Fin 534 homework set 1

FIN 534  Homework Set #1

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 Use the following information for Questions 1 through 8:

Assume that you recently graduated and have just reported to work as an investment advisor at the one

of the firms on Wall Street. You have been presented and asked to review the following Income

Statement and Balance Sheets of one of the firm’s clients. Your boss has developed the following set of questions you must answer.

Income Statements and Balance Sheet

Balance Sheet 2012 2013

Cash $9,000 $7,282

Short-term investments 48,600 20,000

Accounts receivable 351,200 632,160

Inventories 715,200 1,287,360

Total current assets $1,124,000 $1,946,802

Gross fixed assets 491,000 1,202,950

Less: Accumulated depreciation 146,200 263,160

Net fixed assets $344,800 $939,790

Total assets $1,468,800 $2,886,592

 

Liabilities and Equity

Accounts payable $145,600 $324,000

Notes payable 200,000 720,000

Accruals 136,000 284,960

Total current liabilities $481,600 $1,328,960

Long-term debt 323,432 1,000,000

Common stock (100,000 shares) 460,000 460,000

Retained earnings 203,768 97,632

Total equity $663,768 $557,632

Total liabilities and equity $1,468,800 $2,886,592

 

Income Statements 2012 2013

Sales $3,432,000 $5,834,400

Cost of goods sold except depr. 2,864,000 4,980,000

Depreciation and amortization 18,900 116,960

Other expenses 340,000 720,000

Total operating costs $3,222,900 $5,816,960

EBIT $209,100 $17,440

Interest expense 62,500 176,000

EBT $146,600 ($158,560)

Taxes (40%) 58,640 -63,424

Net income $87,960 ($95,136)

 

 Other Data 2012 2013

Stock price $8.50 $6.00

Shares outstanding 100,000 100,000

EPS $0.88 ($0.95)

DPS $0.22 0.11

Tax rate 40% 40%

Book value per share $6.64 $5.58

Lease payments $40,000 $40,000

 

Ratio Analysis 2012 2013

Current 2.3 1.5

Quick 0.8 0.5

Inventory turnover 4 4

Days sales outstanding 37.3 39.6

Fixed assets turnover 10 6.2

Total assets turnover 2.3 2

Debt ratio 35.60% 59.60%

Liabilities-to-assets ratio 54.80% 80.70%

TIE 3.3 0.1

EBITDA coverage 2.6 0.8

Profit margin 2.60% −1.6%

Basic earning power 14.20% 0.60%

ROA 6.00% −3.3%

ROE 13.30% −17.1%

Price/Earnings (P/E) 9.7 −6.3

Price/Cash flow 8 27.5

Market/Book 1.3 1.1

1. What is the free cash flow for 2013?

2. Suppose Congress changed the tax laws so that Berndt’s depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?

3. Calculate the 2013 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2013?

4. Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover.

5. Calculate the 2013 debt ratio, liabilities-to-assets ratio, times-interest-earned, and EBITDA coverage ratios. What can you conclude from these ratios?

6. Calculate the 2013 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?

7. Calculate the 2013 price / earnings ratio, price / cash flow ratio, and market / book ratio.

8. Use the extended DuPont equation to provide a summary and overview of company’s financial condition as projected for 2013. What are the firm’s major strengths and weaknesses?