Question 1
The comparative balance sheet of Cookie and Coffee Creations Inc. at October 31, for the years 2015 and 2014, and the income statements for the years ended October 31, 2014 and 2015, are presented below.
COOKIE & COFFEE CREATIONS INC
Balance Sheet
October 31
|
Assets
|
2015
|
2014
|
|
Cash
|
$34,324
|
$13,050
|
|
Accounts receivable
|
3,250
|
2,710
|
|
Inventory
|
7,897
|
7,450
|
|
Prepaid expenses
|
6,300
|
6,050
|
|
Equipment
|
96,500
|
75,500
|
|
Accumulated depreciation
|
(25,200)
|
(9,100)
|
|
Total assets
|
$123,071
|
$95,660
|
|
Liabilities and Stockholders' Equity
|
|
|
|
Accounts payable
|
$3,650
|
$2,450
|
|
Income taxes payable
|
10,251
|
11,200
|
|
Dividends payable
|
28,000
|
25,000
|
|
Salaries payable
|
2,250
|
1,280
|
|
Interest payable
|
188
|
0
|
|
Note payable - current portion
|
3,000
|
0
|
|
Note payable - long-term portion
|
4,500
|
0
|
|
Preferred stock, no par, $6 cumulative - 3,000 and 2,500 shares
|
15,000
|
12,500
|
|
Issued, respectively
|
|
|
|
Common stock, $1 par - 23,180 shares issued
|
23,180
|
23,180
|
|
Additional paid in capital - Treasury stock
|
250
|
250
|
|
Retained earnings
|
32,802
|
19,800
|
|
Total liabilities and stockholders' equity
|
$123,071
|
$95,660
|
COOKIE & COFFEE CREATIONS INC
Income Statement
Year Ended October 31
|
|
2015
|
2014
|
|
Sales
|
$485,625
|
$462,500
|
|
Cost of goods sold
|
222,694
|
208, 125
|
|
Gross profit
|
262,931
|
254,375
|
|
Operating expenses
|
|
|
|
Depreciation expense
|
17,850
|
9,100
|
|
Salaries and wages expense
|
147,979
|
146,350
|
|
Other operating expenses
|
43,186
|
42,925
|
|
Total operating expenses
|
209,015
|
198,375
|
|
Income from operations
|
53,916
|
56,000
|
|
Other expenses
|
|
|
|
Interest expense
|
413
|
0
|
|
Loss on sale of computer equipment
|
2,250
|
0
|
|
Total other expenses
|
2,663
|
0
|
|
Income before income tax
|
51,253
|
56,000
|
|
Income tax expense
|
10,251
|
11,200
|
|
Net income
|
$41,002
|
$44,800
|
|
Additional information:
|
|
|
The management are thinking about borrowing an additional $20,000 to buy more kitchen equipment. The loan would be repaid over a 4-year period. The terms of the loan provide for equal semi-annual payments of $2,500 on May 1 and November 1 of each year, plus interest of 5% on the outstanding balance.
Required
(a) Calculate the following ratios for 2014 and 2015.
1. Current ratio
2. Debt to total assets
3. Gross profit rate
4. Profit margin
5. Return on assets (Total assets at November 1, 2013, were $33,180)
6. Return on common stockholders' equity (Total common stockholder's equity at November 1, 2013 was $23,180)
7. Payout ratio
(b) Prepare a horizontal analysis of the income statement for Cookie & Coffee Creations
Inc. using 2014 as a base year.
(c) Prepare a vertical analysis of the income statement for Cookie & Coffee Creations
Inc. for 2015 and 2014.
(d) Comment on your findings from parts (a) to (c).
(e) What impact would borrowing an additional $15,000 to buy more equipment have on each of the ratios in (a) above, assuming that no changes are expected on the income statement and balance sheet? Comment on your findings.
(f) What would justify a decision by Cookie & Coffee Creations Inc. to buy the additional equipment? What alternatives are thee instead of bank financing?
Question 2
Currently Hambleton Ales dividends are growing by 10% pa and this is expected to continue for another two years. After that time they are expected to grow by 8% pa for the next two years, and then by 6% every year. Next year's dividend is expected to be $0.80, and the appropriate discount rate is 12%. If you have $20,700 to invest, how many shares can you buy in Hambleton Ales?
Question 3
Three years ago, Batlow Ltd. issued 10 year $1,000 bonds with a 7% coupon rate paid semi-annually, at par value. The market currently requires a 9% yield.
i. What was the price of the bond at issue?
ii. What is the current price of the bond?
iii. If the market yield falls to 6% in two years time, what will the bond's price be at that time?
iv. Explain your results in (i) - (iii).
Second Part
Question 1
What is the project's net present value (NPV)? Explain the economic rationale behind the NPV. Could the NPV of this particular project be different for SRC than for one of Wang's other potential customers? Explain.
Question 2
Calculate the proposed project's internal rate of return (IRR). Explain the rationale for using the IRR to evaluate capital investment projects. Could the IRR for this project be different for SRC than for another customer? Explain.
Question 3
Suppose one of SRC executives uses the payback method as a primary capital budgeting decision tool and wants some payback information.
a. What is the project's payback period?
b. What is the rationale behind the use of payback period as a project evaluation tool?
c. What deficiencies does payback have as a capital budgeting decision method?
d. Does payback provide any useful information regarding capital budgeting decisions?
Question 4
Under what conditions do NPV, IRR, and PI all lead to the same accept/reject decision? When can conflicts occur? If a conflict arises, which method should be used, and why?