Company Analysis:

Dan no longer works for Alphabet, but he has a relatively large amount of his personal wealth tied up in both company stock and debt. Consequently, he would like an objective review of the company today and its future prospects. He would also like an opinion on the stocks equity and bond valuations. Dan has sufficient alternative assets and doesnt need to sell his ABCD stock or bonds, but he is becoming concerned about increasing inflation and is reviewing all of his holdings.

Economic Environment:

The risk-free rate is at 4.2%. The economy is just coming out of a recession, but Alphabet is in an early cycle industry and is already recovering (after a downturn in 2007). Alphabets earnings are expected to grow 12%. Inflation is running at 3%, but both Dan and economists are concerned that inflation could rise to 6% within five years.

Alphabet Corp - Income Statement

Period Ending		2010	2009	2008
Total Revenue		45,000,000	37,500,000	34,000,000
Cost of Revenue		22,000,000	18,750,000	18,700,000
Gross Profit		23,000,000	18,750,000	15,300,000
Operating Expenses
	Research Development	1,800,000	800,000	750,000
	Selling General and Administrative	7,800,000	6,750,000	6,300,000
	Total Operating Expenses	9,600,000	7,550,000	7,050,000
EBIT		13,400,000	11,200,000	8,250,000
	Interest Expense	950,000	1,350,000	1,400,000
EBT		12,450,000	9,850,000	6,850,000
	Income Tax Expense	3,975,000	2,950,000	2,050,000
Net Income Applicable To Common Shares (EAT)		$8,475,000	$6,900,000	$4,800,000
Dividend per share		$.385	$.31	$.20

Alphabet Corp Balance Sheet

Period Ending		2010	2009	2008
Assets
Current Assets
	Cash And Cash Equivalents	2,500,000	3,200,000	2,200,000
	Net Receivables	9,000,000	5,500,000	3,400,000
	Inventory	5,500,000	5,000,000	4,000,000
Total Current Assets		17,000,000	13,700,000	9,600,000
Long Term Investments		3,000,000	4,000,000	4,000,000
Property Plant and Equipment		7,750,000	8,500,000	8,500,000
Goodwill		1,250,000	1,350,000	1,400,000
Total Assets		29,000,000	27,550,000	23,500,000
Current Liabilities
	Accounts Payable	4,500,000	3,800,000	3,500,000
	Other Current Liabilities	900,000	750,000	800,000
	LT Debt Due	-	3,000,000	-
Total Current Liabilities		5,400,000	7,550,000	4,300,000
Long Term Debt		8,000,000	8,000,000	11,000,000
Total Liabilities		13,400,000	15,550,000	15,300,000
Stockholders' Equity
Preferred Stock		-	-	-
Common Stock (11 MM shares @ 1.00)		11,000,000	11,000,000	11,000,000
Retained Earnings		4,600,000	1,000,000	-2,800,000
Total Stockholder Equity		15,600,000	12,000,000	8,200,000

LT Debt 3 MM at 11% maturing 2015, 5 MM at 8% maturing 2020.

Dan asks you to explain to him how ratio and trend analysis can help him analyze ABCD going forward. Also, he would like to provide your specific insights and analysis about the last three years of company financials.

Which of the following contributed to Alphabets high ROE in 2010?

(1) Increased Financial leverage

(2) Increased turnover

(3) Increased sales margin

(4) Decreased tax rate

		1 and 2
		2 and 3
		All of the answer choices.
		1, 2 and 3

QUESTION 7

Which of the following would not be found in the financial statement footnotes?

(1) Alphabet had sold and leased back its production facility

(2) The company had changed its recognition of revenue to delivery date rather than when items are sold.

(3) Depreciation expenses fell when Alphabet changed its depreciation method

(4) $200 MM in long term debt is due to mature in Nov. of 2012.

		2 and 4
		4 only
		They would all be included in the footnotes
		3 and 4

QUESTION 8

What has been Alphabets approximate dividend payout ratio over the past two years?

		60%
		50%
		40%
		45%

QUESTION 9

What has been Alphabets Earnings Per Share over the past two years?

		$7.71, $6.27
		$1.30, $0.80
		$1.22, $1.02
		$.77, $.63

QUESTION 10

Through increased sales and new opportunities, Alphabet expects its earnings to continue to grow at a 20% annual rate over the next 7 years. To maximize shareholder wealth, what should be Alphabets dividend policy?

		Grow dividends at the same 20% rate
		Decrease its payout ratio
		Increase the payout ratio
		No change in the payout ratio