A computer manufacturer has financial statements as follows:
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Balance Sheets
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Assets
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2015
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2016
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2017Estimated
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Cash
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$ 9,000
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$ 7,282
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$ 14,000
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Short-Term Investments.
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48,600
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20,000
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71,632
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Accounts Receivable
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351,200
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632,160
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878,000
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Inventories
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715,200
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1,287,360
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1,716,480
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Total Current Assets
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$ 1,124,000
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$ 1,946,802
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$ 2,680,112
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Gross Fixed Assets
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491,000
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1,202,950
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1,220,000
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Less: Accumulated Depreciation
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146,200
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263,160
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383,160
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Net Fixed Assets
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$ 344,800
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$ 939,790
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$ 836,840
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Total Assets
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$ 1,468,800
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$ 2,886,592
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$ 3,516,952
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Liabilities And Equity
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2015
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2016
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2017 Estimated
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Accounts Payable
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$ 145,600
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$ 324,000
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$ 359,800
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Notes Payable
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200,000
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720,000
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300,000
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Accruals
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136,000
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284,960
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380,000
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Total Current Liabilities
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$ 481,600
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$ 1,328,960
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$ 1,039,800
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Long-Term Debt
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323,432
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1,000,000
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500,000
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Common Stock (100,000 Shares)
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460,000
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460,000
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1,680,936
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Retained Earnings
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203,768
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97,632
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296,216
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Total Equity
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$ 663,768
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$ 557,632
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$ 1,977,152
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Total Liabilities And Equity
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$ 1,468,800
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$ 2,886,592
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$ 3,516,952
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Income Statements
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2015
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2016
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2017E
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Sales
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$ 3,432,000
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$ 5,834,400
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$ 7,035,600
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COGS except depr.
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2,864,000
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4,980,000
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5,800,000
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Depreciation
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18,900
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116,960
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120,000
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Other Expenses
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340,000
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720,000
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612,960
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Total Operating Costs
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$ 3,222,900
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$ 5,816,960
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$ 6,532,960
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EBIT
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$ 209,100
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$ 17,440
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$ 502,640
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Interest Expense
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62,500
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176,000
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80,000
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EBT
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$ 146,600
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$ (158,560)
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$ 422,640
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Taxes (40%)
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58,640
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(63,424)
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169,056
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Net Income
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$ 87,960
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$ (95,136)
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$ 253,584
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Other Data
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2015
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2016
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2017E
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Stock Price
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$ 8.50
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$ 6.00
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$ 12.17
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Shares Outstanding
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100,000
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100,000
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250,000
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EPS
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$ 0.880
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$ (0.951)
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$ 1.014
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DPS
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$ 0.220
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$ 0.110
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$ 0.220
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Tax Rate
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40%
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40%
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40%
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Book Value Per Share
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$ 6.638
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$ 5.576
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$ 7.909
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Lease Payments
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$ 40,000
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$ 40,000
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$ 40,000
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Statement of Cash Flows
2016
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Operating activities
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Net income
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$ (95,136)
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Adjustments:
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noncash adjustments:
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depreciation
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116,960
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changes in working capital:
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change in accounts receivable
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(280,960)
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change in inventories
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(572,160)
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change in accounts payable
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178,400
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change in accruals
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148,960
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Net cash provided by operating activities
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$ (503,936)
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Investing activities
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Cash used to acquire fixed assets
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$ (711,950)
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Cash due to change in short term investments
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$ 28,600
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Net cash provided by operating activities
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$ (683,350)
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Financing activities
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change in notes payable
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$ 520,000
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change in long-term debt
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$ 676,568
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change in common stock
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$ -
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payment of cash dividends
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$ (11,000)
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Net cash provided by financing activities
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$ 1,185,568
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Summary
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Net change in cash
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$ (1,718)
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Cash at beginning of year
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9,000
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Cash at end of year
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$ 7,282
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1. What is free cash flow? Why is it important?
a) What is the company's net operating profit after taxes in 2016 (NOPAT)?
b) What are operating current assets? How much operating current assets does the company have in 2016?
c) What are operating current liabilities? How much operating current liabilities does the company have in 2016?
d) How much net operating working capital does the company have in 2016?
e) How much total net operating capital does the company have in 2016?
f) What is the company's return on invested capital (ROIC) in 2016?
g) What is the company's EVA in 2016? It has a 10% cost of capital (WACC).
h) What is the company's MVA in 2016?
2. Why are ratios useful? What three groups use ratio analysis and for what reasons?
a) Refer to the above company's financial statements. Calculate the 2017 current and quick ratios based on the projected balance sheet and income statement data.
b) Calculate the 2017 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover.
c) Calculate the 2017 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE).
d) Use the extended DuPont equation to provide a summary and overview of the company's financial condition as projected for 2017. What are the firm's major strengths and weaknesses?
3. Suppose someone offered to sell you a note calling for the payment of $1,000 15 months from today. They offer to sell it to you for $850. You have $850 in a bank time deposit which pays a 7% effective annual interest rate (compounding), and you plan to leave the money in the bank unless you buy the note. The note is not risky--you are sure it will be paid on schedule. Should you buy the note?
4. Jordan Jones (JJ) and Casey Carter (CC) are portfolio managers at your firm. Each manages a well-diversified portfolio. Your boss has asked for your opinion regarding their performance in the past year. JJ's portfolio has a beta of 0.7 and had a return of 8.5%; CC's portfolio has a beta of 1.4 and had a return of 9.5%. Which manager had better performance? Why? (Assumer the risk-free rate is 4% and the market risk premium is 5%).