BA Questions
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BAtest.docxProf:
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1. Briefly state what should be the primary objective of managers. (3 pts)
a) Do firms have any responsibilities to society at large? Why? (5 pts)
b) Is stock price maximization good or bad for society? (5 pts)
A computer manufacturer has financial statements as follows:
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Income Statements for Year Ending December 31 |
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(Thousands of Dollars) |
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2019 |
2018 |
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Sales |
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$945,000 |
$900,000 |
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Expenses excluding depreciation and amortization |
812,700 |
774,000 |
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EBITDA |
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$132,300 |
$126,000 |
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Depreciation and amortization |
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33,100 |
31,500 |
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EBIT |
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$99,200 |
$94,500 |
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Interest Expense |
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10,470 |
8,600 |
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EBT |
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$88,730 |
$85,900 |
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Taxes (25%) |
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22,183 |
21,475 |
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Net income |
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$66,547 |
$64,425 |
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Common dividends |
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$56,609 |
$54,115 |
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Addition to retained earnings |
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$9,938 |
$10,310 |
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Balance Sheets for Year Ending December 31 |
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(Thousands of Dollars) |
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Assets |
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2019 |
2018 |
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Cash and cash equivalents |
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$47,250 |
$45,000 |
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Short-term investments |
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3,800 |
3,600 |
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Accounts Receivable |
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283,500 |
270,000 |
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Inventories |
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141,750 |
135,000 |
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Total current assets |
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$476,300 |
$453,600 |
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Net fixed assets |
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330,750 |
315,000 |
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Total assets |
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$807,050 |
$768,600 |
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Liabilities and equity |
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Accounts payable |
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$94,500 |
$90,000 |
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Accruals |
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47,250 |
45,000 |
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Notes payable |
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26,262 |
9,000 |
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Total current liabilities |
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$168,012 |
$144,000 |
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Long-term debt |
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94,500 |
90,000 |
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Total liabilities |
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$262,512 |
$234,000 |
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Common stock |
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444,600 |
444,600 |
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Retained Earnings |
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99,938 |
90,000 |
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Total common equity |
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$544,538 |
$534,600 |
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Total liabilities and equity |
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$807,050 |
$768,600 |
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Other data |
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Tax rate |
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25% |
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Shares outstanding 15,000,000
Stock price $65 per share
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WACC |
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8% |
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2. What is free cash flow? Why is it important? (4 pts)
a) What is the company’s net operating profit after taxes in 2019 (NOPAT)? (3 pts)
b) What are operating current assets? How much operating current assets does the company have in 2019? (3 pts)
c) What are operating current liabilities? How much operating current liabilities does the company have in 2019? (3 pts)
d) How much net operating working capital does the company have in 2019? (3 pts)
e) How much total net operating capital does the company have in 2019? (3 pts)
f) What is the company’s return on invested capital (ROIC) in 2019? (3 pts)
g) What is the company’s EVA in 2019? (3 pts)
h) What is the company’s MVA in 2019? (3 pts)
3. Why are ratios useful? What three groups use ratio analysis and for what reasons? (4 pts)
a) Refer to the above company’s financial statements. Calculate the current and quick ratios. Has the company’s liquidity position improved or worsened? Explain. (4 points)
b) Calculate the inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover. Has the company’s ability to manage its assets improved or worsened? Explain. (8 pts)
c) Calculate the profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). How has the company’s profitability changed during the last year? (8 pts)
d) What are the firm’s major strengths and weaknesses? (The industry averages are listed below for reference) (5 pts)
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Ratio Analysis |
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Industry Average |
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Current |
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2.7 |
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Quick |
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1.0 |
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Inventory Turnover |
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6.1 |
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Days Sales Outstanding |
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32.0 |
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Fixed Assets Turnover |
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7.0 |
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Total Assets Turnover |
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2.5 |
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Profit Margin |
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3.6% |
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Basic Earning Power |
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17.8% |
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ROA |
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9.0% |
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ROE |
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17.9% |
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4. Suppose someone offered to sell you a note calling for the payment of $1,000 15 months from today. They offer to sell it to you for $850. You have $850 in a bank time deposit which pays a 7% effective annual interest rate (compounding), and you plan to leave the money in the bank unless you buy the note. The note is not risky--you are sure it will be paid on schedule. Should you buy the note? (10 pts)
5. Alex Smith and Jane Green are portfolio managers at your firm. Each manages a well-diversified portfolio. Your boss has asked for your opinion regarding their performance in the past year. Alex’s portfolio has a beta of 0.8 and had a return of 9.5%; Jane’s portfolio has a beta of 1.6 and had a return of 11.5%. Which manager had better performance? Why? (Assumer the risk-free rate is 4% and the market risk premium is 5%). (10 pts)
6. The last dividend paid by Wilden Corporation was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of the current stock price? (10 pts)
