Watson Leisure Time Sporting Goods manufactures golf clubs, baseball bats, basketball goals, and other similar items. The company's income statements for the past three years are indicated in Exhibit 1.

The balance Sheets for the same period are shown in Exhibit 2.

Exhibit 1 WATSON LEISURE TIME SPORTING GOODS Income Statement 2017 2018 2019

Sales (all on credit).............................. $1,500,000 $1,800,000 $2,160,000

Cost of goods sold........................... 950,000 1,120,000 1,300,000

Gross profit....................................... 550,000 680,000 860,000

Selling and administrative expense......... 380,000 490,000 590,000

Operating profit................................. 170,000 190,000 270,000

Interest expense............................. 30,000 40,000 85,000

Net income before taxes..................... 140,000 150,000 185,000

Taxes................................................ 46,120 48,720 64,850

Net Income................................... $93,880 $101,280 $120,150

Shares............................................. 40,000 40,000 46,000

WATSON LEISURE TIME SPORTING GOODS has made the following projections 2020.

All sales are on credit March $24,000 June $28,000 April 16,000 July 35,000 May 18,000 August 38,000

Sales in January and February were $27,000 and $26,000, respectively. Experience has shown that of total sales, 40 percent are collected in the month of sale, 40 percent are collected in the following month, and 20 percent are collected two months after sale. Total annual sales for the year 2020 are forecasted to be $2,500,000. Monthly material purchases are set equal to 20 percent of forecasted sales for the next month. Of the total material costs, 40 percent are paid in the month of purchase and 60 percent in the following month. Labour costs will run $6,000 per month, and fixed overheads is $3,000 per month. Interest payments on the debt will be $4,500 for both March and June. Finally, Watson's sales force will receive a 3 percent commission on total sales for the first six months of the year, to be paid on June 30. A cash dividend of $20,000 is scheduled to be paid in September. Tax payments of $3,500 are due in June and September.

2 Exhibit 2 WATSON LEISURE TIME SPORTING GOODS Balance Sheet Assets 2017 2018 2019

Cash...................................................... $20,000 $30,000 $20,000

Marketable securities.............................. 30,000 35,000 50,000

Accounts receivable.................................... 150,000 230,000 330,000

Inventory.......................................... 250,000 285,000 325,000

Total Current Assets.................................... 450,000 580,000 725,000

Net Plant and equipment................................. 550,000 720,000 1,169,000

Total Assets............................................... $1,000,000 $1,300,000 $1,894,000

Liabilities & Equity Accounts payable.................................. $100,000 $225,000 $200,000

Notes payable (bank).................................... 100,000 100,000 300,000

Total Current liabilities................................. 200,000 325,000 500,000 Long-term liabilities................................. 250,000 331,120 550,740 Total liabilities............................................. 450,000 656,120 1,050,740

Common stock ($10 par)........................ 400,000 400,000 460,000

Capital paid in excess of par................... 50,000 50,000 80,000

Retained earnings....................................... 100,000 193,880 303,260

Total stockholders' equity................................... 550,000 643,880 843,260

Total liabilities and stockholders'equity.................. $1,000,000 $1,300,000 $1,894,000

WATSON LEISURE TIME SPORTING GOODS is trying to decide between two potential small shopping centre purchases. Their choices are the Wrigley Village and Croxley Square. The anticipated annual cash inflows for 2021 from each are as follows: Wrigley Village Croxley Square Yearly aftertax cash inflow (in thousands) Probability Yearly aftertax cash inflow (in thousands) Probability $10 0.1 $20 0.1 30 0.2 30 0.3 40 0.3 35 0.4 50 0.3 50 0.2 60 0.1

Required: Question 1 (50 marks) (a) Calculate the earnings per share for the years 2017 through 2019. (3 marks)

(b) Calculate the return on assets (ROA) ratio for the years 2017 through 2019. (3 marks) 3

(c) Calculate the proportions of assets financed by debt for years 2017 through 2019. (3 marks)

(d) Using the Du Pont System, describe the changes in the return on equity from year to year. (10 marks) (e) Construct the common size Income Statement for Watson Company for 2017 through 2019. (9 marks) (f) Using the percent of sales method, draw up Watson Company's Pro-Forma Balance Sheet and Pro-Forma Income Statement for 2020 based on 2019 statements. (10 marks) (g) Prepare Indexed Financial statements on Watson Company with 2017 as the base year. (12 marks)

Question 2 draw up

schedule of monthly cash receipts, monthly cash payments and a complete monthly budget for March through June for Watson Company. (30 marks)

Question 3 (20 marks) (a) What is the expected value of the cash flow from Wrigley Village and Croxley square? (5 marks) (b) What is the coefficient of variation for each shopping centre? (10 marks) (c) Which shopping centre has more risk? Explain your answer. (5 marks)