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Problem #1 (48 marks) Consider the following simplified Statement of Comprehensive income and Statement of Financial Position from Smith Corporation's 2018 Annual Report to Sharcholders, Smith Corporation Statement of Comprehensive Income (5 millions) Net sales $8,324 Cost of goods sold $4,988 Depreciation $1,190 Earnings Before interest and $2,146 taxes Interest paid $320 Taxable income $1,826 Taxes $621 Net income $1,205 Smith Corporation Statement of Financial Position 2017 & 2018 (S millions) 2017 2018 2017 Cash $5415 $3,341 Accounts payable 1,110 Accounts rec. $2.460 $979 Notes payable 2.500 Inventory 2405 2.885 Total 3.610 Total 10,280 7205 Long-term debt 4,800 Net fixed assets 12,300 16.720 Common stock 5,100 Retained earnings 9,070 Total assets 22,580 23.925 Total liabilities and 22.580 Owner's equity 2018 1.650 1,900 3350 4.600 5.900 9.875 23.925 DOO ODD F F5 F6 F7 F8 F9 FV0 a) Generate the common size income statement for 2018. (4 marks) b) For the asset side of the balance sheet create the common size statement for 2017 and 2018 (4 marks) c) Generate the 2018 cash-flow statement for Smith Corporation. (12 marks, one per entry) d) Calculate cash-flow from assets, cash flow to debtholders, and cash-flow to equity holders Does the cash-flow identity hold? (13 marks) e) Calculate the following financial ratios for Smith Corporation for 2018 only (9 marks - 1 Cch) 1. Current ratio IL. Quick ratio it. Return on assets lv. Debt-to-equity ratio v Equity multiplier Vi. Total Asset Turnover vil Prolit Margin VE Times interest earned ratio ROE use DuPont 1 If Smith Corporation pays its suppliers timelier in 2019, what will happen to its current to? Briefly explaint (2 marks) b) If, in 2019. Smith Corporation implements a new inventory management system, which reduces the time goods stay in inventory, what will happen to its quick ratio? Briefly explain! (2 marks) b) If Smith Corporation takes on more debt, what will happen to its times interest earned ratio? Explain (2 marks) Problem 92.332.marks) Your division is considering 2 investment projects, each which requires an upfront expenditure of $27 million. You estimate the cost of capital is 10% and that the investments will produce the following after tax cash flows (in millions of dollars) Year 0 1 2 Project -$27 SS S10 SIS S22 Project -527 S20 510 $8 SA #) What is the regular payback period for cach of these projects? (6 marks) b) What is the discounted payback period for each of these projects (6 marks) c) If the projects are independent and the cost of capital is 10%, which projector projects would you undertake? (5 marks) d) If the projects are mutually exclusive and the cost of capital is 3%, which project should the fint utidertake? (5 marks) e) If the projects are mutually exclusive and the cost of capital is 15%, which project should the fimm undertake? (5 marks) Based on the profitability index (Pb), what is your recommendation concerning these projects in these projects are independent and the cost of capital is 10%7 (5 marks) a) Generate the common-size income statement for 2018. (4 marks) b) For the asset side of the balance sheet create the common-size statement for 2017 and 2018. (4 marks) c) Generate the 2018 cash-flow statement for Smith Corporation. (12 marks, one per entry) d) Calculate cash-flow from assets, cash-flow to debtholders, and cash-flow to equity holders. Does the cash-flow identity hold? (13 marks) e) Calculate the following financial ratios for Smith Corporation for 2018 only (9 marks - 1 each) i. Current ratio ii. Quick ratio iii. Return on assets iv. Debt-to-equity rat Equity multiplier vi. Total Asset Turnover vii. Profit Margin viii. Times interest earned ratio ix. ROE use DuPont f) If Smith Corporation pays its suppliers timelier in 2019, what will happen to its current ratio? Briefly explain! (2 marks) 2) If, in 2019, Smith Corporation implements a new inventory management system, which reduces the time goods stay in inventory, what will happen to its quick ratio? Briefly explain! (2 marks) h) If Smith Corporation takes on more debt, what will happen to its times interest earned ratio? Explain (2 marks) V. Problem #22 marks) Your division is considering 2 investment projects, each which requires an upfront expenditure of $27 million. You estimate the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars). Year 0 1 2 Project A -$27 $5 $10 Project B -$27 $20 $10 Problem #1 (48 marks) Consider the following simplified Statement of Comprehensive income and Statement of Financial Position from Smith Corporation's 2018 Annual Report to Sharcholders, Smith Corporation Statement of Comprehensive Income (5 millions) Net sales $8,324 Cost of goods sold $4,988 Depreciation $1,190 Earnings Before interest and $2,146 taxes Interest paid $320 Taxable income $1,826 Taxes $621 Net income $1,205 Smith Corporation Statement of Financial Position 2017 & 2018 (S millions) 2017 2018 2017 Cash $5415 $3,341 Accounts payable 1,110 Accounts rec. $2.460 $979 Notes payable 2.500 Inventory 2405 2.885 Total 3.610 Total 10,280 7205 Long-term debt 4,800 Net fixed assets 12,300 16.720 Common stock 5,100 Retained earnings 9,070 Total assets 22,580 23.925 Total liabilities and 22.580 Owner's equity 2018 1.650 1,900 3350 4.600 5.900 9.875 23.925 DOO ODD F F5 F6 F7 F8 F9 FV0 a) Generate the common size income statement for 2018. (4 marks) b) For the asset side of the balance sheet create the common size statement for 2017 and 2018 (4 marks) c) Generate the 2018 cash-flow statement for Smith Corporation. (12 marks, one per entry) d) Calculate cash-flow from assets, cash flow to debtholders, and cash-flow to equity holders Does the cash-flow identity hold? (13 marks) e) Calculate the following financial ratios for Smith Corporation for 2018 only (9 marks - 1 Cch) 1. Current ratio IL. Quick ratio it. Return on assets lv. Debt-to-equity ratio v Equity multiplier Vi. Total Asset Turnover vil Prolit Margin VE Times interest earned ratio ROE use DuPont 1 If Smith Corporation pays its suppliers timelier in 2019, what will happen to its current to? Briefly explaint (2 marks) b) If, in 2019. Smith Corporation implements a new inventory management system, which reduces the time goods stay in inventory, what will happen to its quick ratio? Briefly explain! (2 marks) b) If Smith Corporation takes on more debt, what will happen to its times interest earned ratio? Explain (2 marks) Problem 92.332.marks) Your division is considering 2 investment projects, each which requires an upfront expenditure of $27 million. You estimate the cost of capital is 10% and that the investments will produce the following after tax cash flows (in millions of dollars) Year 0 1 2 Project -$27 SS S10 SIS S22 Project -527 S20 510 $8 SA #) What is the regular payback period for cach of these projects? (6 marks) b) What is the discounted payback period for each of these projects (6 marks) c) If the projects are independent and the cost of capital is 10%, which projector projects would you undertake? (5 marks) d) If the projects are mutually exclusive and the cost of capital is 3%, which project should the fint utidertake? (5 marks) e) If the projects are mutually exclusive and the cost of capital is 15%, which project should the fimm undertake? (5 marks) Based on the profitability index (Pb), what is your recommendation concerning these projects in these projects are independent and the cost of capital is 10%7 (5 marks) a) Generate the common-size income statement for 2018. (4 marks) b) For the asset side of the balance sheet create the common-size statement for 2017 and 2018. (4 marks) c) Generate the 2018 cash-flow statement for Smith Corporation. (12 marks, one per entry) d) Calculate cash-flow from assets, cash-flow to debtholders, and cash-flow to equity holders. Does the cash-flow identity hold? (13 marks) e) Calculate the following financial ratios for Smith Corporation for 2018 only (9 marks - 1 each) i. Current ratio ii. Quick ratio iii. Return on assets iv. Debt-to-equity rat Equity multiplier vi. Total Asset Turnover vii. Profit Margin viii. Times interest earned ratio ix. ROE use DuPont f) If Smith Corporation pays its suppliers timelier in 2019, what will happen to its current ratio? Briefly explain! (2 marks) 2) If, in 2019, Smith Corporation implements a new inventory management system, which reduces the time goods stay in inventory, what will happen to its quick ratio? Briefly explain! (2 marks) h) If Smith Corporation takes on more debt, what will happen to its times interest earned ratio? Explain (2 marks) V. Problem #22 marks) Your division is considering 2 investment projects, each which requires an upfront expenditure of $27 million. You estimate the cost of capital is 10% and that the investments will produce the following after-tax cash flows (in millions of dollars). Year 0 1 2 Project A -$27 $5 $10 Project B -$27 $20 $10
