Assignment 1
Financial Management I (ACC 2364)
This assignment is worth 20 percent of the Final Grade. It consists of 4 questions that are each worth 5 percent each. These questions will involve doing calculations, and will require written explanations of the answer derived from these calculations. You must show your calculations and how you came up with your answers in order to receive marks.
Question 1.
A firm has the following financial statements and paid a $1,000 dividend during the year.
|
Balance Sheets
|
|
ASSETS
|
Ending
|
Beginning
|
Income Statement
|
|
Cash
|
$ 2,000
|
$ 1,600
|
Sales
|
$100,000
|
|
Accounts receivable
|
12,000
|
5,200
|
COGS
|
80,000
|
|
Inventory
|
14,000
|
15,600
|
Gross Margin
|
$ 20,000
|
|
Current Assets
|
$28,000
|
$22,400
|
Cash Expenses
|
$ 8,000
|
|
Gross Capital assets
|
$27,000
|
$20,000
|
Amortization
|
1,600
|
|
Accumulated amortization
|
(16,000)
|
(14,400)
|
EBIT
|
$ 10,400
|
|
Net capital assets
|
11,000
|
5,600
|
Interest
|
800
|
|
Total assets
|
$39,000
|
$28,000
|
EBT
|
$ 9,600
|
|
LIABILITIES
|
|
|
Tax
|
2,600
|
|
Accounts payable
|
$ 3,000
|
$ 2,500
|
Net Income
|
$ 7,000
|
|
Accruals
|
1,000
|
1,500
|
|
|
|
Current Liabilities
|
$ 4,000
|
$ 4,000
|
|
|
|
Long term Debt
|
10,000
|
5,000
|
|
|
|
Equity
|
25,000
|
19,000
|
|
|
|
Total liabilities & equity
|
$39,000
|
$28,000
|
|
|
|
a.
|
Calculate cash from operating activities showing the current account changes separately.
|
|
b.
|
Calculate cash from financing activities.
|
|
c.
|
Calculate cash from investing activities.
|
|
d.
|
Develop a statement of cash flows including a reconciliation with the cash account.
|
Question 2.
Emperor Corporation's financial statements for the last year are shown below. All figures are in thousands ($000). The firm paid a $1,000 dividend to its shareholders during the year. Two million common shares are outstanding. The shares are currently trading at a price of $50. There were no sales of new common shares. Lease payments totalling $400 are included in cost and expense.
|
BALANCE SHEET
|
|
|
|
|
ASSETS
|
|
INCOME STATEMENT
|
|
Cash
|
$ 2,000
|
Sales
|
$100,000
|
|
Accounts receivable
|
12,000
|
COGS
|
80,000
|
|
Inventory
|
14,000
|
Gross Margin
|
$ 20,000
|
|
Current Assets
|
$28,000
|
Cash Expenses
|
$ 8,000
|
|
Gross Capital assets
|
$27,000
|
Amortization
|
1,600
|
|
Accumulated amortization
|
(16,000)
|
EBIT
|
$ 10,400
|
|
Net capital assets
|
11,000
|
Interest
|
800
|
|
Total assets
|
$39,000
|
EBT
|
$ 9,600
|
|
LIABILITIES
|
|
Tax
|
2,600
|
|
Accounts payable
|
$ 3,000
|
Net Income
|
$ 7,000
|
|
Accruals
|
1,000
|
|
|
|
Current Liabilities
|
$ 4,000
|
|
|
|
Long term Debt
|
10,000
|
|
|
|
Equity
|
25,000
|
|
|
|
Total liabilities & equity
|
$39,000
|
|
|
Develop Emperor's: Current Ratio Quick Ratio
Average Collection Period (ACP) Inventory Turnover
Capital Asset Turnover Total Asset Turnover Debt Ratio
Debt to Equity ratio
Times Interest Earned (TIE) Cash Coverage
Fixed Charge Coverage Return on Sales (ROS) Return on Assets (ROA) Return on Equity (ROE) Price Earnings Ratio (P/E) Market to Book Value Ratio
Question 3.
Baxter Inc. is in a fast growing industry, but doesn't seem to be able to match its competitors' growth rates. Selected financial information for Baxter is as follows ($000):
|
Sales
|
$20,000
|
|
NI
|
$1,000
|
|
Total Assets
|
$10,000
|
|
Equity
|
$8,000
|
|
Annual dividend
|
$700
|
Research has revealed that the average firm in Baxter's industry pays out 10% of its earnings in dividends, earns 4 cents after tax on every sales dollar, has an equity multiplier of 3.0, and a total asset turnover of 1.9.
a. Use a sustainable growth rate analysis in the following table to determine the source(s) of Baxter's growth problems.
|
gs =
|
Retention Ratio
|
Return on Sales
|
Total Asset Turnover
|
Equity Multiplier
|
|
Industry
|
|
|
|
|
|
|
Baxter
|
|
|
|
|
|
|
b.
|
What negatives might be associated with fixing the problems revealed by the analysis?
|
Question 4.
The Winthrop Company expects to finish the current year with the financial results indicated on the worksheet on the next page. Develop next year's income statement and ending balance sheet using that information and the following planning assumptions and facts. Work to the nearest thousand dollars.
PLANNING ASSUMPTIONS and FACTS
Income Statement Items
|
1.
|
Revenue will grow by 20%.
|
|
2.
|
The cost ratio will improve by 2%.
|
|
3.
|
Spending in the Marketing Department will be held to 20% of revenue.
|
|
4.
|
Finance and Engineering expenses will each increase by 10%.
|
|
5.
|
The combined income tax rate will be 40%.
|
|
6.
|
Interest on all long term borrowing will be 10%.
|
Balance Sheet Items
|
7.
|
Cash balances will remain constant.
|
|
8.
|
The ACP will be 35 days. (Use ending balances.)
|
|
9.
|
The Inventory Turnover Ratio based on COGS will be 4.5X. (Use ending balances.)
|
|
10.
|
Capital spending is expected to be $5M. The average amortization life of the assets to be acquired is 5 years and straight-line amortization is used. Amortization expense for
old assets will be $1.5M.
|
|
11.
|
Accounts payable is expected to be 30% of inventory.
|
|
12.
|
Accruals will not change.
|
|
13.
|
No dividends will be paid and no new shares will be sold.
|
|
WINTHROP COMPANY
|
|
INCOME STATEMENT
|
|
|
($000)
|
|
|
|
|
|
THIS YEAR
|
|
NEXT YEAR
|
|
|
$
|
%
|
$
|
%
|
|
Revenue
|
$73,820
|
100.0
|
|
100.0
|
|
COGS
|
31,743
|
43.0
|
|
|
|
Gross Margin
|
$42,077
|
57.0
|
|
|
|
Expenses:
|
|
|
|
|
|
Marketing
|
$17,422
|
23.6
|
|
|
|
Engineering
|
7,087
|
9.6
|
|
|
|
Fin & Admin
|
7,603
|
10.3
|
|
|
|
Total Exp
|
$32,112
|
43.5
|
|
|
|
EBIT
|
$ 9,965
|
13.5
|
|
|
|
Interest
|
2,805
|
3.8
|
|
|
|
EBT
|
$ 7,160
|
9.7
|
|
|
|
Income Tax
|
$ 3,007
|
4.1
|
|
|
|
NI
|
$ 4,153
|
5.6
|
|
|
WINTHROP COMPANY BALANCE SHEET ($000)
|
ASSETS
|
THIS
|
NEXT
|
LIABILITIES &
|
EQUITY THIS
|
NEXT
|
|
Cash
|
$ 8,940
|
|
Accts Pay
|
$1,984
|
|
|
Accts Rec
|
12,303
|
|
Accruals
|
860
|
|
|
Inventory
|
7,054
|
|
Curr
|
$2,844
|
|
|
|
|
|
Liabilities
|
|
|
|
Curr Assets
|
$28,297
|
|
|
|
|
|
Capital Assets
|
|
|
L/T Debt
|
$22,630
|
|
|
Gross
|
$65,223
|
|
Equity
|
44,059
|
|
|
Accum Amort
|
($23,987)
|
|
Tot Cap
|
$66,689
|
|
|
Net
|
$41,236
|
|
|
|
|
|
Tot Assets
|
$69,533
|
|
Tot L&E
|
69,533
|
|