1. Wildhorse Resource Development of Houston, TX (WRD) is an independent oil and natural gas company focused on the acquisition, exploration, development and production of oil, natural gas, and NGL properties primarily in the Eagle Ford Shale and Austin Chalk in East Texas. In 2016 the company became a publicly traded firm by issuing 27,500,000 shares of its common stock at $15.00 per share. Although Wildhorse has traditionally limited its operations to two fields in Texas (Eagle Ford in south Texas and the Austin Chalk in central Texas) it is now engaged in a series of horizontal drilling investments in north central Louisiana. The rapid rate of growth in scale of the firm's operations have led to dramatic increases in the firm's investments and appetite for investment capital as the following balance sheets illustrate. 2016 2017 $ $ 3,115 26.478 1.630 (Numbers in thousands of dollars) Current assets Cash Accounts receivable Prepaid perces Other current assets Total current assets Noncurrent assets Net Property, plant and Equipment Other concurrent assets Total moncurrent assets Total Assets 226 B4,100 3,290 2336 89.955 31.176 $1,407,899 3.206 $1.411.105 $1.42.281 $2.684.486 3.699 $2.688.145 2.778.100 $ 21,014 23.461 14.07 $ 53,005 199,952 58074 311.031 Current liabilities Accounts payable Accrued liabilities Other current liabilities Total current liabilities Noncurrent liabilities Long-term ett Other current abilis Totall noncurrent liabilities Total liabilities $ 242,750 133,061 $375.311 $ 434,373 $ 770,596 105,694 $875.294 $1.187 375 Preferred stock $ 0 $ 445,463 Stockholders' equity Common stack at par Additional paid in capital Accumulated earnings Total Stockholders' equity $ 917 1,017,368 (10.397 $1,007,888 $1,012 1.118,507 75 76 $1,145,292 Total Liabilities and Equity $1.442.261 $2.778 102 Wildhorse's management team has become increasingly concerned about the firm's ability to sustain the capital requirements of the firm's growing and profitable) drilling operations. So, they have decided to approach the firm's bank to try to increase the firm's borrowing capacity by $200 million. The CFO hopes that the bank will be sufficiently impressed by the firm's current level of profitability and growth prospects to grant them the increased credit. If the Wildhorse is not successful in getting the additional financing they have considered two possible contingencies. First, they may have to sell off some of their producing properties that are now contributing to the firm's growing profits. Second, the management team has considered approaching a larger energy company with a proposal to merge or sell the firm. The idea would be that the larger firm could afford to fund Wildhorse's operations internally or by using an existing line of credit. 2015 386,335 12,348) (56,244) (Numbers are in the sands of dollars) Revenues Cash operating panses Depreciation expense Other Income expense Met operating income Interest capanse Earnings before les Income tax (O) Mer income desso 2016 $127,342 (53,979) (81,757) 6.4231 (44,817) (7.834) 3 (52,651) 5575 102076 2017 $427,187 (121,538) (168,250) 1941.109 42,990 131,994) $11,056 3,824 (25,493) 16,903) *32,435) 129.000 a. Compute times interest earned and debt ratios for Wildhorse's operations for all years for which data is available. What do you lesam about the firm's capital structure from these two ratio? b. If you use net debt as the basis for your computation of the debt ratio does this have any material effect on your assessment of Wildhorse's use of borrowed funds to finance its operations? Why or why not? c. Some lenders calculate the times interest earned ratio using the sum of the firm's net operating income plus depreciation expense divided by interest ex pense. How, if at all, does this measure change your assessment of the firm's ability to afford the amount of debt it owes? d. If you were the loan officer responsible for the Wildhorse account, would you make the loan extension? If not, what would you advise the company to do? 2. Imagine that you were hired recently as a financial analyst for a relatively new, highly leveraged ski manufacturer located in the foothills of Colorado's Rocky Moun- tains. Your firm manufactures only one product, a state-of-the-art snowboard. Up to this point the company has been operating without much quantitative knowledge of the business and financial risks it faces Ski season just ended, however, so the president of the company has started to fo- cus more on the financial aspects of managing the business. He has set up a meeting for next week with the CFO, Maria Sanchez, to discuss matters such as the business and financial risks faced by the company Accordingly, Maria has asked you to prepare an analysis to assist her in her dis- cussions with the president. As a first step in your work, you compiled the following information regarding the cost structure of the company: 80,000 units Operating assets 14,000,000 Operating assetur 8 times Belum on parang asis 32% Degree of paring lima Instapse 3600,000 Marginal tax rate 21% As the next step, you need to determine the break-even point in units of output for the company. One of your strong points has been that you always prepare support- ing work papers that show how you arrived at your conclusions. You know Maria would like to see these work papers to facilitate her review of your work. Therefore, you will have the information you require to prepare an analytical income statement for the company. You are sure that Maria would also like to see this statement. In addition, you know that you need it to be able to answer the following questions You also know Maria expects you to prepare, in a format that is presentable to the president, answers to the following questions to serve as a basis for her discussions with the president: a. What is the firm's break-even point in sales dollars? b. If sales should increase by 30 percent (as the president expects), by what per- centage would EBT (earnings before taxes) and net income increase? c. Prepare another income statement, this time to verify the calculations from part (b). 3. Camping USA Inc. has been operating for only 2 years in the outskirts of Albu- querque, New Mexico, and is a new manufacturer of a top-of-the-line camping tent. You are starting an internship as assistant to the chief financial officer of the com- pany, and the owner and CEO, Tom Charles, has decided that this is the right time to know more about the business and financial risks his company must deal with. For this, the CFO has asked you to prepare an analysis to support him in his next meeting with Tom Charles a week from today. To make the required calculations, you have put together the following data re- garding the cost structure of the company. Output level Operating assets Operating asset turnover Return on operating assets Interest expense Marginal tax rate 120,000 units $6,000,000 12 times 48% $720,000 21% The CFO has instructed you to first determine the break-even point in units of output for the company. He requires that you prepare supporting documents that will demonstrate how you arrived at your conclusion and can facilitate his review of your work. Accordingly, you are required to have the information needed to pre pare a pro forma income statement for the company to be presented to the CFO. In a format that is acceptable for a meeting discussion with the CEO, you also need to prepare answers to the following questions: a. What is the firm's break-even point in sales dollars? b. If sales should increase by 40 percent, by what percentage would EBT (ear- ings before taxes) and net income increase? c. Prepare another income statement, this time to verify the calculations from part (b)