| Acct 515 Spring 2018 |
| ASSUMPTIONS: |
| 1 | On 1/1/X1 the company will purchase additional land, plant, and equipment totaling $10,000,000. You must decide how much is allocated to each category and how you will depreciate each category. Remember that each category has different depreciation rules. Be sure to show the “Historical Cost” for each category (property, plant and equipment) and the associated amount of accumulated depreciation on the balance sheet. You must also decide how the original equipment was depreciated and its asset life. |
| 2 | On 1/1/X1 the company will take out a mortgage to cover part of the cost of the purchases. The interest rate is 4.0%, the payments are quarterly and the maturity is 25 years. You must decide how much of a loan you think you will need, given your current financial structure. You also have the option of selling common stock to raise some of the money to pay for the asset expansion. You must take out a loan for at least $4,000,000. The maximum amount you can borrow is $14,000,000. You must decide the optimum amount of debt and equity. Please include a loan amortization schedule of your particular loan that shows the interest expense for each year. |
| 3 | Sales (in units) increases by 80% in the first year and will grow by 4% additional each year. So, there is a 84% (80% + 4%) growth in sales units in year 2, 88% growth in sales units (80% + 4% + 4%) in year 3 ... These are the annual compounded rates of growth for the sales units. The sales price is $50 in year X0, and the price increases by 22% each year. |
| 4 | To make the analysis less complicated, assume all units in ending inventory at 12/31/X0 have a unit cost of $16 ... but that does not mean that the units in "cost of goods sold" for period zero are valued at $16 per unit. The firm could have purchased inventory at many different prices during period zero. In successive years, the number of units in the ending balance of inventory will increase by 8% each year. The cost per unit of inventory increases by 5% each year. Hint: you will have to decide which inventory method to use for your analysis. I suggest either LIFO or FIFO. |
| 5 | As the balance sheet shows, the firm needs $200,000 in the cash account for transactions purposes. The firm takes any extra cash and invests the cash in marketable securities. You have an option of investing in corporate securities or municipal securities. The corporate securities have a return of 4.1% and the municipal securities have a return of 3.5%, but the municipal securities are federal income tax-free. Interest revenue is calculated by taking the previous year’s ending balance in marketable securities and multiplying by the rate of return from the type of securities selected. For instance, if you decide to invest the in municipal securities during year one, (X1), and had $1,000,000 in marketable securities at the end of year zero (X0), and an interest rate of 4% in year X1, interest revenue for year X1 would be $40,000 ($1,000,000 * 0.04 = $40,000). This calculation of interest revenue is simplistic and obviously unrealistic, but will keep you from having a circular logic problem in your Excel modeling. |
| 6 | The abridged income statement in year zero (X0) needs some explanation. “Operating expenses” includes many accounts, such as wage expense, lease expense, etc. You will need to add a few line items to make the (your) income statement more realistic. For instance, at a minimum you will need to add lines for miscellaneous expense, wage expense, depreciation expense, and interest expense. In the base year, all expenses are lumped together as “operating expenses”, in future income statements (X1-X5) you will need to show all material expenses as separate line items. |
| 7 | The federal corporate income taxes rates for all years will be the actual rates in effect for the 2016 or 2017 tax year. These Federal Corporate Tax Rates can be found on the internet. Be sure to show a schedule for how you calculated federal income tax. Ignore state income taxes. |
| 8 | The P/E (called the price earnings ratio: stock price / earnings per share {EPS}) for all six years will be the same. That is to say that the P/E in period zero is the same as the P/E in all years. Assume the stock price at 12/31/x0 is $10.00 per share. You need this assumption to calculate the P/E. If you decide to sell stock in period X1, you will need to calculate the stock price. Assume that the stock price on January 1, X1, when you need to raise money, will be based on the expected earnings of year X1. In other words, the market is guessing (accurately) about what your earnings will be as of year-end. You then use the P/E and the EPS from year X1, to calculate the stock price. Remember, you may finance completely with debt, or you may elect to finance the new assets partly with debt and partly with the sale of additional common stock. |
| 9 | The par value of the stock is $0.10 (ten cents per share). The particular exchange on which this stock is traded requires that the company have a minimum of 500,000 shares outstanding at all times. |
| 10 | Stock price will not go below $1.00 per share, in any year, even though you may have incurred a loss in any year. |
| 11 | Create a schedule to show stock price for each year, and how you calculated it. |
| 12 | You will need to make many assumptions in the process of creating the financial statements for years X1 through X5. Please make a list of your assumptions. |
hannagetachew
FSA_Project_515_s20181.xlsx
