This is a multi-step problem...

case study 1

In the multiple-choice questions, please highlight your answer.

Make sure that you upload your file before the due date (September 8^th at 11:59pm).

following is the balance sheet for Excel Inc. for the year ended Dec 31^st, 2018.

Consolidated Balance sheet

Excel inc.

As of Dec 31^st, 2018

Assets

Liabilities + Owners Equity

Current Assets

Current Liabilities

Cash

40,000

Accounts Payable

12,000

Accounts Receivables

4,000

Notes Payable

6,000

Inventory

14,000

Accrue Wages

1000

Total Current Assets

58,000

Total Current Liabilities

19,000

Fixed Assets

Long term debt

40,000

Property, Plant, and Equipment

56,000

Owners' equity

Goodwill

24,000

Common Shares

40,000

Total Fixed Assets

80,000

Retained Earnings

39,000

Total Owners equity

79,000

Total Assets

138,000

Liabilities + O.E

138,000

In addition to that, you know the following facts about firm's operations throughout the year:

revenues for the year includes the following: Domestic revenues $160,000. International revenues $80,000. cost of sales and direct labor is 50% of annual revenues.

Because of the strong competition that it faces, Excel Inc. has a generous marketing plan. They signed a contract with the marketing planet Inc. by which the marketing agency will be responsible for Excel Inc. marketing for five years period started this year. The contract costs Excel $100,000 that will be paid evenly over the next five years. the company thinks this plan will affect its sales evenly over the five years period. Excel Inc. also spends $30,000 in the form of general and administrative expenses per year. The depreciable assets historical value is $40,000 and is depreciated on a straight-line basis over 10 years.

Excel pays 10% interest rate on its Long-term debt outstanding. Excel pays 40% of its taxable income as tax expense.

Out of the year's net income, Excel Inc. is planning to repay $30,000 to its shareholders in the form of cash dividends. The company currently has 60,000 shares outstanding

Please set up the income statement for Excel Inc:

Consolidated Income Statement

Excel Inc.

As of Dec 31^st, 2018

Revenues

(-) Cost of goods sold

Gross margin

(-) Marketing expenses

(-) General and administrative expenses

(-) Depreciation

EBIT

(-) Interest expenses

EBT

(-) Tax expenses

Net income

Dividends

Additions to Retained Earnings

1-Ms. Janet McInish works as an elementary school teacher and has a taxable income from her job of $35,000. She inherited 10% of Excel shares outstanding, and recently received her annual dividends. What is the amount of annual dividends received by Mrs. McInish?

a)$ 5000

b)$ 720

c)$ 3000

d)$3720

Mr. David Lawson, the CFO of Excel Inc. plans to increase the company's long term debt from $40,000 to $80,000 by getting a 5 year loan from bank of America.

2-What type of financial decisions did MR. David take?

a)Capital budgeting decision. (investment decision)

b)Capital structure decision.(financing decision)

c)Working capital management decision

d)Accounting decision

3-Will this decision result in Excel to be excessively levered if everything else remains unchanged? Knowing that industry average debt/equity ratio is 1.

a)Yes, because total debt to equity ratio for Excel inc. will be more than the industry average means that this firm has more debt than equity in its capital structure.

b)Yes, because total debt to equity ratio for Excel inc. will be more than the industry average means that this firm has lower debt than equity in its capital structure.

c)No, because total debt to equity ratio for Excel inc. will be lower than the industry average means that this firm has lower debt than equity in its capital structure.

d)No, because total debt to equity ratio for Excel inc. will be higher than the industry average means that this firm has lower debt than equity in its capital structure.

4-The company is planning to use half of the long-term loan proceeds to increase the inventory holdings and keep the rest in its cash bank account, what type of financial decision is this?

a)Capital budgeting decision. (investment decision)

b)Capital structure decision. (financing decision)

c)Working capital management decision

d)Accounting decision

5-If nothing else changes, how would this decision affect Excel Inc. liquidity?

a)The liquidity measured by both current ratio and quick ratio will increase.

b)The liquidity measured by current ratio will increase however if we measure it using the quick ratio it will show a decrease in firm's liquidity.

c)The liquidity measured by both current ratio and quick ratio will decrease.

d)The liquidity measured by quick ratio will increase however if we measure it using the current ratio it will show a decrease in firm's liquidity.

The decision to increase inventory holdings resulted from the consistent pressure of Excel Board of Directors to increase amount of inventory. Mr. David's own opinion was that Excel is holding enough inventory to keep the business running without costing the company lots of money on inventory carrying costs. On the other hand, BOD believes that in such a dynamic industry, holding more inventory is necessary to keep smooth business operations.

6-How long does it currently take the company to turnover its inventory? (before taking the loan)

a)8.57 days

b)12.63 days

c)42.57 days

d)28.9 days

7-Do you agree with Mr. David's opinion? Or, With the BOD? And why? Knowing that industry average inventory turnover is 8.

a)I agree with Mr. David because the company's current inventory turnover is larger than the industry average.

b)I agree with Mr. David because the company's current inventory turnover is lower than the industry average.

c)I agree with BOD because the company's current inventory turnover is lower than the industry average.

Alternatively, Assume that the entire debt taken will be invested in assets (half on inventory and half on land). The BOD believes this step will increase sales by $20,000 next year which they think certainly justifies the decision to increase inventory. Mr. David argues that this sales increase is not enough to balance the drop in firm's total asset utilization.

8-what is the current total asset utilization? (before the loan)

a)1.74

b)1.16

c)0.08

d)2.74

9-What is the new total assets utilization?

a)1.19

b)1.46

c)1.34

d)1.94

10-Do you agree with Mr. David? Or with the BOD?

a)I agree with Mr. David

b)I agree with BOD

If you are given the following information about the year ended Dec 2017 (previous year).

Total assets = $120,000,Total Equity = $70,000,Sales = 150,000,Net income = $35,000

11-Calculate Excel's profitability (ROE) for year ended Dec 2017.

a)2

b)1.5

c)0.5

d)1.7

12-Calculate Excel's profitability (ROE) for year ended Dec 2018.

a)0.47

b)0.44

c)0.27

d)1.7

13-Based on your knowledge of determinants of corporate profitability (DuPont identity), did any significant change happen to Excel's profitability measured by ROE? Did it increase or decrease? What is the underlying reason behind the change, if any? (using your understanding of the Dupont system)

a)The profitability of Excel inc. increased mainly because of the increase in total asset utilization.

b)The profitability of Excel inc. decreased mainly because the company increased its leverage.

c)The profitability of Excel inc. decreased because of the deterioration in firm's efficiency to generate sales.

Ms. Janet McInish is currently considering selling her stock ownership. She strongly believes that the share is overpriced and is going to experience a price drop soon. In order to better understand the current situation of Excel stock, she was advised to use the price earnings ratio. Giving that the total market value of Ms. Janet Excel shares is $120,000.

14-If Ms. Janet believes that any stock that has a P/E ratio that is more that 20% of the industry average to be overpriced, do you recommend Ms. Janet to sell her shares knowing that industry average P/E ratio is 10?

a)I recommend for her to sell her stocks because the stock is now overpriced.

b)I recommend for her to hold on her stocks because the stock is undervalued.