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FI 3300 - CORPORATION FINANCE Take-Home Problem Set Two (THPS-2) Summer 2017 Directions: This problem set covers chapters 1, 3 and 4 in the textbook. Determine or compute an answer for each question/problem. After you have computed an answer for every question, enter your answers online via the \"quiz\" function entitled \"THPS-2 ANSWER SUBMISSION FORM.\" See the course calendar for when the answer submission form will open and close. I will post a detailed solution key to the problem set right after the Answer Submission Form closes. See the course calendar for the day(s) on which I will answer questions about these problems in the chat room. This is a take-home, open book, open notes financial statement analysis problem set. Work on this Assignment is to be yours alone - any discussion of either the questions on the assignment or your answers with anyone other than your instructor will be considered as cheating and, thus, as a violation of the GSU honor code. _______________________________________________ 1. Which of the following is the BEST description of the goal of the financial manager in a corporation where shares are publicly traded? a. Maximize the current value per share of the existing stock b. Maximize sales c. Maximize profits d. Avoid financial distress e. Maintain steady earnings growth 2. Financial statements generally include all but which of the following: a. Income statement b. Federal income tax return c. Balance sheet d. Statement of cash flows 3. A "common size" analysis implies: a. comparing firms having the same asset size. b. comparing firms having the same stockholders' equity c. expressing income statement items as a percentage of sales. d. expressing balance sheet items as a percentage of total assets. e. (c) and (d) 4. __________ is an accounting statement that lists a company's assets, liabilities and equity. The statement is a stock measure that displays these account values at a specific point in time. a. b. c. d. e. The balance sheet The statement of cash flows The sources and uses statement The income statement None of the above 5. Finance is divided into three separate subject areas. Two of the subject areas of finance are Corporate Financial Management and Investments. The third subject area of finance is: a. b. c. d. e. International Cash Flow Management Financial Markets and Institutions Banking Accounting None of the above 6. Which of the following would directly affect (either increase or decrease) net cash flow from operating activities (assuming all else remains constant)? Note: there more be more than one answer for this questions - record the letter of all that apply (this is an all or nothing answer). a. b. c. d. e. f. g. h. i. An increase in dividends paid. A decrease in accounts receivable. A decrease in notes payable (i.e., bank loans). An increase in inventory. An increase in accounts payable. An increase in retained earnings. A decrease in cash. An increase in accruals. A decrease in gross plant and equipment. 7. If the current assets of a firm decrease, but the net fixed assets, firm debt ratio, net profit margin and net sales (i.e., revenue) remain the same as they were before current assets decreased, the firm's: a. ROE would not change. b. ROE could either increase or decrease depending on the interaction between the equity multiplier and the days payable ratio. c. ROE would increase. d. ROE would decrease. e. There is insufficient information to determine the effect on ROE. 8. Consider the following financial statement data submitted in conjunction with a loan request. Current assets = $1.2 billion Current liabilities = $1.5 billion Total assets = $3.8 billion Total liabilities = $2.2 billion Sales = $4.2 billion Cost of goods sold = $1.9 billion Net income = $0.85 billion Compute the firm's "gross profit margin." a. 20.2% b. 25.0% c. 54.8% d. 45.2% e. 67.6% 9. Which of the following actions would decrease the current ratio (assuming an initial current ratio of 0.8, and current liabilities equal to $1,000,000)? a. Borrow $100,000 in short term debt and deposit this money (i.e., $100,000) into the firm's cash account. b. Borrow $200,000 in long-term debt to buy $200,000 worth of additional inventory. c. Borrow $50,000 of short-term debt and use the proceeds to pay all operating expenses sooner, thus lowering accruals (i.e., accrued expenses) by $50,000. d. Sell $250,000 of fixed assets to pay off an equal amount of long-term debt. e. None of the above - that is, none of the actions listed about will decrease the current ratio. 10. RedCap Manufacturing, Inc. is planning to borrow money by taking out a short term loan (i.e., increase notes payable) and depositing this money directly into the firm's checking account (i.e., increase cash). RedCap believes that this event will have no affect on either sales or costs, and therefore no affect on net income. All else constant, this new policy should cause the firm's quick ratio (assuming an initial quick ratio of 1.5) to: a. b. c. d. Increase Decrease No Change Not enough information is provided to answer this question. 11. BlueHat, Inc. is planning to use excess cash that the company has in its checking account (i.e., reduce cash) to pay off a long term loan balance. (i.e., decrease long-term debt). BlueHat believes that this event will have no affect on either sales or costs, and therefore no affect on net income. All else constant, this new policy should cause the firm's debt ratio (assuming an initial debt ratio of 45%) to: a. b. c. d. Increase Decrease No Change Not enough information is provided to answer this question. 12. GreenChapeau, Inc. is planning to increase its short-term loans (i.e., increase notes payable) to pay for an increase in the firm's basic inventory level (i.e., increase inventory). GreenChapeau believes that this event will have no affect on either sales or costs, and therefore no affect on net income. All else constant, this new policy should cause the firm's current ratio (assuming a current ratio of 1.5) to: a. b. c. d. Increase Decrease No Change Not enough information is provided to answer this question. All of the following questions are open-ended problems. You must compute an answer for every problem. For percentage answers, calculate your answer as a percent rounded to 2 decimal places. For example, you would record ROA = .1263974 as 12.64% (note that on iCollege you will enter 12.64 without the percent sign). For dollar answers, round to the nearest dollar. For example, you would record $12,345.83943 as $12,346 (note that on iCollege you will enter 12346 without a comma and without the dollar sign). 13. Felton Farm Supplies, Inc. has an ROA (return on assets) of 16 percent, total assets of $5,000,000 and a net profit margin of 6.0 percent. What are Felton Farm Supplies annual sales? 14. Krisle and Kringle's debt-to-total assets ratio is 0.825 (i.e., debt ratio = 82.5%). What is the company's debtto-equity ratio? (Enter answer as a ratio - that is, do not convert to a percent). 15. Philips, Inc has a debt ratio of 55% and ROE = 8%. What is Phillips' ROA? (Enter answer as a percent). 16. A firm has an ROA of 17% and a debt/equity ratio of 0.55. The firm's ROE is _________. (Enter answer as a percent). 17. Assume that XYZ, Inc. has: Debt ratio = 60% Net profit margin = 12.5% Return on assets (ROA) = 25% Find XYZ's Total Asset Turnover ratio. (Enter answer as a ratio - that is, do not convert to a percent). 18. Assume that your firm has ROA of 17.5%, ROE of 37% and Total Asset Turnover ratio of 3.5. Calculate the debt ratio for the firm. (Enter answer as a percent). USE THE DATA IN THE TABLE BELOW TO ANSWER QUESTIONS 19 - 24 (Assume all account figures are in dollars) Lemark Productions 2015 Accounts payable 360 Accounts receivable, net 1,680 Accruals 165 Cash 165 Common stock 1,660 Cost of goods sold 4,100 Depreciation expenses 400 Interest expenses 290 Inventory 4,375 Long-term debt 4,500 Net fixed assets 6,940 Net sales 7,950 Notes payable 600 Operating expenses (excl. depreciation) 2,130 Retained earnings 5,875 Taxes 390 2016 390 1,510 190 160 1,380 4,850 560 300 4,050 4,150 7,090 8,980 740 2,180 5,960 410 19. Gross Profit for 2016 is $________. 20. The times interest earned ratio for 2015 is ____X. 21. ROE for 2016 is _____%. 22. Cash flow from operating activities in 2016 is $ _______. 23. Cash flow from investing activities in 2016 is $ _________. 24. Cash flow from financing activities in 2016 is $ _________. USE THE INFORMATION BELOW TO ANSWER THE FOLLOWING 3 QUESTIONS Mellon Company Balance Sheet For the Years Ending December 31, 2015 and 2016 (All figures in dollars) Cash Account receivable Inventory Total current assets Gross fixed assets (Accumulated depreciation) Net fixed assets Total assets 2015 1,800 4,010 10,100 15,910 55,800 (9,760) 46,040 61,950 2016 1,840 4,210 9,450 15,500 63,840 (11,050) 52,790 68,290 Notes payable Accounts payable Accruals Current portion of LT debt Total current liabilities Lont-term debt Common stock Paid in capital Retained earnings Total liabilities and equity 620 2,260 1,600 1,590 6,070 37,250 1,000 4,950 12,680 61,950 1,000 4,130 1,850 1,730 8,710 34,780 1,500 9,460 13,840 68,290 Additional Data from 2016 Income Statement: Sales in 2016 Net income in 2016 25. Calculate the Cash flows from operating activities for 2016. 26. Calculate the Cash flows from investing activities for 2016. 27. Calculate the Cash flows from financing activities for 2016. 238,000 9,980 USE THE FOLLOWING INFORMATION TO CONSTRUCT A BALANCE SHEET TO ANSWER QUESTIONS 28 through 30 Sales Gross profit margin Inventory turnover ratio (Cost of goods sold/Inventory) Net profit margin Average collection period Return on equity Accumulated depreciation Return on assets Accounts payable days Notes payable Gross fixed assets Percent of sales on credit (remainder are cash sales) $ $ $ $ 320,000 30% 8 4% 45 25% 15,000 12.5% 18 1,800 48,000 75% NOTE: Assume a 360 day year for all ratios, etc. Assume that the only accounts on the balance sheet are those listed below. Fill in this chart with the data provided and then answer questions 28, 29 and 30. Cash ____________ Notes payable ____________ Accounts receivable ____________ Accounts payable ____________ Inventory ____________ Long-term debt ____________ Gross fixed assets ____________ Equity ____________ (Accumulated depreciation) ____________ Net fixed assets ____________ Total assets 28. Cash = ____________. 29. Long-term debt = ____________. 30. Total assets =____________. ____________ Total liab & equity ____________ USE THE FOLLOWING INFORMATION TO FILL IN THE BALANCE SHEET BELOW TO ANSWER QUESTIONS 31 through 34 Number of shares outstanding Sales Gross profit margin Inventory turnover ratio Notes payable Net profit margin Return on assets 15,000 $ 1,800,000 10% 10 $ 75,000 15% 20% Average collection period (days) Accounts payable days Retained earnings (2010) Dividend payout ratio Accruals Current ratio Debt ratio 60 30 $ 237,000 60% $ 40,000 1.5 40% Note: Of total sales, 60 percent are on credit and the remainder are cash sales. Assume a 360-day year. All data in the table above, unless otherwise stated, is for the year 2016. Hodun, Inc. Balance Sheet for the Year Ending December 31, 2016 Cash __________ Notes payable __________ Accounts receivable __________ Accounts payable __________ Inventory __________ Accruals __________ Net fixed assets __________ Long-term debt __________ __________ Common stock ($2 par value) __________ Capital surplus __________ Retained earnings __________ Total assets Total liab. & equity 31. Cash = ____________. 32. Long-term debt = ____________. 33. Total assets =____________. 34. Capital surplus = __________. __________ USE THE FOLLOWING DATA TO ANSWER QUESTIONS 35 - 40 Annual Income Statements 2013 Sales 500,000 ???? COGS Gross profit 380,000 Oper. exp 225,000 15,000 Depreciation Operating profit 140,000 5,000 Interest exp. EBT 135,000 50,000 Taxes Net Income 85,000 2014 560,000 149,350 410,650 250,100 15,000 145,550 5,000 140,550 56,000 84,550 Annual Balance Sheets Cash Accounts rec Inventories Current Assets Net fixed assets Total Assets 2013 450,000 275,000 280,000 1,005,000 1,125,000 2,130,000 2014 478,500 250,000 325,000 1,053,500 ??? 2,293,500 Notes payable Accounts payable Accruals Current Liabilities Long-term debt Common stock @ ($0.25 par) Additional paid in capital Retained earnings Total Liabilities & Equity 150,000 90,000 15,000 255,000 1,000,000 25,000 500,000 350,000 2,130,000 125,000 115,000 25,000 265,000 1,050,000 28,500 570,000 380,000 2,293,500 35. Net fixed assets in 2014 were $__________. 36. COGS on the 2013 common-sized income statement was 24%. Therefore, COGS in 2013 was 37. The debt ratio for 2014 was ____%. 38. Cash flow from operations in 2014 was $________. 39. Cash flow from investing in 2014 was $__________. 40. Total dividends paid in 2014 was $_______