I started some of the project, but need it reviewed
Page 1 of 9 MSAF 670 Final Exam Read the following information before proceeding with the exam: • You must provide support for your responses to all questions. • For all present value problems, supporting calculations must be rounded to four decimal places and final answers rounded to two decimal places. • Prepare your answers in MS Excel and use formulas for all cells requiring calculations. Below are the financial statements for The Corporation (aka The Firm) followed by other, more general information about the economy, stock market, and The Corporation. The Corporation Comparative Balance Sheet For the 12 Months Ended December 31 20X11 20X10 20X9 Cash 710,000 625,000 560,000 Accounts Receivable 494,000 450,000 410,000 Inventory 526,000 487,000 443,000 Prepaid Insurance 46,000 51,000 43,000 Total Current Assets 1,776,000 1,613,000 1,456,000 Land 1,520,000 1,340,000 1,400,000 Buildings 2,530,000 2,440,000 2,350,000 Less: Accumulated Depreciation -550,000 -480,000 -420,000 Net Buildings 1,980,000 1,960,000 1,930,000 Total Long-Term Assets 3,500,000 3,300,000 3,330,000 Total Assets 5,276,000 4,913,000 4,786,000 Accounts Payable 284,000 277,000 240,000 Salaries and Wages Payable 83,000 74,000 67,000 Dividends Payable 47,044 37,995 44,000 Notes Payable—Line of Credit 212,000 230,000 210,000 Page 2 of 9 Total Current Liabilities 626,044 618,995 561,000 Notes Payable—Long Term 2,090,587 1,609,831 1,105,421 Bonds Payable 1,000,000 1,000,000 1,000,000 Less: Discount on Bonds Payable -249,244 -263,260 -275,973 Net Bonds Payable 750,756 736,740 724,027 Total Long-Term Liabilities 2,841,343 2,346,571 1,829,448 Total Liabilities 3,467,387 2,965,566 2,390,448 Contributed Capital 500,000 500,000 500,000 Retained Earnings 3,424,613 2,679,434 1,983,552 Treasury Stock -2,116,000 -1,232,000 -88,000 Total Stockholders’ Equity (SE) 1,808,613 1,947,434 2,395,552 Total Liabilities and SE 5,276,000 4,913,000 4,786,000 The Corporation Income Statement For the 12 Months Ended December 31 20X11 20X10 20X9 Sales $6,150,000 $ 5,150,000 $ 3,450,000 Cost of Goods Sold -3,890,000 -3,215,000 -1,680,000 Salaries and Wages -912,000 -875,000 -823,000 Depreciation-Building -134,000 -123,000 -120,000 Insurance -78,000 -92,000 -89,000 Total Expenses -5,014,000 -4,305,000 -2,712,000 Operating Income 1,136,000 845,000 738,000 Interest Expense—Notes -134,757 -95,410 -43,917 Interest Expense - Bonds -74,016 -72,713 -71,531 Gain (Loss) Sale of Buildings -120,000 21,000 38,000 Gain (Loss) Sale of Land -31,000 27,000 -77,000 Total Other Revenues & Expenses -359,773 -120,123 -154,448 Net Income $ 776,227 $ 724,877 $ 583,552 Earnings Per Share (EPS) $ 6.16 $ 4.77 $ 2.98 Page 3 of 9 The Corporation Statement of Cash Flows For the 12 Months Ended December 31 20X11 20X11 20X10 Cash received from customers $ 6,106,000 $ 5,110,000 Cash paid to suppliers -3,922,000 -3,222,000 Cash paid for salaries and wages -903,000 -868,000 Cash paid for insurance -73,000 -100,000 Cash paid for interest—Bonds -60,000 -60,000 Cash paid for interest—Notes Payable -134,757 -95,410 Net Cash from Operating Activities $ 1,013,243 $ 764,590 Investment in Land -790,000 -980,000 Investment in Building -770,000 -720,000 Sale of Building 496,000 588,000 Sale of Land 579,000 1,067,000 Net Cash from Investing Activities $ (485,000) $ (45,000) Proceeds (Payment) Notes Pay 462,757 524,410 Purchase of Treasury Stock -884,000 -1,144,000 Dividends Paid -22,000 -35,000 Net Cash from Financing Activities $ (443,243) $ (654,590) Net Change in Cash 85,000 65,000 Beginning Cash 625,000 560,000 Ending Cash $ 710,000 $ 625,000 Page 4 of 9 The Corporation & Industry Financial Ratios 20X11 20X10 20X11/20X10 Industry Return on Equity 0.41 0.33 0.16 Dividend Payout 0.04 0.04 0.12 Return on Assets 0.15 0.15 0.09 Return on Sales 0.13 0.14 0.09 Asset Turnover 1.21 1.06 0.90 Current Ratio 2.84 2.61 2.75 Quick Ratio 1.92 1.74 1.82 Debt/Assets 0.54 0.48 0.20 Accounts Receivable Days 28.01 30.48 32.01 Inventory Days 47.53 52.79 49.53 Accounts Payable Days 26.59 29.75 24.59 Summary: Cash Conversion Days 48.95 53.51 56.95 Other Information Bonds Payable: On December 31, 20X1, the firm issued 1,000 bonds with a 20-year maturity. The bonds pay interest every six months (June 30 and December 31), and the yield to maturity/effective interest rate is 10 percent. Stock Price-Firm: The market price of the stock (per the stock exchange) was $34 at year-end 20X11, $26 at year-end 20X10, $22 at year-end 20X9, and $17 at year-end 2006. Market Information: The average return in the market over 20X9–20X11 is 12 percent, and its standard deviation 6.50 percent. Treasury Bonds: The average rate on U.S. Treasury bonds was 5 percent. Stock Shares: The firm has 600,000 authorized shares and 200,000 issued, and 126,000 outstanding at year-end 20X11. Stock Valuation Data: The required rate of return demanded by investors approximates 17 percent. The Page 5 of 9 firm’s beta is 1.75. The firm estimates that the growth rate in dividends is 20% for 20X12 and 20X13, and 14% for all years thereafter. Treasury Stock: The firm had zero treasury stock at year-end 20X8. The firm purchased 4,000 treasury shares at year-end 20X9, 44,000 at year-end 20X10, and 26,000 at year-end 20X11. There were no sales of treasury stock during this period—only purchases of treasury stock. Financial Ratio Formulas Return on Equity: Net Income/Average Stockholders’ Equity Dividend Payout: Dividends Declared/Net Income Return on Assets: Net Income/Average Total Assets Asset Turnover: Total Sales/Average Assets Current Ratio: Current Assets/Current Liabilities Quick Ratio: (Cash + Marketable Securities + AR)/Current Liabilities Debt-Asset Ratio: Total Liabilities/Total Assets Accounts Receivable Days: 365/A/R Turnover Inventory Days: 365/Inventory Turnover Accounts Payable: 365/A/P Turnover Cash Conversion Days: A/R Days + Inventory Days - A/P Days A/R Turnover: Total Sales/Average Accounts Receivable Inventory Turnover: Total Cost of Goods Sold Expense/Average Inventory. Accounts Payable Turnover: Purchases/Average Accounts Payable. Page 6 of 9 Finance Formulas Page 7 of 9 Respond to the following Stock and Bond questions: Stock Questions (Questions 1–4; 48 Points) 1. An intern is confused. She is looking at the December 31, 20X10, balance sheet and focusing on the $1,232,000 treasury stock amount. She is trying to provide support that shows how the firm arrived at this amount. Provide this support. (4 points) 2. The firm believes that its stock price at December 31, 20X11, does not accurately reflect its intrinsic value on the same date. Assume that 20X11 dividends were $31,049. a. Calculate the intrinsic value of stock at year-end 20X11. (9 points) b. Explain the pros and cons of purchasing the treasury stock at year-end 20X11. (5 points) c. What is the dividend and capital gains yield for 20X12? (2 points) d. What is the dividend and capital gains yield for 20X14? (2 points) 3. Recalculate 20X11 total assets, 20X11 total liabilities, and 20X11 total stockholders’ equity assuming the firm did not purchase any treasury stock during 20X11. (5 points) 4. Please refer to the background information for some of these problems. During the period 20X9–20X11, the firm’s closest competitor had stock price activity that resulted in an average stock return of 25.7 percent with a standard deviation of 19.275 percent. This competitor’s beta is 1.20. a. Based on stand-alone risk and using the Coefficient of Variation, which firm is riskier, our firm or our competitor? Explain your answer. (8 points) b. Calculate the required rates of return for our firm and for our competitor. Show the detail to your work. (4 points) c. If the return on the market were to fall from its current level of 12 percent to 9 percent, what would be the resulting impact on required return for our firm and for our competitor? What explains the difference between the two firms (be specific in your answer)? (6 points) d. If an investor held a portfolio consisting of equal percentages of the market portfolio, the firm’s stock, and Page 8 of 9 the competitor’s stock, what would the beta of this portfolio be? (3 points) Bond Questions (Questions 5–12; 52 Points) 5. Prepare the journal entry to record the sale of bonds on December 31, 20X1.