AGEC $424$ EXAM 1 Fall 2019 (167 points)

Name___________________________

Show your work for all questions (even if I forgot to put a reminder on the question). Logically correct
work must be shown to receive credit for your answers.

I. Computron Manufacturing (CM): Balance Sheet as of December 31

Cash $ 100 Accts payable $ 200
AR 400 Notes Payable 200
Inventories 700 Accruals 100
Total CA $1,200 Total CL $ 500

Net FA $ 700 Long-term debt 400

Total Assets $1,900 Common stock 300

Retained earnings 700

Total L & OE $ 1,900

Computron Manufacturing (CM): Income Statement for Year Ended December 31

Sales $ 6,000
COGS (4,500)
Other expenses (1,000)
Deprec. (200)
EBIT $ 300
Interest exp. (60)
EBT $ 240
Taxes (30%) (72)
Net income $ 168

Other data for Computron Manufacturing (CM):

Dec. 31 stock price $18
Number of shares outstanding 100
Dividends per share $0.44
Lease payments $20

You may remove this page, but also put your name at the top of page 3 and hand both in.

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Name_______________________
1. (46 points) Calculate ratios for Computron Manufacturing (CM) for use in comparison to the following
industry averages. Show your work in the Computron Manufacturing (CM) box.
Ratio Industry Computron Manufacturing Evaluate briefly and then support
average If you don’t show your work in this your statement by comparing to
column you don’t get the points.
2 points each the industry average. 5 pts each
Debt ratio 70% Evaluate debt level:
(TL/TA)

Times Interest 2.5x

Earned

Inventory 5x Evaluate asset management

turnover

Days sales 40 days

outstanding

Fixed Asset 4.5x

turnover

Total assets 2.0x

turnover

Profit margin 3.0% Evaluate profitability:

(Return on
Sales)

Return on total 6%
assets (ROA)

Return on 20%
equity (ROE)

Price-Earnings 15x Evaluate market ratios:

Market to Book 2.2x

Accounts pay. 20 da. Don’t evaluate. Notice that I

deferral eliminated liquidity ratios and added
ICP here so you don’t have to show
Inventory 72 da. the calculation of ICP in the CCC
Conv. Period question.
Use the above data for questions 2 through 5.

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2. (10 points) Construct the extended Du Pont equation for both CM and for the industry. Then analyze the component
breakdown of the company's ROE in comparison to the industry. Indicate if each component is better or worse than the
industry.

3. (4 points) Which is more responsible for the deviation of CM’s ROE from the industry average: cost control, asset
management, or debt management? Explain.

4. (10 points) Show a side by side comparison of the cash conversion cycle for CM with the industry. Use the CCC to
analyze working capital management for CM in comparison to the industry. Indicate if each component is better or
worse than the industry.

5. (4 points) Based on the ratios and information in questions 1-4, point out any red flags and major successes that you see
for CM.

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6. (10 points). A firm has the following balance sheet:
Last Factor 4th yr Last Factor 4th yr_
Cash $ 10 Accounts payable $ 10
Accounts receivable 10 Notes payable 20
Inventories 10 Long-term debt 40
Fixed assets 90 Common stock 40
Retained earnings 10
Total assets $120 Total liab.& equity $120

Fixed assets are being used at 80 percent of capacity; sales for the year just ended were $200; sales will increase $20 per
year for each of the next 4 years; the profit margin is 5 percent; and the dividend payout ratio is 60 percent. Assume that
fixed assets cannot be sold. Show the balance sheet projected for year 4 above and other calculations below. What are the
total external financing requirements for the entire 4 years, i.e., the AFN for the 4-year period? Show your work.

7. (11 points) You are given the following selected financial information for The Blatz Corporation.
Income Statement Balance Sheet Ratios
COGS $750 Cash $250 ROS 10%
Net Income $160 Net Fixed Assets $850 Current Ratio 2.3
Inventory Turnover 6.0
ACP 45 days
Debt Ratio 49.12%
Calculate the following items and show your work in the space provided below.
Sales:

LT Debt:
Inventory:

Accts Rec: Equity:

Current Assets:
ROA:

Total Assets:
ROE

Current Liabilities:

Total Liab.:

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8. (30 points) Forecast AFN with a 40 % sales increase; at 90% of capacity last year; any additional funds will come from
Notes payable, or a surplus will reduce notes payable. The interest rate is 10%. Round to the nearest whole dollar.
Show sales factor _______ And capacity calculation ___________
Last Factor 1st Pass Feedback 2nd Pass
Sales 40,000
-VC -20,000
-FC -15,000
EBIT 5,000
-interest -600
EBT 4,400
-Taxes (40%) -1,760
NI 2,640
-Div (45%) -1188
Add. RE 1452
Cash 1,000
AR 6,000
Inv 9,000
CA 16,000
NFA 13,000
TA 29,000
AP 5,000
Accr. 2,000
Notes 2,000
CL 9,000
Bonds 4,000
Stock 4,000
RE 12,000
TL+E 29,000

Below show calculations and label: AFN for each pass, total AFN after two passes and additional interest expense.

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9. a. (2 points) Nu-Mode Fashions Inc. manufactures quality women’s wear, and needs to borrow money to get
through a brief cash shortage. Unfortunately, sales are down, and lenders consider the firm risky. The CFO has
asked you to estimate the interest rate Nu-Mode should expect to pay on a one year loan. She’s told you to assume
a 3% default risk premium even though the loan is relatively short, and to assume the liquidity and maturity risk
premiums are each ½%. Inflation is expected to be 4% over the next twelve months. Economists believe the pure
interest rate is currently about 3½%. Show work.

b. (2 points) Calculate the rate Nu-Mode in the last problem should expect to pay on a two year loan. Assume a 4%
default risk premium and liquidity and maturity risk premiums of ¾% due to the longer term. Inflation is expected to
be 5% in the loan’s second year. Show work.

10. (3 points) Adams Inc. recently borrowed money for one year at 9%. The pure rate is 3%, and Adams’ financial
condition warrants a default risk premium of 2% and a liquidity risk premium of 1%. There is little or no maturity risk
in one-year loans. What inflation rate do lenders expect next year? Show work.

11. (2 points) The ratio group most likely to be used to indicate a firm’s ability to meet short-term financial
obligations would be:
a. liquidity ratios
b. financial leverage ratios
c. activity ratios
d. profitability ratios

12. (2 points) Which of the following ratios would probably not be used to assess the profitability of a firm?
a. Return on stockholders’ equity
b. Return on total assets
c. Times interest earned
d. A and c only

13. (2 points) Under the DuPont system, the return on assets is equal to:
a. the product of the gross profit margin and inventory turnover
b. the sum of the debt-equity ratio and the return on sales
c. the product of the return on sales and total asset turnover
d. the product of the return on sales, total asset turnover, and equity multiplier
e. none of the above

14. (2 points) Which of the following is not affected by a change in interest expense?
a. Gross margin
b. EBIT
c. ROE
d. a and b
e. All of the above

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15. (3 points) Find the debt ratio of a firm with total liabilities equal to $800,000 and net worth equal to
2,400,000. Show work.

16. (4 points) Williamson Trucking has current sales of $10,000 and a cost of goods sold of $4,300. Williamson
has projected sales to increase 50% and expects the new cost ratio to decrease by 2% due to increased
efficiency. Assuming that Williamson wants to maintain an inventory turnover of 5.0, calculate their
projected level of inventory. Show work.

17. (4 points) Wessel Corp. plans to sell 1,000 units in 2005 at an average sale price of $45 each. Cost of goods sold will
be 40% of the sale price. Depreciation expense will be $3,000, interest expense $2,500, and other expenses will be
$4,000. Wessel’s tax rate is 20%. What will Wessel Corp.’s net income be for 2005?
a. $3,500
b. $6,800 Show work here:
c. $14,000
d. $16,400
e. $28,400

18. (4 points) The following items are components of a traditional balance sheet. How much are the total assets of the
firm?
Show work here:
Plant and equipment $ 42,000
Common stock 15,000
Cash 8,000
Inventory 21,000
Bad debt reserve 6,000
Paid in excess 6,000
Accumulated depreciation 28,000
Accounts receivable 22,000

19. (2 points) Which of the following is not a short-term debt instrument?

a. Commercial paper
b. Common stock
c. Money market securities
d. Treasury bills

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20. (2 points) Which of the following is a characteristic(s) of initial public offerings (IPOs)?
a. Very stable
b. General public can get involved right away
c. Institutions are the largest investors in IPOs
d. Secondary market transaction

21. (2 points) The term “red herring” relates to the:

a. SEC’s approval of a stock offering from a company whose future is questionable.
b. circulation of the company’s prospectus prior to approval by the SEC.
c. document distributed to potential investors that is stamped “incomplete information.”
d. SEC’s conditional approval of the prospectus.

22. (2 points) The initial public offerings, or IPOs:

a. do not require the SEC’s final approval of the prospectus.
b. always result in immediate wealth for the executives of the company who have divested most of their ownership
through the offering.
c. represent a very risky subdivision of the general stock market.
d. all of the above

23. (4 points) CVD, Inc. has an equity multiplier of 2. What is CVD’s stockholders’ equity if total liabilities are
$100,000?
a. $100,000
b. $150,000 Show work here:
c. $200,000
d. $50,000