Use the extended DuPont equation to provide a summary and overview of your firm?s financial condition.

Be sure to do all calculations for 3 years, using Excel. Use real numbers from the financials, not reported ratios provided by online and other sources. Show the source of the numbers.Include the balance sheet and income statement and as many exhibits as you wish

ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag INCOME STATEMENT Fiscal year ends in December. USD in millions except per share data. Revenue Cost of revenue Gross profit Operating expenses Research and development Sales, General and administrative Other operating expenses Total operating expenses Operating income Interest Expense Other income (expense) Income before taxes Provision for income taxes Net income from continuing operations Net income from discontinuing ops Net income Preferred dividend Net income available to common shareholders Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted EBITDA 2010-12 2011-12 29321 37905 10417 13188 18904 24717 3762 4761 2012 50175 20634 29541 2013 59825 25858 33967 2014 66001 25691 40310 TTM 71763 26897 44866 6793 9988 7952 12049 9832 11585 13982 14902 20001 13966 83 613 14496 2282 12214 706 12920 23814 16496 101 864 17259 3331 13928 516 14444 415 10796 2291 8505 5162 7313 500 12975 11742 58 642 12326 2589 9737 8505 9737 16781 12760 84 710 13386 2598 10788 -51 10737 8505 9737 10737 12920 26487 18379 103 702 18978 3537 15441 967 16408 522 14444 15886 13.36 13.17 15.1 14.89 16.42 16.17 19.43 19.08 21.37 23.28 21.02 23.08 637 646 11777 645 654 14235 645 645 16432 665 677 18518 676 682 687 688 22339 24007 8523 10381 ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag BALANCE SHEET Fiscal year ends in December. USD in millions except per share data. Assets Current assets Cash Cash and cash equivalents Short-term investments Total cash Receivables Inventories Deferred income taxes Prepaid expenses Other current assets Total current assets Non-current assets Property, plant and equipment Gross property, plant and equipment Accumulated Depreciation Net property, plant and equipment Equity and other investments Goodwill Intangible assets Deferred income taxes Other long-term assets Total non-current assets Total assets Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt Accounts payable Taxes payable Accrued liabilities Deferred revenues Other current liabilities Total current liabilities Non-current liabilities Long-term debt Deferred taxes liabilities Deferred revenues Other long-term liabilities Total non-current liabilities Total liabilities Stockholders' equity Common stock Retained earnings Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity 2010-12 2011-12 2012 2013 2014 18898 39819 58717 8882 426 1526 2827 508 72886 18347 46048 64395 9383 23837 -7313 16524 1976 11492 6066 32746 -8863 23883 3079 15599 4607 13630 21345 34975 4252 9983 34643 44626 5427 259 1326 750 41562 215 1745 745 52758 14778 33310 48088 7885 505 1144 2132 700 60454 11771 -4012 7759 523 6256 1044 265 442 16289 57851 14400 -4797 9603 790 7346 1578 17697 -5843 11854 1469 10537 7473 499 19816 72574 2011 1976 3280 33344 38034 50448 93798 110920 131133 3465 483 37 3256 394 2361 9996 1218 588 197 4356 547 2007 8913 2549 2012 240 6968 895 1673 14337 3009 2453 24 7986 1062 1374 15908 2009 1715 96 9455 752 2778 16805 35 1579 1614 11610 2986 287 44 2199 5516 14429 2988 1872 100 2786 7746 22083 2236 1947 139 3381 7703 23611 3228 1971 104 4525 9828 26633 18235 27868 138 46241 57851 20264 37605 276 58145 72574 22835 25922 28767 48342 61262 75706 538 125 27 71715 87309 104500 93798 110920 131133 1322 3412 2173 80685 Ratios Price/Earning Ratio Price/Cash flow Ratio Market/Book Value Ratio Return On Asset Return On Equity Yahoo 2012 19.68 0.07 2.91 12.91% 14.97% 2013 20.59 0.10 3.05 12.62% 14.80% 2014 26.05 (1.01) 3.60 11.93% 13.82% 2012 2013 22.3 25.4 0.00001 (0.00004) 17.76 34.50 23.07% 8.06% 27.10% 10.45% Yahoo 2014 28.9 0.0001 23.14 19.10% 19.42% Price Price 2012 323.14 2013 400 Cash flow for the year 2012 2013 4795 4120 Book Value 2012 71715 Market value 2012 208,425.30 Average Assets 2012 83186 2014 556.7 2014 -551 2012 15.54 Cash flow for the year 2012 1105388 2013 24.73 2014 35.95 2013 -590188 2014 590326 2013 13074909 2014 38741837 Book Value 2013 87309 2014 104500 2012 14560200 Market value 2013 266,000.00 2013 102359 2014 376,329.20 2012 258,588,708.00 2013 451,141,971.00 2014 896,603,785.00 2014 121026.5 Average Assets 2012 17103253 2013 16954106 2014 39382651.5 2012 3945479 2013 1366281 2014 7521731 2012 0.2371052632 2013 0.0748946702 2014 0.2550577987 Net Profit EPS ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag INCOME STATEMENT Fiscal year ends in December. USD in millions except per share data. Revenue Cost of revenue Gross profit Operating expenses Research and development Sales, General and administrative Other operating expenses Total operating expenses Operating income Interest Expense Other income (expense) Income before taxes Provision for income taxes Net income from continuing operations Net income from discontinuing ops Net income Preferred dividend Net income available to common shareholders Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted EBITDA 2012-12 2013-12 2014-12 TTM 50175 59825 66001 71763 20634 25858 25691 26897 29541 33967 40310 44866 6793 9988 7952 12049 9832 11585 13982 14902 16781 12760 84 710 13386 2598 10788 -51 10737 20001 13966 83 613 14496 2282 12214 706 12920 23814 16496 101 864 17259 3331 13928 516 14444 10737 12920 26487 18379 103 702 18978 3537 15441 967 16408 522 14444 15886 16.42 16.17 19.43 19.08 21.37 23.28 21.02 23.08 645 645 16432 665 677 18518 676 682 687 688 22339 24007 ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag BALANCE SHEET Fiscal year ends in December. USD in millions except per share data. Assets Current assets Cash Cash and cash equivalents Short-term investments Total cash Receivables Inventories Deferred income taxes Prepaid expenses Other current assets Total current assets Non-current assets Property, plant and equipment Gross property, plant and equipment Accumulated Depreciation Net property, plant and equipment Equity and other investments Goodwill Intangible assets Deferred income taxes Other long-term assets Total non-current assets Total assets Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt Accounts payable Taxes payable Accrued liabilities Deferred revenues Other current liabilities Total current liabilities Non-current liabilities Long-term debt Deferred taxes liabilities Deferred revenues Other long-term liabilities Total non-current liabilities Total liabilities Stockholders' equity Common stock Retained earnings Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity 2012-12 2013-12 2014-12 14778 33310 48088 7885 505 1144 2132 700 60454 18898 39819 58717 8882 426 1526 2827 508 72886 18347 46048 64395 9383 17697 -5843 11854 1469 10537 7473 23837 -7313 16524 1976 11492 6066 32746 -8863 23883 3079 15599 4607 1322 3412 2173 80685 2011 1976 3280 33344 38034 50448 93798 110920 131133 2549 2012 240 6968 895 1673 14337 3009 2453 24 7986 1062 1374 15908 2009 1715 96 9455 752 2778 16805 2988 1872 100 2786 7746 22083 2236 1947 139 3381 7703 23611 3228 1971 104 4525 9828 26633 22835 25922 28767 48342 61262 75706 538 125 27 71715 87309 104500 93798 110920 131133 2012 4.216642254 Current Ratio 4.181418707 Quick Ratio 40.85940594 Inventory Turnover Days Sales Outstanding 57.35974091 4.232748439 Fixed Asset Turnover 0.534926118 Total Asset Turnover 2013 4.58172 4.554941 60.69953 54.19022 3.620491 0.539353 2012 0.059031109 0.235431459 126.0595238 195.6190476 21.40% 14% 2013 0.047286 0.212865 168.2651 223.1084 21.60% 13% 2014 Apple Microsof Verizon Industry 4.80125 1.11 2.5 1.06 2.07 4.80125 0.48 n/a 27.71 51.89005 2.763514 0.503313 Facebook Yahoo Debt Ratio Liabilities-to-Assets Ratio Times-Interest-Earned EBITDA Coverage Ratio Profit Margin Basic Earning Power 2014 0.039937 0.203099 163.3267 221.1782 21.88% 13% Twitter 0.58 0.3 2.12 2.12 28.79 26.78 50.03 23.58 18.27 140.19 -23.57 -41.18 This sheet contains GOOG income statement and Balance Sheet. ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag INCOME STATEMENT Fiscal year ends in December. USD in millions except per share data. Revenue Cost of revenue Gross profit Operating expenses Research and development Sales, General and administrative Other operating expenses Total operating expenses Operating income Interest Expense Other income (expense) Income before taxes Provision for income taxes Net income from continuing operations Net income from discontinuing ops Net income Preferred dividend Net income available to common shareholders Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted EBITDA ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag BALANCE SHEET Fiscal year ends in December. USD in millions except per share data. Assets Current assets Cash Cash and cash equivalents Short-term investments Total cash Receivables Inventories Deferred income taxes Prepaid expenses Other current assets Total current assets Non-current assets Property, plant and equipment Gross property, plant and equipment Accumulated Depreciation Net property, plant and equipment Equity and other investments Goodwill Intangible assets Deferred income taxes Other long-term assets Total non-current assets Total assets Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt Accounts payable Taxes payable Accrued liabilities Deferred revenues Other current liabilities Total current liabilities Non-current liabilities Long-term debt Deferred taxes liabilities Deferred revenues Other long-term liabilities Total non-current liabilities Total liabilities Stockholders' equity Common stock Retained earnings Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity 2012-12 2013-12 2014-12 50,175 59,825 66,001 20,634 25,858 25,691 29,541 33,967 40,310 6,793 9,988 7,952 12,049 9,832 13,982 16,781 12,760 84 710 13,386 2,598 10,788 (51) 10,737 20,001 13,966 83 613 14,496 2,282 12,214 706 12,920 23,814 16,496 101 864 17,259 3,331 13,928 516 14,444 10,737 12,920 14,444 16 16 19 19 21 21 645 645 16,432 665 677 18,518 676 687 22,339 2012-12 2013-12 2014-12 14,778 33,310 48,088 7,885 505 1,144 2,132 700 60,454 18,898 39,819 58,717 8,882 426 1,526 2,827 508 72,886 18,347 46,048 64,395 9,383 17,697 (5,843) 11,854 1,469 10,537 7,473 23,837 (7,313) 16,524 1,976 11,492 6,066 32,746 (8,863) 23,883 3,079 15,599 4,607 2,011 33,344 93,798 1,976 38,034 110,920 3,280 50,448 131,133 2,549 2,012 240 6,968 895 1,673 14,337 3,009 2,453 24 7,986 1,062 1,374 15,908 2,009 1,715 96 9,455 752 2,778 16,805 2,988 1,872 100 2,786 7,746 22,083 2,236 1,947 139 3,381 7,703 23,611 3,228 1,971 104 4,525 9,828 26,633 22,835 48,342 538 71,715 93,798 25,922 61,262 125 87,309 110,920 28,767 75,706 27 104,500 131,133 1,322 3,412 2,173 80,685 This sheet calculates the ROE using the extended Dupont method. ROE = (Net Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity) Inputs to the Extended Dupont Method Variable Net income EBT EBIT Sales Total Assets Shareholders' equity Description Used on GOOG Financials Net income Income before taxes Operating income Revenue Total assets Total stockholders' equity 2012-12 10,737 13,386 12,760 50,175 93,798 71,715 Financial Year 2013-12 12,920 14,496 13,966 59,825 110,920 87,309 2014-12 14,444 17,259 16,496 66,001 131,133 104,500 2012-12 80% 1.05 25% 53% 131% 15.0% Financial Year 2013-12 89% 1.04 23% 54% 127% 14.8% 2014-12 84% 1.05 25% 50% 125% 13.8% ROE Calculation Using the Extended Dupont Method Description Formula Tax Burden Interest Burden Sales Margin Asset Turnover Financial Leverage Return on Equity (Net Income / EBT) (EBT / EBIT) (EBIT / Sales) (Sales / Assets) (Assets / Equity) ROE ROE (Net income / Equity) Check difference 15.0% - 14.8% - 13.8% ... This is the ROE calculated directly. - ... Difference between ROE calculated using extended Dupont method and ROE calcula E calculated directly, ie (Net income / Equity) This sheet contains GOOG income statement and Balance Sheet. ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag INCOME STATEMENT Fiscal year ends in December. USD in millions except per share data. Revenue Cost of revenue Gross profit Operating expenses Research and development Sales, General and administrative Other operating expenses Total operating expenses Operating income Interest Expense Other income (expense) Income before taxes Provision for income taxes Net income from continuing operations Net income from discontinuing ops Net income Preferred dividend Net income available to common shareholders Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted EBITDA ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag BALANCE SHEET Fiscal year ends in December. USD in millions except per share data. Assets Current assets Cash Cash and cash equivalents Short-term investments Total cash Receivables Inventories Deferred income taxes Prepaid expenses Other current assets Total current assets Non-current assets Property, plant and equipment Gross property, plant and equipment Accumulated Depreciation Net property, plant and equipment Equity and other investments Goodwill Intangible assets Deferred income taxes Other long-term assets Total non-current assets Total assets Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt Accounts payable Taxes payable Accrued liabilities Deferred revenues Other current liabilities Total current liabilities Non-current liabilities Long-term debt Deferred taxes liabilities Deferred revenues Other long-term liabilities Total non-current liabilities Total liabilities Stockholders' equity Common stock Retained earnings Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity 2012-12 2013-12 2014-12 50,175 59,825 66,001 20,634 25,858 25,691 29,541 33,967 40,310 6,793 9,988 7,952 12,049 9,832 13,982 16,781 12,760 84 710 13,386 2,598 10,788 (51) 10,737 20,001 13,966 83 613 14,496 2,282 12,214 706 12,920 23,814 16,496 101 864 17,259 3,331 13,928 516 14,444 10,737 12,920 14,444 16 16 19 19 21 21 645 645 16,432 665 677 18,518 676 687 22,339 2012-12 2013-12 2014-12 14,778 33,310 48,088 7,885 505 1,144 2,132 700 60,454 18,898 39,819 58,717 8,882 426 1,526 2,827 508 72,886 18,347 46,048 64,395 9,383 17,697 (5,843) 11,854 1,469 10,537 7,473 23,837 (7,313) 16,524 1,976 11,492 6,066 32,746 (8,863) 23,883 3,079 15,599 4,607 2,011 33,344 93,798 1,976 38,034 110,920 3,280 50,448 131,133 2,549 2,012 240 6,968 895 1,673 14,337 3,009 2,453 24 7,986 1,062 1,374 15,908 2,009 1,715 96 9,455 752 2,778 16,805 2,988 1,872 100 2,786 7,746 22,083 2,236 1,947 139 3,381 7,703 23,611 3,228 1,971 104 4,525 9,828 26,633 22,835 48,342 538 71,715 93,798 25,922 61,262 125 87,309 110,920 28,767 75,706 27 104,500 131,133 1,322 3,412 2,173 80,685 This sheet calculates the ROE using the extended Dupont method. ROE = (Net Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity) Inputs to the Extended Dupont Method Variable Net income EBT EBIT Sales Total Assets Shareholders' equity Description Used on GOOG Financials Net income Income before taxes Operating income Revenue Total assets Total stockholders' equity 2012-12 10,737 13,386 12,760 50,175 93,798 71,715 Financial Year 2013-12 12,920 14,496 13,966 59,825 110,920 87,309 2014-12 14,444 17,259 16,496 66,001 131,133 104,500 2012-12 80% 1.05 25% 53% 131% 15.0% Financial Year 2013-12 89% 1.04 23% 54% 127% 14.8% 2014-12 84% 1.05 25% 50% 125% 13.8% ROE Calculation Using the Extended Dupont Method Description Formula Tax Burden Interest Burden Sales Margin Asset Turnover Financial Leverage Return on Equity (Net Income / EBT) (EBT / EBIT) (EBIT / Sales) (Sales / Assets) (Assets / Equity) ROE ROE (Net income / Equity) Check difference 15.0% - 14.8% - 13.8% ... This is the ROE calculated directly. - ... Difference between ROE calculated using extended Dupont method and ROE calcula Commentary Introduction Overall, Google's return on equity (ROE) has been declining over the past three years. To better understand why this is the case, we employ the extended Dupont method, which is: ROE = (Net Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity) where EBT is earnings before tax; and EBIT is earnings before interest and tax. ROE Factors/Contributors Financial Leverage Part of the reason why ROE was declining is the decrease in financial leverage (Asset / Equity). This shows that GOOG increasingly used more equity and less debt to finance its operations. Deleveraging has a negative effect on ROE. Asset Turnover Asset turnover gradually declined over the period. This indicates that GOOG was increasingly generating less revenue for its given assets. This could be a sign of inefficient use of the company's assets. It should nevertheless be noted that the drop in asset turnover is somewhat moderate. Sales Margin GOOG's sales margin remained fairly constant around 25%. This indicates that the company's portfolio mix was largely unchanged. Interest Burden The interest burden also remained fairly flat. This can partly be explained by the increased use of equity in the operations of the business. Tax Burden The tax burden also remained fairly flat. This inidicates that it is not a siginficant factor explaining the moderate drop in ROE. Conclusion Despite the moderate drop in GOOG's ROE, the company remains financially in good health as seen by the continued positive ROE. The reason for the moderate drop in ROE is largely explained by a decrease in financial leverage and asset turnover. E calculated directly, ie (Net income / Equity) This sheet contains GOOG income statement and Balance Sheet. ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag INCOME STATEMENT Fiscal year ends in December. USD in millions except per share data. Revenue Cost of revenue Gross profit Operating expenses Research and development Sales, General and administrative Other operating expenses Total operating expenses Operating income Interest Expense Other income (expense) Income before taxes Provision for income taxes Net income from continuing operations Net income from discontinuing ops Net income Preferred dividend Net income available to common shareholders Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted EBITDA ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag BALANCE SHEET Fiscal year ends in December. USD in millions except per share data. Assets Current assets Cash Cash and cash equivalents Short-term investments Total cash Receivables Inventories Deferred income taxes Prepaid expenses Other current assets Total current assets Non-current assets Property, plant and equipment Gross property, plant and equipment Accumulated Depreciation Net property, plant and equipment Equity and other investments Goodwill Intangible assets Deferred income taxes Other long-term assets Total non-current assets Total assets Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt Accounts payable Taxes payable Accrued liabilities Deferred revenues Other current liabilities Total current liabilities Non-current liabilities Long-term debt Deferred taxes liabilities Deferred revenues Other long-term liabilities Total non-current liabilities Total liabilities Stockholders' equity Common stock Retained earnings Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity 2012-12 2013-12 2014-12 50,175 59,825 66,001 20,634 25,858 25,691 29,541 33,967 40,310 6,793 9,988 7,952 12,049 9,832 13,982 16,781 12,760 84 710 13,386 2,598 10,788 (51) 10,737 20,001 13,966 83 613 14,496 2,282 12,214 706 12,920 23,814 16,496 101 864 17,259 3,331 13,928 516 14,444 10,737 12,920 14,444 16 16 19 19 21 21 645 645 16,432 665 677 18,518 676 687 22,339 2012-12 2013-12 2014-12 14,778 33,310 48,088 7,885 505 1,144 2,132 700 60,454 18,898 39,819 58,717 8,882 426 1,526 2,827 508 72,886 18,347 46,048 64,395 9,383 17,697 (5,843) 11,854 1,469 10,537 7,473 23,837 (7,313) 16,524 1,976 11,492 6,066 32,746 (8,863) 23,883 3,079 15,599 4,607 2,011 33,344 93,798 1,976 38,034 110,920 3,280 50,448 131,133 2,549 2,012 240 6,968 895 1,673 14,337 3,009 2,453 24 7,986 1,062 1,374 15,908 2,009 1,715 96 9,455 752 2,778 16,805 2,988 1,872 100 2,786 7,746 22,083 2,236 1,947 139 3,381 7,703 23,611 3,228 1,971 104 4,525 9,828 26,633 22,835 48,342 538 71,715 93,798 25,922 61,262 125 87,309 110,920 28,767 75,706 27 104,500 131,133 1,322 3,412 2,173 80,685 This sheet calculates the ROE using the extended Dupont method. ROE = (Net Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity) Inputs to the Extended Dupont Method Variable Net income EBT EBIT Sales Total Assets Shareholders' equity Description Used on GOOG Financials Net income Income before taxes Operating income Revenue Total assets Total stockholders' equity 2012-12 10,737 13,386 12,760 50,175 93,798 71,715 Financial Year 2013-12 12,920 14,496 13,966 59,825 110,920 87,309 2014-12 14,444 17,259 16,496 66,001 131,133 104,500 2012-12 80% 1.05 25% 53% 131% 15.0% Financial Year 2013-12 89% 1.04 23% 54% 127% 14.8% 2014-12 84% 1.05 25% 50% 125% 13.8% ROE Calculation Using the Extended Dupont Method Description Formula Tax Burden Interest Burden Sales Margin Asset Turnover Financial Leverage Return on Equity (Net Income / EBT) (EBT / EBIT) (EBIT / Sales) (Sales / Assets) (Assets / Equity) ROE ROE (Net income / Equity) Check difference 15.0% - 14.8% - 13.8% ... This is the ROE calculated directly. - ... Difference between ROE calculated using extended Dupont method and ROE calcula Commentary Introduction Overall, Google's return on equity (ROE) has been declining over the past three years. To better understand why this is the case, we employ the extended Dupont method, which is: ROE = (Net Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity) where EBT is earnings before tax; and EBIT is earnings before interest and tax. ROE Factors/Contributors Financial Leverage Part of the reason why ROE was declining is the decrease in financial leverage (Asset / Equity). This shows that GOOG increasingly used more equity and less debt to finance its operations. Deleveraging has a negative effect on ROE. Asset Turnover Asset turnover gradually declined over the period. This indicates that GOOG was increasingly generating less revenue for its given assets. This could be a sign of inefficient use of the company's assets. It should nevertheless be noted that the drop in asset turnover is somewhat moderate. Sales Margin GOOG's sales margin remained fairly constant around 25%. This indicates that the company's portfolio mix was largely unchanged. Interest Burden The interest burden also remained fairly constant around 1.05. This can partly be explained by the increased use of equity in the operations of the business. Tax Burden The tax burden also remained fairly flat. A plausible reason why this is the case is that GOOG's marginal rate of tax remained fairly constant over the observation period. Thus, tax is not a siginficant factor to explain the moderate drop in ROE. Conclusion Despite the moderate drop in GOOG's ROE, the company remains financially in good health as seen by the continued positive ROE. The reason for the moderate drop in ROE is largely explained by a decrease in financial leverage and asset turnover. E calculated directly, ie (Net income / Equity) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 B C D E F G Name______________________________________ Final Examination FINC 5880 Session 9 Question 1. 10 points) Both Berkley and Oakley are large public corporations with subsidiaries throughout the world. Berkley uses a centralized approach and makes most of the decisions for its subsidiaries. Oakley uses a decentralized approach and its subsidiaries make many of their own decisions. a. Would the agency problem be more pronounced for Berkley or for Oakley? Explain. b. Would agency costs likely be higher for Berkley or Oakley? Why? c. Discuss a major advantage and a major disadvantage to a centralized approach such as Berkley uses. d. Discuss a major advantage and a major disadvantage to a decentralized approach such as Oakley uses. e. Which is better, a centralized or decentralized approach? Explain. A 53 B C D E F G A 1 B C D E F G Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 Question 2. (20 points) Assume the firm's stock now sells for $30 per share. The company wants to raise $20 million by issuing 20-year, annual interest, $1,000 par value bonds. Each bond will have 40 warrants attached, each exercisable into 1 share of stock at an exercise price of $36. The firms straight bonds yield 8%. Each warrant is expected to have a market value of $0.75 when the stock sells at $30. The company wants to establish a coupon interest rate and dollar coupon to ensure that the bonds will clear the market. a. Calculate the value of the debt portion of the bonds with warrants. Stock price Bonds-life and par value Par value # of warrants per bond Exercise price Warrant market value @ P=$30) Yield on straight bonds $30 20 $1,000 40 $36 $0.75 8% b. Calculate the dollar coupon amount per bond with warrants. c. Calculate the coupon interest rate that should be set on the bonds with warrants. d. Identify 3 advantages to the company of issuing a bond with warrants instead of straight bonds. e. Identify 3 advantages to the investor of buying a bond with warrants instead of straight bonds. A 63 64 65 B C D E F G A 1 B C D E F Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Question 3. (15 points) Mantra Corporation is interested in acquiring Corlos Corporation. Corlos has 10 million shares outstanding and a target capital structure consisting of 30 percent debt and 70 percent equity. The debt interest rate is 8%. Assume that the risk-free rate of interest is 3% and the market risk premium is 7%. 2 Corlos' free cash flow (FCF0) is $5 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is 1.2. Corlos has $5 million in debt. The tax rate for both companies is 30%. Shares outstanding Target debt in capital structure Debt interest rate rRF Market risk premium Tax rate 10,000,000 30% 8% 3% 7% 30% FCF0 Constant growth rate Beta Amount of debt a. Calculate the required rate of return on equity using equation: r s= rRF + RPM(b) b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g) d. Calculate the value of the company's equity, using equation: Vs = Vops - debt e. Calculate the current value of the company's stock. 5,000,000 6% 1.2 5,000,000 A 51 52 53 54 55 56 57 B C D E F A 1 B C D E F G Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 2 5 6 7 Question 4. (20 points) A Treasury bond futures contract settled at 97'16. 8 9 a. Calculate the present value of one futures contract in dollars? 10 11 12 13 14 15 16 17 b. Are current market interest rates higher or lower than the standardized rate on a futures contract? Explain. 18 19 20 21 22 23 24 25 26 c. Calculate the implied annual interest rate on the futures contract. 27 28 29 30 31 32 33 34 35 36 37 38 39 d. Calculate the new value of the futures contract if interest rates increase by 1 percentage point 40 annually. 41 42 43 44 45 46 47 48 49 50 51 52 53 e. Describe differences between forward and futures contracts? Illustrate, using a specific example, of how 54 companies could use either a futures or forward contract to hedge a position. 55 56 57 58 59 60 61 A 62 63 64 65 66 B C D E F G A 1 B C D E Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 Question 5. (20 points) Corizon Company's balance sheet and income statement are shown below (in millions of dollars). Corizon and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $5 preferred will be exchanged for one share of $2.00 preferred with a par value of $50 plus one 10% subordinated income debenture with a par value of $50. The $8 preferred issue will be retired with cash. The company's tax rate is 30%. Current Assets Net fixed assets Total assets Balance Sheet prior to Reorganization (in millions) Current liabilities Advance payments $5 preferred stock, $100 par value (1,000,000) shares $8 preferred stock, no par, callable at 100 (80,000 shares) Common stock, $1.00 par value (5,000,000) shares Retained earnings 425 Total claims 200 225 175 10 100 8 25 107 425 a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value. Balance Sheet after Reorganization (in millions) b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect net income available to common stockholders? Income Statement (in millions) Prior to Reorganization Net sales 700.0 Operating expense 630.0 Net operating income 70.0 Other income 7.0 EBT Taxes Net income Dividends on $5 PS Dividends on $8 PS Income to Common SHs 77.0 23.1 53.9 5.0 0.6 48.3 After Reorganization F A B C D E 67 68 69 c. Calculate the required pre-tax earnings to cover debt and preferred stock obligations, before and after the recapitalization? 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 d. Calculate the debt ratio before and after the reorganization? 85 86 87 88 89 90 91 92 93 94 e. Would the common stockholders be in favor of the reorganization? Explain your answer, providing at least 2 reasons for it. 95 96 97 98 99 100 F A 1 B C D E F G Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 Question 6. (15 points) Your portfolio is diversified. It has an expected return of 10.0% and a beta of 1.10. You want to add 500 shares of Tundra Corporation at $30 a share to your portfolio. Tundra has an expected return of 14.0% and a beta of 1.30. The total value of your current portfolio is $50,000. a. Calculate the expected return on the portfolio after the purchase of the Tundra stock? b. Calculate the expected beta on the portfolio after you have added the new stock? c. Is your portfolio less risky or more risky than the market? Explain. d. Will your portfolio likely outperform or underperform the market in a period when stocks are rapidly falling in value? Explain. e. Is beta always an accurate predictor of a portfolio's performance? Explain? This sheet contains GOOG income statement and Balance Sheet. ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag INCOME STATEMENT Fiscal year ends in December. USD in millions except per share data. Revenue Cost of revenue Gross profit Operating expenses Research and development Sales, General and administrative Other operating expenses Total operating expenses Operating income Interest Expense Other income (expense) Income before taxes Provision for income taxes Net income from continuing operations Net income from discontinuing ops Net income Preferred dividend Net income available to common shareholders Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted EBITDA ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag BALANCE SHEET Fiscal year ends in December. USD in millions except per share data. Assets Current assets Cash Cash and cash equivalents Short-term investments Total cash Receivables Inventories Deferred income taxes Prepaid expenses Other current assets Total current assets Non-current assets Property, plant and equipment Gross property, plant and equipment Accumulated Depreciation Net property, plant and equipment Equity and other investments Goodwill Intangible assets Deferred income taxes Other long-term assets Total non-current assets Total assets Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt Accounts payable Taxes payable Accrued liabilities Deferred revenues Other current liabilities Total current liabilities Non-current liabilities Long-term debt Deferred taxes liabilities Deferred revenues Other long-term liabilities Total non-current liabilities Total liabilities Stockholders' equity Common stock Retained earnings Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity 2012-12 2013-12 2014-12 50,175 59,825 66,001 20,634 25,858 25,691 29,541 33,967 40,310 6,793 9,988 7,952 12,049 9,832 13,982 16,781 12,760 84 710 13,386 2,598 10,788 (51) 10,737 20,001 13,966 83 613 14,496 2,282 12,214 706 12,920 23,814 16,496 101 864 17,259 3,331 13,928 516 14,444 10,737 12,920 14,444 16 16 19 19 21 21 645 645 16,432 665 677 18,518 676 687 22,339 2012-12 2013-12 2014-12 14,778 33,310 48,088 7,885 505 1,144 2,132 700 60,454 18,898 39,819 58,717 8,882 426 1,526 2,827 508 72,886 18,347 46,048 64,395 9,383 17,697 (5,843) 11,854 1,469 10,537 7,473 23,837 (7,313) 16,524 1,976 11,492 6,066 32,746 (8,863) 23,883 3,079 15,599 4,607 2,011 33,344 93,798 1,976 38,034 110,920 3,280 50,448 131,133 2,549 2,012 240 6,968 895 1,673 14,337 3,009 2,453 24 7,986 1,062 1,374 15,908 2,009 1,715 96 9,455 752 2,778 16,805 2,988 1,872 100 2,786 7,746 22,083 2,236 1,947 139 3,381 7,703 23,611 3,228 1,971 104 4,525 9,828 26,633 22,835 48,342 538 71,715 93,798 25,922 61,262 125 87,309 110,920 28,767 75,706 27 104,500 131,133 1,322 3,412 2,173 80,685 This sheet calculates the ROE using the extended Dupont method. ROE = (Net Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity) Inputs to the Extended Dupont Method Variable Net income EBT EBIT Sales Total Assets Shareholders' equity Description Used on GOOG Financials Net income Income before taxes Operating income Revenue Total assets Total stockholders' equity 2012-12 10,737 13,386 12,760 50,175 93,798 71,715 Financial Year 2013-12 12,920 14,496 13,966 59,825 110,920 87,309 2014-12 14,444 17,259 16,496 66,001 131,133 104,500 2012-12 80% 1.05 25% 53% 131% 15.0% Financial Year 2013-12 89% 1.04 23% 54% 127% 14.8% 2014-12 84% 1.05 25% 50% 125% 13.8% ROE Calculation Using the Extended Dupont Method Description Formula Tax Burden Interest Burden Sales Margin Asset Turnover Financial Leverage Return on Equity (Net Income / EBT) (EBT / EBIT) (EBIT / Sales) (Sales / Assets) (Assets / Equity) ROE ROE (Net income / Equity) Check difference 15.0% - 14.8% - 13.8% ... This is the ROE calculated directly. - ... Difference between ROE calculated using extended Dupont method and ROE calcula Commentary Introduction Overall, Google's return on equity (ROE) has been declining over the past three years. To better understand why this is the case, we employ the extended Dupont method, which is: ROE = (Net Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity) where EBT is earnings before tax; and EBIT is earnings before interest and tax. ROE Factors/Contributors Financial Leverage Part of the reason why ROE was declining is the decrease in financial leverage (Asset / Equity). This shows that GOOG increasingly used more equity and less debt to finance its operations. Deleveraging has a negative effect on ROE. Asset Turnover Asset turnover gradually declined over the period. This indicates that GOOG was increasingly generating less revenue for its given assets. This could be a sign of inefficient use of the company's assets. It should nevertheless be noted that the drop in asset turnover is somewhat moderate. Sales Margin GOOG's sales margin remained fairly constant around 25%. This indicates that the company's portfolio mix was largely unchanged. Interest Burden The interest burden also remained fairly flat. This can partly be explained by the increased use of equity in the operations of the business. Tax Burden The tax burden also remained fairly flat. This inidicates that it is not a siginficant factor explaining the moderate drop in ROE. Conclusion Despite the moderate drop in GOOG's ROE, the company remains financially in good health as seen by the continued positive ROE. The reason for the moderate drop in ROE is largely explained by a decrease in financial leverage and asset turnover. E calculated directly, ie (Net income / Equity) This sheet contains GOOG income statement and Balance Sheet. ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag INCOME STATEMENT Fiscal year ends in December. USD in millions except per share data. Revenue Cost of revenue Gross profit Operating expenses Research and development Sales, General and administrative Other operating expenses Total operating expenses Operating income Interest Expense Other income (expense) Income before taxes Provision for income taxes Net income from continuing operations Net income from discontinuing ops Net income Preferred dividend Net income available to common shareholders Earnings per share Basic Diluted Weighted average shares outstanding Basic Diluted EBITDA ALPHABET INC CLASS C CAPITAL STOCK (GOOG) CashFlowFlag BALANCE SHEET Fiscal year ends in December. USD in millions except per share data. Assets Current assets Cash Cash and cash equivalents Short-term investments Total cash Receivables Inventories Deferred income taxes Prepaid expenses Other current assets Total current assets Non-current assets Property, plant and equipment Gross property, plant and equipment Accumulated Depreciation Net property, plant and equipment Equity and other investments Goodwill Intangible assets Deferred income taxes Other long-term assets Total non-current assets Total assets Liabilities and stockholders' equity Liabilities Current liabilities Short-term debt Accounts payable Taxes payable Accrued liabilities Deferred revenues Other current liabilities Total current liabilities Non-current liabilities Long-term debt Deferred taxes liabilities Deferred revenues Other long-term liabilities Total non-current liabilities Total liabilities Stockholders' equity Common stock Retained earnings Accumulated other comprehensive income Total stockholders' equity Total liabilities and stockholders' equity 2012-12 2013-12 2014-12 50,175 59,825 66,001 20,634 25,858 25,691 29,541 33,967 40,310 6,793 9,988 7,952 12,049 9,832 13,982 16,781 12,760 84 710 13,386 2,598 10,788 (51) 10,737 20,001 13,966 83 613 14,496 2,282 12,214 706 12,920 23,814 16,496 101 864 17,259 3,331 13,928 516 14,444 10,737 12,920 14,444 16 16 19 19 21 21 645 645 16,432 665 677 18,518 676 687 22,339 2012-12 2013-12 2014-12 14,778 33,310 48,088 7,885 505 1,144 2,132 700 60,454 18,898 39,819 58,717 8,882 426 1,526 2,827 508 72,886 18,347 46,048 64,395 9,383 17,697 (5,843) 11,854 1,469 10,537 7,473 23,837 (7,313) 16,524 1,976 11,492 6,066 32,746 (8,863) 23,883 3,079 15,599 4,607 2,011 33,344 93,798 1,976 38,034 110,920 3,280 50,448 131,133 2,549 2,012 240 6,968 895 1,673 14,337 3,009 2,453 24 7,986 1,062 1,374 15,908 2,009 1,715 96 9,455 752 2,778 16,805 2,988 1,872 100 2,786 7,746 22,083 2,236 1,947 139 3,381 7,703 23,611 3,228 1,971 104 4,525 9,828 26,633 22,835 48,342 538 71,715 93,798 25,922 61,262 125 87,309 110,920 28,767 75,706 27 104,500 131,133 1,322 3,412 2,173 80,685 This sheet calculates the ROE using the extended Dupont method. ROE = (Net Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity) Inputs to the Extended Dupont Method Variable Net income EBT EBIT Sales Total Assets Shareholders' equity Description Used on GOOG Financials Net income Income before taxes Operating income Revenue Total assets Total stockholders' equity 2012-12 10,737 13,386 12,760 50,175 93,798 71,715 Financial Year 2013-12 12,920 14,496 13,966 59,825 110,920 87,309 2014-12 14,444 17,259 16,496 66,001 131,133 104,500 2012-12 80% 1.05 25% 53% 131% 15.0% Financial Year 2013-12 89% 1.04 23% 54% 127% 14.8% 2014-12 84% 1.05 25% 50% 125% 13.8% ROE Calculation Using the Extended Dupont Method Description Formula Tax Burden Interest Burden Sales Margin Asset Turnover Financial Leverage Return on Equity (Net Income / EBT) (EBT / EBIT) (EBIT / Sales) (Sales / Assets) (Assets / Equity) ROE ROE (Net income / Equity) Check difference 15.0% - 14.8% - 13.8% ... This is the ROE calculated directly. - ... Difference between ROE calculated using extended Dupont method and ROE calcula Commentary Introduction Overall, Google's return on equity (ROE) has been declining over the past three years. To better understand why this is the case, we employ the extended Dupont method, which is: ROE = (Net Income / EBT) * (EBT / EBIT) * (EBIT / Sales) * (Sales / Assets) * (Assets / Equity) where EBT is earnings before tax; and EBIT is earnings before interest and tax. ROE Factors/Contributors Financial Leverage Part of the reason why ROE was declining is the decrease in financial leverage (Asset / Equity). This shows that GOOG increasingly used more equity and less debt to finance its operations. Deleveraging has a negative effect on ROE. Asset Turnover Asset turnover gradually declined over the period. This indicates that GOOG was increasingly generating less revenue for its given assets. This could be a sign of inefficient use of the company's assets. It should nevertheless be noted that the drop in asset turnover is somewhat moderate. Sales Margin GOOG's sales margin remained fairly constant around 25%. This indicates that the company's portfolio mix was largely unchanged. Interest Burden The interest burden also remained fairly constant around 1.05. This can partly be explained by the increased use of equity in the operations of the business. Tax Burden The tax burden also remained fairly flat. A plausible reason why this is the case is that GOOG's marginal rate of tax remained fairly constant over the observation period. Thus, tax is not a siginficant factor to explain the moderate drop in ROE. Conclusion Despite the moderate drop in GOOG's ROE, the company remains financially in good health as seen by the continued positive ROE. The reason for the moderate drop in ROE is largely explained by a decrease in financial leverage and asset turnover. E calculated directly, ie (Net income / Equity) A 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 B C D E F G Name______________________________________ Final Examination FINC 5880 Session 9 Question 1. 10 points) Both Berkley and Oakley are large public corporations with subsidiaries throughout the world. Berkley uses a centralized approach and makes most of the decisions for its subsidiaries. Oakley uses a decentralized approach and its subsidiaries make many of their own decisions. a. Would the agency problem be more pronounced for Berkley or for Oakley? Explain. b. Would agency costs likely be higher for Berkley or Oakley? Why? c. Discuss a major advantage and a major disadvantage to a centralized approach such as Berkley uses. d. Discuss a major advantage and a major disadvantage to a decentralized approach such as Oakley uses. e. Which is better, a centralized or decentralized approach? Explain. A 53 B C D E F G A 1 B C D E F G Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 Question 2. (20 points) Assume the firm's stock now sells for $30 per share. The company wants to raise $20 million by issuing 20-year, annual interest, $1,000 par value bonds. Each bond will have 40 warrants attached, each exercisable into 1 share of stock at an exercise price of $36. The firms straight bonds yield 8%. Each warrant is expected to have a market value of $0.75 when the stock sells at $30. The company wants to establish a coupon interest rate and dollar coupon to ensure that the bonds will clear the market. a. Calculate the value of the debt portion of the bonds with warrants. Stock price Bonds-life and par value Par value # of warrants per bond Exercise price Warrant market value @ P=$30) Yield on straight bonds $30 20 $1,000 40 $36 $0.75 8% b. Calculate the dollar coupon amount per bond with warrants. c. Calculate the coupon interest rate that should be set on the bonds with warrants. d. Identify 3 advantages to the company of issuing a bond with warrants instead of straight bonds. e. Identify 3 advantages to the investor of buying a bond with warrants instead of straight bonds. A 63 64 65 B C D E F G A 1 B C D E F Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Question 3. (15 points) Mantra Corporation is interested in acquiring Corlos Corporation. Corlos has 10 million shares outstanding and a target capital structure consisting of 30 percent debt and 70 percent equity. The debt interest rate is 8%. Assume that the risk-free rate of interest is 3% and the market risk premium is 7%. 2 Corlos' free cash flow (FCF0) is $5 million per year and is expected to grow at a constant rate of 6 percent a year; its beta is 1.2. Corlos has $5 million in debt. The tax rate for both companies is 30%. Shares outstanding Target debt in capital structure Debt interest rate rRF Market risk premium Tax rate 10,000,000 30% 8% 3% 7% 30% FCF0 Constant growth rate Beta Amount of debt a. Calculate the required rate of return on equity using equation: r s= rRF + RPM(b) b. Calculate weighted average cost of capital, using equation: WACC = Wdrd(1-%) + wsrs c. Calculate the value of operations, using equation: Vops = FCF0(1+g)/WACC - g) d. Calculate the value of the company's equity, using equation: Vs = Vops - debt e. Calculate the current value of the company's stock. 5,000,000 6% 1.2 5,000,000 A 51 52 53 54 55 56 57 B C D E F A 1 B C D E F G Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 2 5 6 7 Question 4. (20 points) A Treasury bond futures contract settled at 97'16. 8 9 a. Calculate the present value of one futures contract in dollars? 10 11 12 13 14 15 16 17 b. Are current market interest rates higher or lower than the standardized rate on a futures contract? Explain. 18 19 20 21 22 23 24 25 26 c. Calculate the implied annual interest rate on the futures contract. 27 28 29 30 31 32 33 34 35 36 37 38 39 d. Calculate the new value of the futures contract if interest rates increase by 1 percentage point 40 annually. 41 42 43 44 45 46 47 48 49 50 51 52 53 e. Describe differences between forward and futures contracts? Illustrate, using a specific example, of how 54 companies could use either a futures or forward contract to hedge a position. 55 56 57 58 59 60 61 A 62 63 64 65 66 B C D E F G A 1 B C D E Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 Question 5. (20 points) Corizon Company's balance sheet and income statement are shown below (in millions of dollars). Corizon and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the $5 preferred will be exchanged for one share of $2.00 preferred with a par value of $50 plus one 10% subordinated income debenture with a par value of $50. The $8 preferred issue will be retired with cash. The company's tax rate is 30%. Current Assets Net fixed assets Total assets Balance Sheet prior to Reorganization (in millions) Current liabilities Advance payments $5 preferred stock, $100 par value (1,000,000) shares $8 preferred stock, no par, callable at 100 (80,000 shares) Common stock, $1.00 par value (5,000,000) shares Retained earnings 425 Total claims 200 225 175 10 100 8 25 107 425 a. Construct the pro forma balance sheet after reorganization takes place. Show the new preferred at its par value. Balance Sheet after Reorganization (in millions) b. Construct the pro forma income statement after reorganization takes place. How does the recapitalization affect net income available to common stockholders? Income Statement (in millions) Prior to Reorganization Net sales 700.0 Operating expense 630.0 Net operating income 70.0 Other income 7.0 EBT Taxes Net income Dividends on $5 PS Dividends on $8 PS Income to Common SHs 77.0 23.1 53.9 5.0 0.6 48.3 After Reorganization F A B C D E 67 68 69 c. Calculate the required pre-tax earnings to cover debt and preferred stock obligations, before and after the recapitalization? 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 d. Calculate the debt ratio before and after the reorganization? 85 86 87 88 89 90 91 92 93 94 e. Would the common stockholders be in favor of the reorganization? Explain your answer, providing at least 2 reasons for it. 95 96 97 98 99 100 F A 1 B C D E F G Name______________________________________ 3 Final Examination FINC 5880 4 Session 9 2 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 Question 6. (15 points) Your portfolio is diversified. It has an expected return of 10.0% and a beta of 1.10. You want to add 500 shares of Tundra Corporation at $30 a share to your portfolio. Tundra has an expected return of 14.0% and a beta of 1.30. The total value of your current portfolio is $50,000. a. Calculate the expected return on the portfolio after the purchase of the Tundra stock? b. Calculate the expected beta on the portfolio after you have added the new stock? c. Is your portfolio less risky or more risky than the market? Explain. d. Will your portfolio likely outperform or underperform the market in a period when stocks are rapidly falling in value? Explain. e. Is beta always an accurate predictor of a portfolio's performance? Explain