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Directions: Answer the following questions
on a separate document. Explain how you reached the answer or show your work if
a mathematical calculation is needed, or both. Submit your assignment using the
assignment link in the course shell. This homework assignment is worth 100
points.
Use the following information for
Questions 1 through 8:
Assume
that you recently graduated and have just reported to work as an investment
advisor at the one of the firms on Wall Street. You have been presented and
asked to review the following Income
Statement
and Balance Sheets of one of the firm’s clients. Your boss has developed the
following set of questions you must answer.
Income
Statements and Balance Sheet
Balance
Sheet 2012 2013 2014
Cash $9,000 $7,282 $14,000
Short-term
investments 48,600 20,000 71,632
Accounts
receivable 351,200 632,160 878,000
Inventories 715,200 1,287,360 1,716,480
Total
current assets $1,124,000 $1,946,802 $2,680,112
Gross
fixed assets 491,000 1,202,950 1,220,000
Less:
Accumulated depreciation 146,200 263,160 383,160
Net
fixed assets $344,800 $939,790 $836,840
Total
assets $1,468,800 $2,886,592 $3,516,952
Liabilities
and Equity
Accounts
payable $145,600 $324,000 $359,800
Notes
payable 200,000 720,000 300,000
Accruals 136,000 284,960 380,000
Total
current liabilities $481,600 $1,328,960 $1,039,800
Long-term
debt 323,432 1,000,000 500,000
Common
stock (100,000 460,000 460,000 1,680,936
shares)
Retained
earnings 203,768 97,632 296,216
Total
equity $663,768 $557,632 $1,977,152
Total
liabilities and equity $1,468,800 $2,886,592 $3,516,952
FIN 534
– Homework Set #1
Income
Statements 2012 2013 2014
Sales $3,432,000 $5,834,400 $7,035,600
Cost of
goods sold except depr. 2,864,000 4,980,000 5,800,000
Depreciation
and amortization 18,900 116,960 120,000
Other
expenses 340,000 720,000 612,960
Total
operating costs $3,222,900 $5,816,960 $6,532,960
EBIT $209,100 $17,440 $502,640
Interest
expense 62,500 176,000 80,000
EBT $146,600 ($158,560) $422,640
Taxes
(40%) 58,640 -63,424 169,056
Net
income $87,960 ($95,136) $253,584
Other
Data 2012 2013 2014
Stock
price $8.50 $6.00 $12.17
Shares
outstanding 100,000 100,000 250,000
EPS $0.88 ($0.95) $1.104
DPS $0.22 0.11 0.22
Tax rate 40% 40% 40%
Book
value per share $6.64 $5.58 $7.909
Lease
payments $40,000 $40,000 $40,000
FIN 534
– Homework Set #1
Ratio
Analysis 2012 2013 Industry
Average
Current 2.3 1.5 2.7
Quick 0.8 0.5 1.0
Inventory
turnover 4 4 6.1
Days
sales outstanding 37.3 39.6 32.0
Fixed
assets turnover 10 6.2 7.0
Total
assets turnover 2.3 2 2.5
Debt
ratio 35.60% 59.60% 32.0%
Liabilities-to-assets
ratio 54.80% 80.70% 50.0%
TIE 3.3 0.1 6.2
EBITDA
coverage 2.6 0.8 8.0
Profit
margin 2.60% −1.6% 3.6%
Basic
earning power 14.20% 0.60% 17.8%
ROA 6.00% −3.3% 9.0%
ROE 13.30% −17.1% 17.9%
Price/Earnings
(P/E) 9.7 −6.3 16.2
Price/Cash
flow 8 27.5 7.6
Market/Book 1.3 1.1 2.9
1. What is the free cash flow for 2014?
2. Suppose Congress changed the tax laws
so that Berndt’s depreciation expenses doubled. No changes in operations
occurred. What would happen to reported profit and to net cash flow?
3. Calculate the 2014 current and quick
ratios based on the projected balance sheet and income statement data. What can
you say about the company’s liquidity position in 2013?
4. Calculate the 2014 inventory turnover,
days sales outstanding (DSO), fixed assets turnover, and total assets turnover.
5. Calculate the 2014 debt ratio,
liabilities-to-assets ratio, times-interest-earned, and EBITDA coverage ratios.
What can you conclude from these ratios?
6. Calculate the 2014 profit margin, basic
earning power (BEP), return on assets (ROA), and return on equity (ROE). What
can you say about these ratios?
7. Calculate the 2014 price / earnings
ratio, price / cash flow ratio, and market / book ratio.
8. Use the extended DuPont equation to
provide a summary and overview of company’s financial condition as projected
for 2014. What are the firm’s major strengths and weaknesses?
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