FIN 534 Homework Set 1



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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
Cash $9,000 $7,282
Short-term investments 48,600 20,000
Accounts receivable 351,200 632,160
Inventories 715,200 1,287,360
Total current assets $1,124,000 $1,946,802
Gross fixed assets 491,000 1,202,950
Less: Accumulated depreciation 146,200 263,160
Net fixed assets $344,800 $939,790
Total assets $1,468,800 $2,886,592
Liabilities and Equity
Accounts payable $145,600 $324,000
Notes payable 200,000 720,000
Accruals 136,000 284,960
Total current liabilities $481,600 $1,328,960
Long-term debt 323,432 1,000,000
Common stock (100,000 shares) 460,000 460,000
Retained earnings 203,768 97,632
Total equity $663,768 $557,632
Total liabilities and equity $1,468,800 $2,886,592

 

Income Statements 2012 2013 

 

Sales $3,432,000 $5,834,400
Cost of goods sold except depr. 2,864,000 4,980,000
Depreciation and amortization 18,900 116,960
Other expenses 340,000 720,000
Total operating costs $3,222,900 $5,816,960
EBIT $209,100 $17,440
Interest expense 62,500 176,000
EBT $146,600 ($158,560)
Taxes (40%) 58,640 -63,424
Net income $87,960 ($95,136)
Other Data 2012 2013
Stock price $8.50 $6.00
Shares outstanding 100,000 100,000
EPS $0.88 ($0.95)
DPS $0.22 0.11
Tax rate 40% 40%
Book value per share $6.64 $5.58
Lease payments $40,000 $40,000

 

 

Ratio Analysis 2012 2013 
Current 2.3 1.5
Quick 0.8 0.5
Inventory turnover 4 4
Days sales outstanding 37.3 39.6
Fixed assets turnover 10 6.2
Total assets turnover 2.3 2
Debt ratio 35.60% 59.60%
Liabilities-to-assets ratio 54.80% 80.70%
TIE 3.3 0.1
EBITDA coverage 2.6 0.8
Profit margin 2.60% −1.6%
Basic earning power 14.20% 0.60%
ROA 6.00% −3.3%
ROE 13.30% −17.1%
Price/Earnings (P/E) 9.7 −6.3
Price/Cash flow 8 27.5
Market/Book 1.3 1.1

 

 

  1. What is the free cash flow for 2013?

 

  1. 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?

 

  1. Calculate the 2013 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?

 



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