Problem Review Set-1 Question-1 a. Given the following financial statements, historical ratios, and industry averages, calculate Sterling Company's financial ratios for 2012. (Assume a 365-day year.) Sterling Company Income Statement Year End December 2012 Sales revenue Less: Cost of goods sold Gross profits Less: Operating expenses Selling expense General and administrative expenses Lease expense Depreciation expense Total operating expense Operating profits Less: Interest expense Net profits before taxes Less: Taxes (rate = 40%) Net profits after taxes Less: Preferred stock dividends Earnings available for common stockholders Earnings per share (EPS) Number of Outstanding Shares
10,000,000.00 7,500,000 2,500,000.00 300,000.00 650.00 50.00 200.00 1,200,000.00 1,300,000.00 200.00 1,100,000.00 440.00 660,000.00 50,000.00 610,000.00 $3.05 200,000
Sterling Company Balance Sheet Year End December 2012 Cash Marketable securities Accounts receivable Inventories Total current assets Gross fixed assets (at cost)J Less: Accumulated depreciation Net fixed assets Other assets Total assets
$200,000.00 $50,000.00 $800,000.00 $950,000.00 $2,000,000.00 $12,000,000 3,000,000 $9,000,000.00 1,000,000 $12,000,000
Accounts payable6 Notes payable Accruals Total current liabilities Long-term debt (includes financial leases)'
$900,000.00 $200,000.00 $100,000.00 $1,200,000.00 $3,000,000.00
Preferred stock (25,000 shares, $2 dividend) Common stock (200,000 shares at %i par) Paid-in capital in excess of par value Retained earnings Total stockholders' equity Total liabilities and stockholders' equity
$1,000,000.00 $600,000.00 $5,200,000.00 $1,000,000.00 $7,800,000.00 $12,000,000.00
Footnote a: The firm has a financial lease requiring make annual payments of 50,000.Five years of the lease has yet to run Footnote b: Annual Credit pruchases of 6,200,000 made during the year Footnote c: The annual principal payment on the long term debt is $100,000; pre tax equivalent is X=100,000/0.6=166,667 Footnote d: On December 31 2012, the firm’s common stock closed at 39.50 per share
Actual 2010 Current ratio Quick ratio Inventory turnover Average collection period Average payment period Total asset turnover Debt ratio Times interest earned ratio Fixed-payment coverage ratio Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Return on common equity (ROE) Earnings per share (EPS) Price/earnings (P/E> ratio Market/book (M/B) ratio
1.4 1 9.52 45.6 days 59.3 days 0.74 0.2 8.2 4.5 0.3 0.12 0.062 0.045 0.061 $1.75 12 1.2
Actual 2011 1.55 0.92 9.21 36.9 days 61.6 days 0.8 0.2 7.3 4.2 0.27 0.12 0.062 0.05 0.067 $2.20 10.5 1.05
Actual 2012 ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?
Industry Average 2012 1.85 1.05 8.6 35.5 days 46.4 days 0.74 0.3 8 4.2 0.25 0.1 0.053 0.04 0.066 $1.50 11.2 1.1
b. Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint. Break your analysis into evaluation of the firm's liquidity, activity, debt, profitability, and market ratios.
Question-2: Home Health, Inc., has come to Jane Ross for a yearly financial checkup. As a first step, Jane has prepared a complete set of ratios for fiscal years 2011 and 2012. She will use them to look for significant changes in the company's situation from one year to the next. Home Health Inc. Financial Ratios Ratio Current ratio Quick ratio Inventory turnover Average collection period Total asset turnover Debt ratio Times interest earned ratio Gross profit margin Operating profit margin Net profit margin Return on total assets Return on common equity Price/earnings ratio Market/book ratio
2011 3.25 2.5 12.8 42.6 days 1.4 0.45 4 68 14% 8.3% 11.6% 21.1% 10.7 1.4
2012 3 2.2 10.3 31.4 days 2 0.62 3.85 65% 16% 8.1% 16.2% 42.6% 9.8 1.25
a. To focus on the degree of change, calculate the year-to-year proportional change by subtracting the year 2011 ratio from the year 2012 ratio, then dividing the difference by the year 2011 ratio. Multiply the result by 100. Preserve the positive or negative sign. The result is the percentage change in the ratio from 2011 to 2012. Calculate the proportional change for the ratios shown here.
b. For any ratio that shows a year-to-year difference of 10% or more, state whether the difference is in the company's favor or not. c. For the most significant changes (25% or more), look at the other ratios and cite at least one other change that may have contributed to the change in the ratio that you are discussing.
Question-3 Consider the balance sheets and selected data from the income statement of Keith Corporation that appear below. Keith Corporation Balance Sheets Assets Cash Marketable securities Accounts receivable Inventories Total current assets Gross fixed assets Less: Accumulated depreciation Net fixed assets Total assets Liabilities and Stockholders' Equity Accounts payable Notes payable Accruals Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity
Dec-12 2012 $1,500 $1,800 $2,000 $2,900 $8,200 $29,500 $14,700 $14,800 $23,000
Dec-11 2011 $1,000 $1,200 $1,800 $2,800 $6,800 $28,100 $13,100 $15,000 $21,800
$1,600 $2,800 $200 $4,600 $5,000 $9,600 $10,000 $3,400 $13,400 $23,000
$1,500 $2,200 $300 $4,000 $5,000 $9,600 $10,000 $2,800 $12,800 $22,400
Ketith Corporation Income Statement Data (2012) Depreciation Expense 1,600 EBIT 2,700 Interest Expense 367 Net Profits After Taxes 1,400 Tax Rate 40%
a. Calculate the firm's net operating profit after taxes (NOPAT) for the year ended December 31, 2012. Hint: NOPAT=EBIT x (1-T) b. Calculate the firm's operating cash flow (OCF) for the year ended December 31, 2012. c. Calculate the firm's free cash flow (FCF) for the year ended December 31, 2012. d. Interpret, compare, and contrast your cash flow estimates in parts b and c.
Question-4: The actual sales and purchases for Xenocore, Inc., for September and October 2012, along with its forecast sales and purchases for the period November 2012 through April 2013, follow. The firm makes 20% of all sales for cash and collects on 40% of its sales in each of the 2 months following the sale. Other cash inflows are expected to be $12,000 in September and April, $15,000 in January and March, and $27,000 in February. The firm pays cash for 10% of its purchases. It pays for 50% of its purchases in the following month and for 40% of its purchases 2 months later.
Year 2012 2012 2012 2012 2013 2013 2013 2013
Month September October November December January February March April
Sales $210,000 $250,000 $170,000 $160,000 $140,000 $180,000 $200,000 $250,000
Purchases $120,000 $150,000 $140,000 $100,000 $80,000 $110,000 $100,000 $90,000
Wages and salaries amount to 20% of the preceding month's sales. Rent of $20,000 per month must be paid. Interest payments of $10,000 are due in January and April. A principal payment of $30,000 is also due in April. The firm expects to pay cash dividends of $20,000 in January and April. Taxes of $80,000 are due in April. The firm also intends to make a $25,000 cash purchase of fixed assets in December. a. Assuming that the firm has a cash balance of $22,000 at the beginning of November, determine the end-of-month cash balances for each month, November through April. b. Assuming that the firm wishes to maintain a $15,000 minimum cash balance, determine the required total financing or excess cash balance for each month, November through April. c. If the firm were requesting a line of credit to cover needed financing for the period November to April, how large would this line have to be? Explain your answer.
Question-5: Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other information provided below to prepare the financial plans. The following financial data are also available: (1) The firm has estimated that its sales for 2013 will be $900,000. (2) The firm expects to pay $35,000 in cash dividends in 2013. (3) The firm wishes to maintain a minimum cash balance of $30,000. (4) Accounts receivable represent approximately 18% of annual sales. (5) The firm's ending inventory will change directly with changes in sales in 2013. (6) A new machine costing $42,000 will be purchased in 2013. Total depreciation for 2013 will be $17,000. (7) Accounts payable will change directly in response to changes in sales in 2013. (8) Taxes payable will equal one-fourth of the tax liability on the pro forma income statement. (9) Marketable securities, other current liabilities, long-term debt, and common stock will remain unchanged. a. Prepare a pro forma income statement for the year ended December 31, 2013, using the percent-ofsales method. b. Prepare a pro forma balance sheet dated December 31, 2013, using the judgmental approach. c. Analyze these statements, and discuss the resulting external financing required.
Question-6 California Integrated Systems Inc. recently reported $27.75bn of sales, $17.25bn of operating costs other than depreciation, and $2.1bn of depreciation. The company had no amortization charges, it had $9.6bn of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In order to sustain its operations and thus generate sales and cash flows in the future, the firm was required to make $3.75bn of capital expenditures on new fixed assets and to invest $900 million in net working capital requirement (operating working capital) . By how much did the firm's net income exceed its free cash flow? [Hint: Use FCF=EBIT(1-T)+Depreciation-NWCR-NFAI]
Vocabulary: NWCR=Operating Working Capital = WCR=NCAI NFAI=Net Fixed Asset Investment
