Corporate Finance Problems

FI 3300 - CORPORATION FINANCE Take-Home Problem Set Two (THPS-2)

Spring 2016 Directions: This problem set covers chapters 1, 3 and 4 in the textbook. Determine or compute an answer for each question/problem. After you have computed an answer for every question, enter your answers online via the “quiz” function entitled “THPS-2 ANSWER SUBMISSION FORM.” See the course calendar for when the answer submission form will open and close. I will post a detailed solution key to the problem set right after the Answer Submission Form closes. See the course calendar for the day(s) on which I will answer questions about these problems in the chat room.

This is a take-home, open book, open notes financial statement analysis problem set. Work on this Assignment is to be yours alone - any discussion of either the questions on the assignment or your answers with anyone other than your instructor will be considered as cheating and, thus, as a violation of the GSU honor code.

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1. The primary goal of the management of a publicly traded corporation should be to ______________.

a. create jobs b. maximize shareholder wealth c. promote social good d. maximize profits e. minimize risk

2. In conducting a common-size analysis, every balance sheet item is divided by __________ and every income

statement item is divided by __________. a. its corresponding base year balance sheet item; its corresponding base year income statement item. b. its corresponding base year income statement item; its corresponding base year balance sheet item. c. net sales or revenues; total assets. d. total assets; total liabilities and equity. e. total assets; net sales or revenues.

3. __________ is an accounting statement that lists a company’s assets, liabilities and equity. The statement is a

stock measure that displays these account values at a specific point in time.

a. The balance sheet b. The statement of cash flows c. The sources and uses statement d. The income statement e. None of the above

4. Finance is divided into three separate subject areas. Two of the subject areas of finance are Corporate Financial

Management and Investments. The third subject area of finance is:

a. International Cash Flow Management b. Financial Markets and Institutions c. Banking d. Accounting e. None of the above

5. Which of the following are items/accounts that typically appear on a balance sheet?

a. net sales, cost of goods sold, retained earnings b. net sales, inventories, notes payable c. net sales, depreciation expense, advertising expense d. cash, depreciation expense, taxes e. cash, accounts receivable, inventories

6. Which of the following would directly affect (either increase or decrease) net cash flow from operating

activities (assuming all else remains constant)? Note: there more be more than one answer for this questions – record the letter of all that apply (this is an all or nothing answer).

a. An increase in dividends paid. b. A decrease in accounts receivable. c. A decrease in notes payable (i.e., bank loans). d. An increase in inventory. e. An increase in accounts payable. f. An increase in retained earnings. g. A decrease in cash. h. An increase in accruals. i. A decrease in gross plant and equipment.

7. If a firm increases its total assets but its debt ratio, net profit margin and net sales (i.e., revenue) remain the same as they were before total assets decreased, the firm’s:

a. ROE would not change. b. ROE could either increase or decrease depending on the interaction between the equity multiplier and

the days payable ratio. c. ROE would increase. d. ROE would decrease. e. There is insufficient information to determine the effect on ROE.

8. Which of the following steps is most likely to decrease a company’s cash conversion cycle (assume that none

of the following actions has any impact on sales or COGS)? Note: there more be more than one answer for this questions – record the letter of all that apply (this is an all or nothing answer).

a. Change its receivables policy from net 35 to net 40 (note that this action will increase the firm’s average collection period from 35 days to 40 days).

b. Change its payables policy to pay bills in 40 days instead of in 30 days. c. Decrease the inventory conversion period from 50 days to 40 days. d. Reduce the firm’s notes payable (i.e., bank loan) balance by 20%. e. None of the actions listed above will decrease the firm’s cash conversion cycle.

9. Which of the following actions would decrease the current ratio (assuming an initial current ratio of 0.8, and

current liabilities equal to $1,000,000)?

a. Borrow $100,000 in short term debt and deposit this money (i.e., $100,000) into the firm’s cash account. b. Borrow $200,000 in long-term debt to buy $200,000 worth of additional inventory. c. Borrow $50,000 of short-term debt and use the proceeds to pay all operating expenses sooner, thus

lowering accruals (i.e., accrued expenses) by $50,000. d. Sell $250,000 of fixed assets to pay off an equal amount of long-term debt. e. None of the above – that is, none of the actions listed about will decrease the current ratio.

10. RedCap Manufacturing, Inc. is planning to borrow money by taking out a short term loan (i.e., increase notes payable) and depositing this money directly into the firm’s checking account (i.e., increase cash). RedCap believes that this event will have no affect on either sales or costs, and therefore no affect on net income.

All else constant, this new policy should cause the firm’s quick ratio (assuming an initial quick ratio of 1.5) to:

a. Decrease b. Increase c. No Change d. Not enough information is provided to answer this question.

11. BlueHat, Inc. is planning to use excess cash that the company has in its checking account (i.e., reduce cash) to pay off a long term loan balance. (i.e., decrease long-term debt). BlueHat believes that this event will have no affect on either sales or costs, and therefore no affect on net income.

All else constant, this new policy should cause the firm’s debt ratio (assuming an initial debt ratio of 45%) to:

a. Decrease b. Increase c. No Change d. Not enough information is provided to answer this question.

12. GreenChapeau, Inc. is planning to increase its short-term loans (i.e., increase notes payable) to pay for an increase in the firm’s basic inventory level (i.e., increase inventory). GreenChapeau believes that this event will have no affect on either sales or costs, and therefore no affect on net income.

All else constant, this new policy should cause the firm’s current ratio (assuming a current ratio of 1.5) to: a. Decrease b. Increase c. No Change d. Not enough information is provided to answer this question.

All of the following questions are open-ended problems. You must compute an answer for every problem. For percentage answers, calculate your answer as a percent rounded to 2 decimal places. For example, you would record ROA = .1263974 as 12.64% (note that on D2L you will enter 12.64 without the percent sign). For dollar answers, round to the nearest dollar. For example, you would record $12,345.83943 as $12,346 (note that on D2L you will enter 12346 without a comma and without the dollar sign). 13. Felton Farm Supplies, Inc. has an ROA (return on assets) of 12 percent, total assets of $300,000 and a net

profit margin of 4.5 percent. What are Felton Farm Supplies annual sales?

14. Krisle and Kringle's debt-to-total assets ratio is 0.445 (i.e., debt ratio = 44.5%). What is the company’s debt- to-equity ratio? (Enter answer as a ratio rounded to 2 decimal places – that is, do not convert to a percent; for example, enter 80/35 = 2.2857 as 2.29).

15. Philips, Inc has a debt ratio of 15% and ROE = 13%. What is Phillips’ ROA? (Enter answer as a percent).

16. A firm has an ROA of 17% and a debt/equity ratio of 0.65. The firm's ROE is _________. (Enter answer as a percent).

17. Assume that XYZ, Inc. has:

x Debt ratio = 60% x Net profit margin = 12.5% x Return on assets (ROA) = 15%

Find XYZ’s Total Asset Turnover ratio. (Enter answer as a ratio – that is, do not convert to a percent).

18. Assume that your firm has ROA of 17.5%, ROE of 38% and Total Asset Turnover ratio of 2.75. Calculate the debt ratio for the firm. (Enter answer as a percent).

USE THE DATA IN THE TABLE BELOW TO ANSWER QUESTIONS 19 – 24 (Assume all account figures are in dollars)

19. This company’s gross profit margin (as a percent rounded to 1 decimal place) in 2014 was ________.

20. Assume that this is a retail company. If the company purchased products that it sold in 2015 for $5.00 per unit, how many units did the company purchase in 2015?

21. ROE for 2015 is _____%.

22. Cash flow from operating activities in 2015 is $ _______.

23. Cash flow from investing activities in 2015 is $ _________.

24. Cash flow from financing activities in 2015 is $ _________.

USE THE INFORMATION BELOW TO ANSWER THE FOLLOWING 3 QUESTIONS

2014 2015 Accounts payable 440 380 Accounts receivable, net 1,810 2,040 Accruals 95 120 Cash 120 90 Common stock 2,120 2,380 Cost of goods sold 6,610 6,420 Depreciation expense 1,560 1,630 Interest expense 140 170 Inventory (end of year) 5,720 5,530 Long-term debt 3,890 4,150 Net fixed assets 7,530 8,050 Net sales 10,750 11,650 Notes payable 800 740 Operating expenses (excluding depreciation) 1,680 1,780 Retained earnings 7,835 7,940 Taxes 260 380

25. Calculate the Cash flows from operating activities for 2011.

26. Calculate the Cash flows from investing activities for 2011.

27. Calculate the Cash flows from financing activities for 2011.

2010 2011

Cash 1,500 1,820 Account receivable 3,740 3,980 Inventory 10,120 8,470 Total current assets 15,360 14,270 Gross fixed assets 56,100 63,840 (Accumulated depreciation) (9,590) (11,000) Net fixed assets 46,510 52,840 Total assets 61,870 67,110

Notes payable 1,000 1,000 Accounts payable 2,260 4,150 Accruals 1,570 1,640 Current portion of LT debt 470 1,730 Total current liabilities 5,300 8,520 Lont-term debt 37,750 34,790 Common stock 1,000 1,500 Paid in capital 4,800 9,460 Retained earnings 13,020 12,840 Total liabilities and equity 61,870 67,110

Additional Data from 2011 Income Statement: Sales in 2011 238,000 Net income in 2011 9,940

Mellon Company Balance Sheet

For the Years Ending December 31, 2010 and 2011 (All figures in dollars)

USE THE FOLLOWING INFORMATION TO CONSTRUCT A BALANCE SHEET TO ANSWER QUESTIONS 28 through 30

Assume that the only accounts on the balance sheet are those listed below. Fill in this chart with the data provided and then answer questions 28, 29 and 30.

Cash ____________ Notes payable ____________

Accounts receivable ____________ Accounts payable ____________

Inventory ____________ Long-term debt ____________

Gross fixed assets ____________ Equity ____________

(Accumulated depreciation) ____________ Total liab & equity ____________

Net fixed assets ____________

Total assets ____________

28. Cash = ____________.

29. Long-term debt = ____________.

30. Total assets =____________.

Sales 2,000,000$ Gross profit margin 20% Inventory turnover ratio (Cost of goods sold/Inventory) 25 Net profit margin 4% Average collection period 45 Return on equity 25% Accumulated depreciation 75,000$ Return on assets 12.5% Accounts payable days 18 Notes payable 18,000$ Gross fixed assets 400,000$ Percent of sales on credit (remainder are cash sales) 80%

NOTE: Assume a 360 day year for all ratios, etc.

USE THE FOLLOWING INFORMATION TO FILL IN THE BALANCE SHEET BELOW TO ANSWER QUESTIONS 31 through 34

Note: Of total sales, 60 percent are on credit and the remainder are cash sales. Assume a 360-day year. All data in the table above, unless otherwise stated, is for the year 2015.

Hodun, Inc. Balance Sheet for the Year Ending December 31, 2015

Cash __________ Notes payable __________

Accounts receivable __________ Accounts payable __________

Inventory __________ Accruals __________

Net fixed assets __________ Long-term debt __________

Total assets __________ Common stock ($2 par value) __________

Capital surplus __________

Retained earnings __________

Total liab. & equity __________

31. Cash = ____________.

32. Long-term debt = ____________.

33. Total assets =____________.

34. Capital surplus = __________.

Number of shares outstanding 15,000 Average collection period (days) 60 Sales 200,000$ Accounts payable days 90 Gross profit margin 20% Retained earnings (2010) 23,700$ Inventory turnover ratio 4 Dividend payout ratio 80% Notes payable 8,000$ Accruals 4,000$ Net profit margin 15% Current ratio 1.5 Return on assets 8% Debt ratio 40%

USE THE FOLLOWING DATA TO ANSWER QUESTIONS 35 – 40

35. Net fixed assets in 2014 were $__________. 36. COGS on the 2013 common-sized income statement was 24%. Therefore, COGS in 2013 was 37. The debt ratio for 2014 was ____%. 38. Cash flow from operations in 2014 was $________. 39. Cash flow from investing in 2014 was $__________. 40. Total dividends paid in 2014 was $_______.

2013 2014 Sales 500,000 560,000 COGS ???? 149,350 Gross profit 380,000 410,650 Oper. exp 225,000 250,100 Depreciation 15,000 15,000 Operating profit 140,000 145,550 Interest exp. 5,000 5,000 EBT 135,000 140,550 Taxes 50,000 56,000 Net Income 85,000 84,550

2013 2014 Cash 450,000 478,500 Accounts rec 275,000 250,000 Inventories 280,000 325,000 Current Assets 1,005,000 1,053,500 Net fixed assets 1,125,000 ??? Total Assets 2,130,000 2,293,500

Notes payable 150,000 125,000 Accounts payable 90,000 115,000 Accruals 15,000 25,000 Current Liabilities 255,000 265,000 Long-term debt 1,000,000 1,050,000 Common stock @ ($0.25 par) 25,000 28,500 Additional paid in capital 500,000 570,000 Retained earnings 350,000 380,000 Total Liabilities & Equity 2,130,000 2,293,500

Annual Balance Sheets

Annual Income Statements