabilities and equity
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Notes payable
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390
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380
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Industry averages for selected financial ratios
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Accounts payable
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280
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250
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Current ratio
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4.2
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Accruals
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85
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70
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Quick (Acid test) ratio
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2.1
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Total current liabilities
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755
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700
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Inventory turnover ratio
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9
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Long-term debt
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950
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1,100
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Days sales outstanding
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36
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Total liabilities
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1,705
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1,800
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Fixed asset turnover ratio
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3
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Total asset turnover ratio
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1.8
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Common stock
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1,000
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1,000
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Debt ratio
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30%
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Retained earnings
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1,400
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1,000
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Times-interest earned ratio
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6
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Total common equity
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2,400
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2,000
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Profit margin on sales
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5%
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ROA
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9%
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Total liabilities and equity
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4,105
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3,800
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ROE
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15%
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Part A: Compute NOPAT for 2008
Part B: Compute Free Cash Flow for 2008
Part C: Compute net cash provided by operating activities in 2008 appearing on the statement of cash flows (Please note that statement of cash flows is not provided, meaning that you will have to make the computations. For a hint please check Table 2-4 on page 58).
Part D: Compute the amount of dividends paid out in 2008.
Part E: Compute the current ratio for 2008
Part F: Compute the acid ratio for 2008
Part G: Compute the inventory turnover ratio for 2008
Part H: Compute days sales outstanding for 2008
Part I: Compute fixed asset turnover ratio for 2008
Part J: Compute the total asset turnover ratio for 2008
Part K: Compute the debt ratio for 2008
Part L: Compute times-interest-earned for 2008
Part N: Compute return on total assets (ROA) for 2008
Part O: Compute return on common equity (ROE) for 2008
Part P: Using your computations above comment on the firm's liquidity policy.
Part Q: Using your computations above comment on the firm's asset management policy.
Part R: Using your computations above comment on the firm's debt management policy.
Part S: Using DuPont analysis please explain why ROE is larger than ROA
Question 3
The following schedule shows how much money you withdraw or deposit every month to your bank account. If the number shown is negative then the number represents a withdrawal amount and similarly if the number is positive then the number represents a deposit amount. t=1 represents 1 month, t=2 represents 2 months from today. Currently you have a zero balance in your bank account and the first deposit of $10,000 will be made 1 month from today.
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Point in time
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Withdrawal/Deposit
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t=0
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0
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t=1
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10000
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t=2
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144
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t=3
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622
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t=4
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715
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t=5
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82
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t=6
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708
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t=7
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164
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t=8
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419
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t=9
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-273
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t=10
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-656
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t=11
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208
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t=12
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-862
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t=13
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1994
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t=14
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1267
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t=15
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-75
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t=16
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431
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t=17
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1329
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t=18
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183
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t=19
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1877
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t=20
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1837
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t=21
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-545
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t=22
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1412
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t=23
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-407
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t=24
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49
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t=25
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-366
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t=26
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1798
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t=27
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-163
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t=28
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-706
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t=29
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1073
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t=30
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44
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t=31
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1482
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t=32
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1148
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t=33
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772
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t=34
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214
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t=35
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-344
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a) Assuming that your money earns an interest rate of 0.1% per month during the next 36 months, what will be your final balance at the end of t=36?
b) Assuming that your money earns an interest rate of 0.1% per month during the next 12 months (starting from t=0 to t=12) and an interest rate of 0.2% per month during the following months (starting from t=12 to t=24) and an interest rate of 0.3% per month during the following 12 months (starting from t=24 to t=36), what will be your balance at the end of t=36?
Question 4
Suppose that Joe Brown borrows $300,000 via 15-year mortgage that requires him to make payments every month. The first payment will be made one month from today (t=1) and the last payment will be made 180 months from today (t=180). Assume that the monthly interest rate on the loan (r) is 0.5% and there are no prepayment penalties.
a) What will be Joe's monthly mortgage payment?
b) Joe makes the monthly payments (calculated in part a) during the next 60 months and wants to payback all of the loan at the end of the 60th month (t=60). How much will Joe have to pay to extinguish the debt.
c) At t=60, instead of paying back all of the debt out of his own pocket, Joe borrows from another lender a 10-year mortgage loan at a lower monthly rate of 0.4%. What will be Joe's new monthly payments? (Assume no refining costs)
d) Assume the scenario in part c except for that Joe will have to pay a one-time upfront fee of $12000 for refinancing. Should Joe refinance? Why or why not? Please be specific and assume that Joe can reinvest his money in an investment that earns 0.6% rate of return per month.
Question 5
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For years ending 12/31
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2010
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2011
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INCOME STATEMENT
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Net sales
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$ 16,230
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$ 20,355
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Cost of sales
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$ 9,430
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$ 11,898
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Gross Profit
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$ 6,800
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$ 8,457
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Selling, general, and administrative expenses
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$ 5,195
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$ 6,352
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Depreciation
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$ 160
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$ 180
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Net interest expense
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$ 119
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$ 106
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Pre-tax income
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$ 1,326
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$ 1,819
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Income taxes
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$ 546
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$ 822
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Net income
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$ 780
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$ 997
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Dividends
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$ 155
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$ 200
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Contribution to retained earnings
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BALANCE SHEET
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Assets
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2010
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2011
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Cash balances
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$ 508
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$ 609
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Accounts receivable
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$ 2,545
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$ 3,095
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Inventories
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$ 1,630
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$ 1,838
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Total current assets
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$ 4,683
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$ 5,542
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Gross plant & equipment
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$ 3,232
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$ 3,795
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Accumulated depreciation
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$ 1,335
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$ 1,515
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Net plant & equipment
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$ 1,897
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$ 2,280
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Total assets
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$ 6,580
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$ 7,822
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Liabilities & Equity
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Current maturities of long-term debt
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$ 125
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$ 125
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Accounts payable
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$ 1,042
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$ 1,325
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Accrued expenses
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$ 1,145
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$ 1,432
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Total current liabilities
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$ 2,312
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$ 2,882
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Long-term debt
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$ 1,000
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$ 875
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Common stock
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$ 1,135
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$ 1,135
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Retained earnings
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$ 2,133
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$ 2,930
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Total shareholders' equity
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$ 3,268
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$ 4,065
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Total liabilities and equity
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$ 6,580
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$ 7,822
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Please construct the statement of cash flows for year 2011 using the above information.