Solution contains Excel file with workings

Cumulative Problem: XYZ Company has sales of $4,800,000, COGS is 40% of sales, operating expenses are $2,100,000, interest expense $20,000 and depreciation 30,000. Tax rate 40%. Construct their income statement and answer the below.

1. EBT is ___.
a. 760,000
b. 750,000
c. 730,000
d. 400,000

2. What best describes operating profit margin.
a. Cost of goods sold in relation to sales.
b. Earnings before interest and taxes in relation to sales.
c. Net profit margin in relation to sales.
d. Impact of depreciation on taxes paid.

3. Net profit margin is __.
a. 9.1%
b. 12%
c. 9.5%
d. 9.4%

4. Dividend payout is 40%, retained earnings are___.
a. 270,000
b. 273,600
c. 262,800
d. 144,000

5. They have a 50-50 target capital structure of debt/equity. Their stated loan rate is 6% and rs = 12%, what is their WACC?
a. 9%
b. 15.6%
c. 9.6%
d. 7.8%

6. They have 100,000 shares of common stock outstanding, what is their dividend per share? Round to hundredth
a. 1.75
b. .96
c. 2.74
d. 2.70

7. What is their EPS?
a. 4.80
b. 4.38
c. 4.56
d. 2.40

8. What is the current dividend yield if P0 is $50? Taken to tenth
a. 8.8%
b. 5.4%
c. 5.5%
d. 3.5%

9. If they were to change their dividend payout to 50%, what would their dividend per share be?

10. List two things a company can do with retained earnings?

XYZ (same company) is now evaluating the purchase of a new machine for $210,000 installed with no NWC change. They plan to sell the machine at the end of 3 years for $40,000. MACRS 3 year depreciation. With the more efficient machine, labor savings per year are expected to be $70,000, $94,000 and $76,000 respectively. 40% tax. The cost of capital for this project is 8.2%

11. What is the initial investment?
a. 210,000
b. 200,000
c. 220,000
d. 180,000

12. What is the project net cash flow (OCF) for year 2?

13. What is the book value at the end of year 3?
a. 194,439
b. 15,561
c. 31,101
d. 210,000

14. What is the terminal cash flow?

15. What is the discounted payback for this project?
a. 3.2 years
b. 2.94 years
c. 2.52 years
d. 2.99 years

16. If the cost of capital for this project is determined to be equal to their WACC (reference question #5), what is the NPV now?
a. 1271.63
b. 6054.33
c. 1,150
d. (1054.64)

17. What is the IRR?
a. 8%
b. 9.33%
c. 8.57%
d. 8.31%

The option of working cooperatively with another company has just been presented. The details of this option are: initial investment of $120,000, net operating cash flows (years 1-3) of 47,000, 49,000 and 52,000 respectively (already takes into account depreciation effect and terminal cash flow so there is no need to calculate depreciation effect or terminal value just use these as-is for your analysis), cost of capital for this project is 8.2%.

18. What is the NPV for the new alternative?
a. 4,515
b. 7,980
c. 6,807
d. 6,343

19. What is the IRR for the new alternative?
a. 11.06%
b. 8%
c. 7.5%
d. 12.12%

20. So we have 2 options for XYZ Co.: purchase a new machine or work cooperatively with another company. Using your NPV and IRR answers from the previous questions, which should they choose and why (20 words or less)? They should choose the _fill in _ option because it will provide them fill in.

21. Besides just analyzing the numbers, list two areas of concern XYZ might look at when deciding whether to work cooperatively with another company. State in 25 words or less.
22. Still using XYZ, they expect to increase sales by 8% next year. Complete a proforma income statement with COGS and operating expenses increasing at the 8%, interest expense stays the same and depreciation expense increases by $40,000 (new machine purchase decision). What is their EAT, earnings after tax?
a. 475,440
b. 463,440
c. 451,440
d. 438,000
23. XYZ has current assets of $680,000, fixed assets of $5,400,000 and $240,000 in AP and accruals. They are presently at 90% of capacity. What can sales reach before they need to add fixed assets?
a. 5,333,333
b. 5,280,000
c. 4,320,000
d. 6,800,000
24. T/F they have a need for external funds ( AFN)?
Short answer

25. You are given 2 choices and a budget of $50,000. Determine which you would choose using the below. WACC 9%

                                Choice 1(expansion)     Choice 2(efficiency)

Init. Inv.               50,000                               40,000  

Net OCF so no need to calculate anything-these are net

yr 1            15,000                             12,000

yr 2            25,000                             24,000

yr 3            20,000                              12,000

Choice 1 has a NPV and IRR of

a. 10,000, 9.26%
b. 247, 9.26%
c. 595, 9.66%
d. (5000), 8.7%

26. Choice 2 has a NPV and IRR of
a. 476, 9.66%
b. 8000, 9.66%
c. 2000, 9.66%
d. 0, 9.66%
27. Continuing from 25. And 26., which would you choose and why (20 words or less)?

28. What is the breakeven in units for a company with $6.4 million in sales, $2.4 million in fixed costs, a selling price of $1,400 per unit and variable costs of $800 per unit? Does this mean their net income is zero?
a. 4000, no
b. 4000, yes
c. 10,000, no
d. 10,000, yes

29. A 2:1 stock split occurs. The initial stock price was $140 and you held 2000 shares. How many shares will you own after the split and what will be the post-split price per share?
a. 2000, $70
b. 4000, $70
c. 4000, $140
d. 2000, $70

30. ABC Company has an inventory conversion period of 75 days, receivables collection period of 35 days and payables deferral period of 30 days. What is their CCC? Would it be better or worse for cash management if the inventory conversion period went to 80 days?
a. 140 days, worse
b. 80 days, better
c. 80 days, worse
d. 140 days, better

31. Zedco and Associates has $3 million in cash from the recent sale of a business unit and a goal of repurchasing stock. Their Po is $30 with No of 3.2 million. How many shares will remain after the repurchase?
a. 1,900,000
b. 2,900,000
c. 3,100,000
d. 3,000,000

32. If I have $1 million in retirement investments how much can I withdraw per year for the next 30 years and have a 0 balance at the end of year 30 if my expected return is 5.5%
a. $68,805
b. $82,611
c. $55,000
d. $142,525

33. Balance Sheet accounts for a project are as follows:

Cash $     9,000                         AP                   13,000

AR            12,000                        Accruals          2,000

Inventory   12,000                      Notes pay      10,000

Dividend payout is 80%            M  3%

If sales are $300,000 and increase by 30%, no addition to fixed assets is needed, using the AFN equation, what is their need for additional funds?
a. $7,440
b. $3,060
c. none
d. $1,440

34. You are looking at investing in ABC Company. Risk free rate is 2%, rm 10%, Beta is 1.2. What is the required return using CAPM? So, if they had an expected return of 11%, should you invest?
a. 11.6%, no
b. 14%, no
c. 11.6%, yes
d. 14%, yes

35. The total valuation of MVP Company is $30 million, consisting of 400,000 shares of stock at P0 $60 and $6 million in debt. If they restructure to a 50-50 target capital structure they will repurchase ________ shares of stock.
a. 50,000
b. 100,000
c. 150,000
d. 300,000

36. You are analyzing 2 projects. Details are as follows:

Probability                 Exp. Return

                                    Poland           Costa Rica

Best case    .30                     .15                   .18

Most likely   .50                     .14                   .12

Worst case  .20                     .05                   .06

T/F Poland has the higher expected return.

37. T/F Costa Rica has the higher risk.

38. List 2 mechanisms of corporate governance.

39. T/F Agency problems arise when the goals of the principals and agents conflict.

40. T/F When I get to be CEO I will elect Dr. Faye to serve on my board of directors. For those who weren't in class and didn't listen to the recording, just put true. Have a great December!