QUESTION 1

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 statements is incorrect regarding ratio and trend analysis?

		Ratio analysis will help Dan compare his company to others that are not identical in terms of size and revenue dollars.
		Dan can use ratio and trend analysis to look at his company over time and make comparison to competitors and industry data.
		A negative trend is always a red flag that requires attention.
		Dan should not only look at the ratios but focus on the trend of those ratios.

QUESTION 2

What was the companys return on equity in 2010?

		29.2%
		184.5%
		45.5%
		54.3%

QUESTION 3

What of the following statements is correct regarding the companys financial ratios of Dans company?

		The long term debt-to-assets ratio has deteriorated over the last three years.
		The companys current ratio is a definite concern that should be addressed (liquidity red flag)
		The companys net profit margin has improved over this three year period
		Total asset turnover has declined in 2010 when compared to the prior period

QUESTION 4

Which of the following statements are correct regarding company trends (2010 versus 2009)?

(1) Company sales growth exceeded the growth rate in expenses in the latest fiscal period.

(2) The return on equity has risen over time

(3) The trend in the total debt ratio is improving

(4) The trend in return on investment is positive

		1 and 4
		2, 3 and 4
		3 and 4
		All of the answer choices

QUESTION 5

Which of the following is least likely to increase net earnings per share in the short-run?

		Pay off some debt
		Increase gross margins
		Increase revenues
		Decrease expenses

QUESTION 6

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

QUESTION 11

Alphabets business competitors sell at a price-to-sales multiple of 2.7x, a price-to-earnings multiple of 15x, and a price-to-book ratio of 8x. What is the most accurate range of valuation per share that you would place on Alphabet when applying the above multiples to its 2010 financial data?

		$11.00-$11.60
		$16-$17
		$10.50-$13.50
		$5.25-$5.75

QUESTION 12

Dans stock was worth $7.00 when he received shares 4 years ago. It has paid dividends in 2008 2010. If the stock is worth $11.50 at the end of 2010, what is Dans HPR?

		77%
		177%
		64%
		19%

QUESTION 13

Because ABCD pays out 50% of its earnings as dividends, its expected growth rate is reduced to 6%. If Dans discount rate is 12%, what is ABCDs approximate fair value?

		$11.25
		$6.40
		$3.40
		$6.80

QUESTION 14

Dan asks for your advice about financing acquisitions. Which of the following responses are correct?

(1) Debt financing allows the company to write-off interest payments prior to calculating taxes due

(2) Adding some debt financing to an all equity firm will decrease the average weighted cost of capital

(3) The before-tax cost of debt is the important rate to use in the weighted average cost of capital calculation.

(4) Adding more debt will typically increase the financial risk of a company

		All of the answer choices
		1, 2 and 4
		1 and 2
		3 and 4

QUESTION 15

Alphabet is considering the purchase of a publicly-traded competitor. The purchase price for the business is $3,500,000.

Year	After-tax Cashflows
1	$150,000
2	$340,000
3	$420,000
4	$500,000
5	$600,000
6-10	$640,000

Does the purchase price make sense based on the 10-years of after-tax cashflows if Dan wants a return on investment of 8%?

		No, the net present value of the acquisition is negative and the IRR% is less than the required 8% return on investment
		No, the net present value of the acquisition is negative but the IRR% of the acquisition is positive
		Yes, the net present value of the acquisition is negative but the IRR% of the acquisition is positive
		Yes, the net present value of the acquisition is positive and the IRR% is positive

QUESTION 16

Year	After-tax Cashflows	Synergistic Savings
1	$150,000	$40,000
2	$340,000	$40,500
3	$420,000	$50,000
4	$500,000	$50,000
5	$600,000	$50,000
6-10	$640,000	$30,000

Synergistic gains often occur when two companies are merged. The combination may result in net savings from duplication of staffing in accounting and administrative, legal, distribution, etc. Based on both the 10-years of after-tax cashflows and synergistic savings does this merger make sense based on an internal rate of return of 8% and a positive net present value?

		Yes, the net present value of the acquisition is positive and the IRR% is greater than the required 8% return on investment rate.
		Yes, the net present value of the acquisition is negative but the IRR% of the acquisition is positive
		No, the net present value of the acquisition is negative and the IRR% is less than the required 8% return on investment
		No, the net present value of the acquisition is negative but the IRR% of the acquisition is positive

QUESTION 17

The CFO of Alphabet is a little nervous about the acquisition and the calculations assumptions. What are some ways that she might build in a margin of safety?

(1) Increase the discount rate

(2) Decrease the discount rate

(3) Increase the cashflow assumptions

(4) Decrease the cashflow assumptions

	a.	2 and 3
	b.	1 and 4
	c.	1 and 3
	d.	2 and 4

QUESTION 18

Alphabet is considering making an even larger acquisition for $8,000,000, but first needs to compute its current Weighted Average Cost of Capital. Alphabet will be using only debt and equity, and wants to keep its ratio of LT Debt to Equity constant. The price of Alphabet stock is $13, and the expected growth rate is 10%. Assuming no additional issuance costs, what is the WACC?

		9.87%
		11.56%
		10.86%
		13.50%

QUESTION 19

The Board of Directors is reviewing executive compensation. Which of the following are viable alternatives that would align the CEO with the shareholders?

(1) A combination of quarterly ROE and ROI

(2) A combination of yearly EVA and MVA measures

(3) Bonuses based on 5 year financial performance

(4) A compensation package that is transparent to shareholders

		All of the answer choices.
		1, 2 and 3
		2, 3 and 4
		1 and 3

QUESTION 20

Dan has come across an opportunity to buy an apartment building for $1,250,000, but isnt sure. He can get a loan for 80% of the buildings value at 8%, but because of the risks Dans own required return is 12%. Given the following annual cash flows, what is the building worth to Dan?

Gross Rents 210,000

Expected vacancy 7%

Utilities, Insurance, taxes 48,000

Interest 24,000

Maintenance 10,800

Capital Repair Fund 10,000

Mgt. Fees 12,000

Depreciation 32,000

		$1,037,500
		$1,020,833
		$1,556,250 (50% credit)
		$ 754,166