PART I: Multiple Choice (each question worth 1 points)

1 Georgia State University Department of Finance FI 4020 – FINANCIAL ANALYSIS / INTRO LOAN STRUCTURING Fall 2020 Takehome Problem Set Three (THPS -3) Directions : Determine an answer to every question on this problem set. AFTER you determine an answer to every question, record your answers only on the THPS -2 Answer Submission Form (which will be posted on iCollege a couple of days before the due date). I STRONGLY suggest that you keep your worked -out solutions to every problem in order to check your work against the solution key that I will post after the Answer Submission Form closes. That way you can learn from any mistakes that you make, and not repeat those sam e mistakes on the Midterm or Final Exam. PART I: Multiple Choice ( each question worth 1 points ) 1. Which of the following items would cause the cash conversion cycle to decrease? a. Increasing the average collection period. b. Increasing days payable outstanding. c. Increasing the days inventory held. d. All of the above. e. None of the above. 2. What is an investor’s objective in financial statement analysis? a. To determine whether an investment is warranted by estimating a company’s future earnings stream. b. To determine the co mpany’s taxes for the current year. c. To determine if the firm would be a good place to obtain employment. d. To decide whether the borrower has the ability to repay interest and principal on borrowed funds. e. All of the above. 3. Which of the following would be helpful to an analyst evaluating the performance of a firm? a. Understanding the economic and political environment in which the company operates. b. Reviewing the annual reports of a company’s suppliers, customers, and competitors. c. Preparing common -size financi al statements and calculating key financial ratios for the company being evaluated. d. All of the above. 4. What do the asset turnover ratios measure? a. Management’s effectiveness in generating sales from investments in assets. b. The liquidity of the firm’s current assets. c. The overall efficiency and profitability of the firm. d. The distribution of assets in which funds are invested. e. All of the above. 5. Which of the following is not required to be discussed in the Management Discussion and Analysis of the Financial Condition and Results of Operations? a. Liquidity b. Operations c. Capital resources d. Earnings projections 2 6. What type of information found in supplementary schedules is required for inclusion in an annual report? a. Material litigation and management photographs b. Segmental data c. Inflation data d. Management remuneration and segmental data 7. Why is the amount of debt in a company’s capital structure important to the financial analyst? a. Debt is equal to total assets. b. Debt is less costly than equity. c. Equity is riskier than debt. d. Debt implies risk. 8. Which of the following is not a tool or technique used by a financial statement analyst? a. Random sampling analysis b. Industry comparisons c. Trend analysis d. Common -size financial statement 9. What information can be gained from sources such as Industry Norms and Key Business Ratios, Annual Statement Studies, and Industry Surveys? a. Forecasts of earnings b. Elaborations of financial statement disclosures c. The general economic condition d. A company’s relative position within its industry 10. What do liquidity ratios measure? a. The extent of a firm’s financing with debt relative to equity. b. The liquidity of fixed assets. c. A firm’s ability to meet cash needs as they arise. d. The overall performance of a firm. 11. Which categ ory of ratios is useful in assessing the capital structure and long -term solvency of a firm? a. Activity ratios b. Liquidity ratios c. Leverage ratios d. Profitability ratios 12. What is a serious limitation of financial ratios? a. Ratios are not predictive. b. Ratios can be u sed only by themselves. c. Ratios indicate weaknesses only. d. Ratios are screening devices. 13. What is the most widely used liquidity ratio? a. Debt ratio b. Current ratio c. Inventory turnover d. Quick ratio 3 14. Why is the quick ratio a more rigorous test of short -run solvency than the current ratio? a. The quick ratio eliminates prepaid expenses for the denominator. b. The quick ratio eliminates prepaid expenses for the numerator. c. The quick ratio eliminates inventories from the numerator. d. The quick ratio considers only cash and marketable securities as current assets. 15. What does an increasing collection period for accounts receivable suggest about a firm’s credit policy? a. The credit policy is too restrictive. b. The credit policy may be too lenient. c. The firm is probably losing qu alified customers. d. The collection period has no relationship to a firm’s credit policy. 16. Which of the following statements about inventory turnover is false? a. Inventory turnover is a gauge of the liquidity of a firm’s inventory. b. Inventory turnover measures the efficiency of the firm in managing and selling inventory. c. A low inventory turnover is generally a sign of efficient inventory management. d. Inventory turnover is calculated with cost of goods sold in the numerator. 17. What is a creditor’s objectiv e in performing an analysis of financial statements? a. To determine the company’s taxes for the current year. b. To determine if the firm would be a good place to obtain employment. c. To decide whether the borrower has the ability to repay interest and principal on borrowed funds. d. To determine whether an investment is warranted by estimating a company’s future earnings stream. 18. What information does the auditor’s report contain? a. A detailed coverage of the firm’s liquidity, capital resources, and operations. b. The re sults of operations. c. An opinion as to the fairness of the financial statements. d. An unqualified opinion. 19. What is a limitation common to both the current and quick ratio? a. Inventories may not be truly liquid. b. Prepaid expenses are potential sources of cash. c. Accounts receivable may not be truly liquid. d. Marketable securities are not liquid. 20. Why is the fixed charge coverage ratio a broader measure of a firm’s coverage capabilities than the times interest earned ratio? a. The times interest earned ratio does not consider the possibility of higher interest rates. b. The fixed charge ratio includes lease payments as well as interest payments. c. The fixed charge ratio includes both operating and capital leases whereas the times interest earned ratio includes only oper ating leases. d. The fixed charge ratio indicates how many times the firm can cover interest payments. 21. Which profit margin measures the overall operating efficiency of the firm? a. Net profit margin b. Gross profit margin c. Return on equity d. Operating profit margin 4 22. W hat is the first step in an analysis of financial statements? a. Check the auditor’s report. b. Check references containing financial information. c. Specify the objectives of the analysis. d. Do a common -size analysis. 23. Which ratio or ratios measure the overall efficiency of the firm in managing its investment in assets and in generating return to shareholders? a. Return on investment. b. Gross profit margin and net profit margin. c. Total asset turnover and operating profit margin. d. Return on investment and return on equity. 24. What does a financial level index greater than one indicate about a firm? a. An increased level of borrowing. b. Operating returns more than sufficient to cover interest payments on borrowed funds. c. The unsuccessful use of financial level. d. More debt financing than equity financing. 25. What does the price to earnings ratio measure? a. The percentage of dividends paid to net earnings of the firm. b. The earnings for one common share of stock. c. The relationship between dividends and market prices. d. The “multiple” that the stock market places on a firm’s earnings. 5 PART II: Short Open -ended Problems ( each question worth 1.5 points ) Instructions: Determi ne a solution for each problem. Enter your final numerical answer on the THPS -2 Answer Submission Form on iCollege. Enter dollar answers rounded to the nearest cent, without a dollar sign and without any commas (for example, enter $3,210.35987 as 3210.36); enter percent answer rounded to 1 decimal place, without a percent sign and without any commas (for example, enter 0.274324 = 27.4324% as 27.4). USE THE TABLE BELOW TO ANSWER QUESTIONS 26 -30 WKS Corporation Selected Financial Data (Note: if a sub -accoun t is not specifically mentioned, assume it is equal to 0) December 31, 2019 Current assets $150,000 Current portion of long -term debt 55,000 Inventories 50,000 Accounts payable 15,000 Notes payable 75,000 Accounts receivable 40,000 Net sales 900,000 Long -term debt 275,000 Wage, tax and other accruals 30,000 Cost of goods sold 675,000 Operating profit 310,000 26. WKS’s current ratio is __________. (Record your answer rounded to 2 decimal places ) 27. WKS’s quick ratio is __________. (Record your answer rounded to 2 decimal places ) 28. WKS’s average collection period (assuming 85% of net sales are on credit and there are 360 days per year ) is __________. (Record your answer as the number of days rounded to 1 decimal place ) 29. WKS’s gross profit margi n is __________. 30. WKS’s inventory turnover ratio is __________. ( Record your answer rounded to 2 decimal places ) 6 USE THE TABLE BELOW TO ANSWER QUESTIONS 31 -35 JCB Corporation Selected Financial Data December 31, 2019 Net sales $1,900,000 Cost of goods sold 1,030,000 Operating expenses 345,000 Net operating income 525,000 Net income 295,000 Total stockholders’ equity 570,000 Cash flow from operating activities 35,000 Debt ratio (i.e., total liabilities/total assets) 62. 5% Cash flow from investing activities -60,000 Cash flow from financing activities 25,000 31. JCB’s debt to equity ratio is __________. ( Record your answer rounded to 2 decimal places ) 32. JCB’s return on equity is __________. 33. JCB’s return on investment is __________. 34. JCB’s cash flow margin is __________. 35. The change in cash between JCB’s 2018 and 2019 balance sheet is __________. 7 PART III: Longer Open -ended Problems ( each question worth 2.4 points ) Instructions: Determi ne a solution for each problem. Enter your final numerical answer on the THPS -2 Answer Submission Form on iCollege. Enter dollar answers rounded to the nearest cent, without a dollar sign and without any commas (for example, enter $3,210.35987 as 3210.36); ente r percent answer rounded to 1 decimal place, without a percent sign and without any commas (for example, enter 0.274324 = 27.4324% as 27.4). USE THE INFORMATION BELOW TO ANSWER QUESTIONS 36 -40 Due to the recovery that is threatening to cause sales to grow faster than the company can produce output, City Manufacturing, Inc. has decided to change its credit terms from net 35 days to net 30 days. City believes that this policy change will keep sale s at their current level but decrease the firm’s average collection period by 5 days (from 35 days to 30 days). Assume that this policy change will have no effect on costs, and because it also will have no effect on sales, it will have no impact on net inc ome. 36. If any asset change(s) resulting from this new policy will be offset by a corresponding and equal change in short -term debt (i.e., notes payable), all else constant, this new policy should cause the firm’s current ratio (assuming an initial current r atio greater than one) to: a. INCREASE b. DECREASE c. NO CHANGE 37. If any asset change(s) resulting from this new policy will be offset by a corresponding and equal change in common stock, all else constant, this new policy should cause the firm’s return on equity to: a. INCREASE b. DECREASE c. NO CHANGE 38. If any asset change(s) resulting from this new policy will be offset by a corresponding and equal change long -term debt, all else constant, this new policy should cause the firm’s debt ratio to (assuming that the current debt ratio is 40%): a. INCREASE b. DECREASE c. NO CHANGE 39. If any asset change(s) resulting from this new policy will be offset by a corresponding and equal change in cash, all else constant, this new policy should cause the firm’s total asset turnover ratio to: a. INCREASE b. DECREASE c. NO CHANGE 40. If any asset change(s) resulting from this new policy will be offset by a corresponding and equal change in short -term debt (i.e., notes payable), all else equal, this new policy should cause the firm’s quick ratio (assuming that the cur rent quick ratio = 0.8) to: a. INCREASE b. DECREASE c. NO CHANGE 8 Using the following information, fill in the balance sheet below, and then answer questions 41 -45 Green Co. began operation on January 1, 201 5. On January 1, 201 5, the company purchased $ 12 ,400 of Equipment. Green has not purchased any additional equipment since this initial purchase, nor have they sold any equipment. This equipment is being depreciated on a straight -line basis to a $ 400 salvage value over an estimated depreciable life of 10 year s. The following is a list of some of the income statement accounts (for the period January 1, 201 9 to December 31, 201 9), some of the balance sheet accounts (on December 31, 201 9) and a few financial ratios for Green Co. (for the year ending December 31, 201 9). Sales = 1 6,000 Acct. Payable Days = 30 Current ratio = 2.0 Cash = 1 30 Average collection period = 36 days Dividends paid = 480 Tax rate = 25% Gross profit margin = 25% Debt ratio = 25% Accruals = 1 10 Inventory turnover ratio = 6 Times interest earned = 5 Operating expenses (excl. dep.) = $ 12 00 NOTES: In 201 9, 80% of Green Company sales were on credit; the remainder were cash sales. The average collection period was calculated using a 360 -day year. Use COGS/Inventory for inv entory turnover ratio formula. Retained earnings as of December 31, 201 8 = $2,000. Use Common Stock as a plug figure to make your balance sheet balance. Use year -end numbers for ratios that involve both B/S and I/S (instead of average between two years). Round ALL values in the balance sheet to the nearest dollar (e.g., $327.84 = 328). Green Co. Balance Sheet For the Year ending December 31, 201 9 Cash __________ Notes payable __________ Accounts receivable __________ Accounts payable __________ Inventory __________ Accruals __________ Current assets __________ Current liabilities __________ Long -term Debt __________ Gross fixed assets __________ Total liabilities __________ (Accumulated depreciation) __________ Common stock __________ Net fixed assets __________ Retained earnings __________ Total assets __________ Total liabilities & Equity __________ 41. Current assets = ____________ 42. Total assets = ____________ 43. Current liabilities = ____________ 44. Total liabilities = ____________ 45. Total shareholder equity (i.e., common stock + retained earnings) = ____________ 9 46. Felton Farm Supplies, Inc. has an ROA (return on assets) of 10 percent, total assets of $300,000 and a net profit margin of 4.5 percent. What are Felton Farm Supplies annual sales? 47. Krisle and Kringle’s debt -to-total assets ratio is 0.745 (i.e., debt ratio = 74.5%). What is the company’s debt – to-equity ratio? (Enter answer as a ratio – that is, do not convert to a percent). 48. Philip s, Inc has a debt ratio of 75% and ROE = 12%. What is Phillips’ ROA? (Enter answer as a percent). 49. A firm has an ROA of 18% and a debt/equity ratio of 0.65. The firm’s ROE is _________. (Enter answer as a percent). 50. Assume that XYZ, Inc. has: • Debt ratio = 60% • Net profit margin = 15% • Return on assets (ROA) = 25% Find XYZ’s Total Asset Turnover ratio. (Enter answer as a ratio – that is, do not convert to a percent). Using the following balance sheet for Sherman, Incorporated below to answer questions 51 -56 51. Sales for Sherman, Inc. in 2018 were $700,000. The projected growth rate in sales for 2019 is 30 percent and the project ed net profit margin for 2019 is 5 percent. If all assets and all spontaneous liabilities (i.e., accounts payable and accruals) grow as a percent of sales, and if Sherman plans to pay out 70 percent of all net income as dividends in 2019, what is Sherman’s additional (or, outside) funds needed for 2019? 52. Sales for 2018 were $550,000. The 2019 projected net profit margin is 3.5% and Sherman projects that the growth rate in sales in 2019 will be 40 percent. Sherman plans to pay a total dividend of $3,000 in 201 9. Assuming that all current assets and all current liabilities except for current portion of LT debt grow as a percent of sales (i.e., current portion of LT debt does not change), net fixed asset grow at 25% of the growth rate in sales (i.e., at 25% of 40 percent), what is Sherman’s additional (or, outside) funds needed for 2019? Cash 12,000 Notes payable 11,000 Accounts receivable 24,000 Accounts payable 16,000 Inventory 46,000 Accruals 3,000 Current assets 82,000 Current portion LD debt 7,000 Net fixed assets 156,000 Current liabilities 37,000 Total assets 238,000 LT Debt 66,000 Common stock ($2.00 par value) 20,000 Additional paid in capital 67,000 Retained earnings 48,000 Total liabilities & equity 238,000 She rman, Incorporate d Balance She e t (in dollars) for the Ye ar Ending De ce mbe r 31, 2018 10 53. Sales for Sherman, Inc. in 2018 were $850,000. The 2019 projected net profit margin is 4.8% and Sherman projects that the growth rate in sales in 2019 will be 20 percent. Sherman plans to pay out 72 percent of net income as dividends in 2019. Assuming that cash does not change from its 2018 level, accounts receivable and inventory grow as a percent of sales, net fixed assets grow at 60% of the growth rate in sales, and all current liabilities grow as a percent of sales, what is Sherman’s additional (or, outside) funds needed for 2019? 54. Sales for Sherman, Inc. in 2018 were $700,000. The projected net profit margin for 2019 is 5 percent. If all assets and all spontaneous liabilities (i .e., accounts payable and accruals) grow as a percent of sales, and if Sherman plans to pay out 70 percent of all net income as dividends in 2019, what is Sherman’s sustainable growth rate for 2019? 55. Sales for 2018 were $550,000. The 2019 projected net pro fit margin is 3.5%. Sherman plans to pay a total dividend of $3,000 in 2019. Assuming that all assets (i.e ., all current assets and net fixed ass ets) and all current liabilities except for current portion of LT debt grow as a percent of sales (i.e., current portion of LT debt does not change), w hat is sustainable growth rate for 2019? 56. Sales for Sherman, Inc. in 2018 were $850,000. The 2019 projected net profit margin is 4.8%. Sherman plans to pay out 72 percent of net income as dividends in 2019. Assuming that cash does not change from its 2018 l evel, accounts receivable and inventory grow as a percent of sales, net fixed assets grow at 60% of the growth rate in sales, and all current liabilities grow as a percent of sales, what is sustainable growth rate for 2019? 11 USE THE FOLLOWING INFORMATION TO ANSWER THE QUESTIONS 57 -60 The balance sheet for the Regal Corp. for the year ending December 31, 201 9 is shown below: Regal Corp. Balance Sheet as of December 31, 201 9 (All figures in dollars) Cash 250 Notes payable 800 Accounts receivable 3,500 Accounts payable 3,200 Inventory 6,250 Accruals 1,100 Current assets 10,000 Current liabilities 5,100 Net fixed assets 6,400 Long -term debt 4,500 Total assets 16,400 Common stock ($0.20 par) 1,200 Additional paid in capital 2,600 Retained earnings 3,000 Total liabilities and equity 16,400 Regal had sales revenue in 2019 of $75,000. Regal’s projected net profit margin for 2020 is 4 percent and Regal plans to pay a dividend of $0.25 per share on December 31, 2020 . Compute Regal sustainable growth rate for 2020 assuming that cash in 2020 will be equal to 0.4% of 2020 sales (for example, if sales = 1000, cash will be 0.4% of 1000, or 4), the average collection period for 2020 will be 24 days (assume 75% of all sales are on credit and use a 360 day year), the inventory turnover ratio for 2020 will be 10 (use COGS/Inventory and assume 2020 COGS = 80% of sales), net fixed assets will grow as a percent of sales, the 2020 current ratio will be 2.2, and Regal will issue (on July 1, 2020 ) 1,000 shares of additional stock in 2020 at a sale price per share of $0.15 per share. Compute and record your answer as a percent rounded to 2 decimal p laces (for example, record .1358934 as 13.59%). Now construct a 2020 proforma balance sheet (i.e., redo the balance sheet above) using the guidelines above and the sustainable growth rate answer you found to prove that the growth rate you computed is in f act correct. Note that if your sustainable growth rate is correct, your proforma balance sheet should balance with no outside funds (i.e., additional long -term debt, common stock or additional paid in capital) needed. Round all figures in your proforma bal ance sheet to whole dollars. From that proforma balance sheet, answer the questions below: 57. What is cash on Regal Corp.’s 2020 proforma balance sheet? 58. What is accounts receivable on Regal Corp.’s 2020 proforma balance sheet? 59. What is total assets on Regal Corp.’s 2020 proforma balance sheet? 60. What is total liabilities (i.e., current liabilities + long term debt) on Regal Corp.’s 2020 proforma balance sheet?

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