BCOR 2200 – Spring 2014 Midterm 1 Answers: Financial Analysis of Buff Co. - Prof. David Gr, Exams of Finance

Download BCOR 2200 – Spring 2014 Midterm 1 Answers: Financial Analysis of Buff Co. - Prof. David Gr and more Exams Finance in PDF only on Docsity! BCOR 2200 – Spring 2014 Midterm 1 with Answers Dr. David M. Gross Name (please print): ________________________________________________ Note: last, first, middle initial Student ID Number (NOT social security number): __________________________ You are expected to follow the Honor Code during this Exam and sign below to acknowledge this. Honor Code “On my honor, as a University of Colorado at Boulder student, I have neither given nor received unauthorized assistance on this work.” Signature: _____________________________________________ Instructions: 1. Check your exam to make certain you have 36 questions--all questions are worth the same value. 2. On the Answer Sheet, please bubble in: (1) Your NAME (2) Your Student ID (3) Your Section Number: 3:00 pm is Section 0001, 4:30 pm is Section 0002 Please DO NOT bubble in a Test Version. 3. Carefully enter answers on the computer-graded answer sheet. Only answers on the answer sheet will be scored. Answers on the question sheets will not be scored. 4. Please show your student ID to a TA when requested. 5. You have ONE HOUR and FIFTEEN MINUTES to complete the exam. This INCLUDES the time needed to enter your answers on the answer sheet. 6. Please note: Sharing calculators is not allowed. Please turn off and do not handle cell phones and other electronic devices – including electronic translators. 7. When finished, please turn in your QUESTION SHEET, your ANSWER SHEET and your FORMULA SHEET. 1 Please use the Buff Co. Financial Statements on the Formula Sheet to answer questions 1 through 18. 1. Compute the Days’ Sales in Inventory for Buff Co. at the end of 2013. Is this value higher or lower than you would expect to observe for a restaurant? a. 0.009 Lower than a restaurant DSI = 365/(COGS/INV) = (365/(2500/700) = 102.2 b. 3.57 Higher than a restaurant c. 3.57 Lower than a restaurant d. 102.20 Higher than a restaurant e. 109.50 Higher than a restaurant 2. Calculate the Current Ratio at the end of 2013 for Buff Co. Does this ratio indicate that Buff Co.’s short-term solvency is better or worse than the industry average Current Ratio of 1.25? a. 1.23 Better solvency than the industry average Quick = CA/CL b. 1.50 Better solvency than the industry average = 2350/1100 = 2.14 > 1.25 c. 1.50 Worse solvency than the industry average d. 2.14 Better solvency than the industry average e. 2.14 Worse solvency than the industry average 3. Calculate the Cash Coverage Ratio at the end of 2013 for Buff Co. Does this ratio indicate that Buff Co.’s short-term solvency is better or worse than the industry average of 20? a. 9.00 Better solvency than the industry average Cash Coverage = EBITDA/Int Exp b. 9.00 Worse solvency than the industry average = 3800/150 = 25.33 > 20 Better c. 13.66 Better solvency than the industry average d. 13.66 Worse solvency than the industry average e. 25.33 Better solvency than the industry average 4. Buff Co. estimated at the end of 2013, if its long-term assets were immediately liquidated, the company would receive $5,000. If its current assets were liquidated, the company would receive the full value of its Cash and Other Current Assets but only 50% of the book value of its Inventory and Accounts Receivables. Calculate the book value of assets and the estimated market value assets at the end of 2013. a. Book Val = $4,400 Market Val = $5,000 Book Val Assets = 6900 b. Book Val = $6,800 Market Val = $5,000 Mkt Val Assets = 5000 + 1350 + .5(1000) = 6850 c. Book Val = $6,800 Market Val = $6,900 d. Book Val = $6,900 Market Val = $6,850 e. Book Val = $6,900 Market Val = $7,400 5. Calculate Buff Co.’s Marginal Tax Rate for 2013. 2 a. It paid $150 to its Creditors Net New LT Liab = 2000 – 1200 = 800 b. It paid $650 to its Creditors CF to Credit = Int Exp – Net New LT Liab = 150 – 800 = -650 c. It got $650 from its Creditors d. It paid $950 to its Creditors e. It got $950 from its Creditors 14. Calculate the growth rate that is possible at the end of 2013 if Buff Co. does not change its overall efficiency, dividend policy or leverage. a. 9.79% ROE = 2050/3800 = 0.5395 b. 19.31% b = RE/NI = 1435/2050 = 0.70 c. 26.26% Sustainable Growth Rate = (ROE)(b)/[1 – (ROE)(b)] d. 29.71% = (0.5395)(0.7)/[1 – (0.5395)(0.7)] = 0. 6068 e. 60.68% 15. Calculate the growth rate that is possible at the end of 2013 if Buff Co. does not change its overall efficiency or dividend policy and sells no stocks or bonds. a. 9.79% ROA = 2050/6900 = 0.2971 b. 19.31% b = RE/NI = 1435/2050 = 0.70 c. 26.26% Internal Growth Rate = (ROA)(b)/[1 – (ROA)(b)] d. 29.71% = (0.2971)(0.7)/[1 – (0.2971)(0.7)] = 0.2626 e. 60.68% 16. Compare Buff Co. at the end of 2013 to the end of 2012. Did the company’s efficiency in generating sales improve or deteriorate in 2013 relative to 2012? How do you know? a. It improved because AT is greater at the end of 2013. AT2013 = 7000/6900 = 1.01 b. It deteriorated because AT is smaller at the end of 2013. AT2012 = 5400/6000 = 0.90 c. It improved because ROA is greater at the end of 2013. d. It deteriorated because ROA is smaller at the end of 2013. e. It deteriorated because PM is smaller at the end of 2013. 17. Compare Buff Co. at the end of 2013 to the end of 2012. Did the company’s efficiency in controlling expenses improve or deteriorate in 2013 relative to 2012? How do you know? 5 a. It improved because AT is greater at the end of 2013. PM2013 = 2050/7000 = 0.2929 b. It deteriorated because AT is smaller at the end of 2013. PM2012 = 1800/5400 = 0.3333 c. It improved because ROA is greater at the end of 2013. d. It deteriorated because ROA is smaller at the end of 2013. e. It deteriorated because PM is smaller at the end of 2013 18. At the end of 2013, Buff Co.’s overall profitability measured by accounting profit per unit of equity increased. To what can you attribute this increase? a. Profitability increased because leverage decreased and overall efficiency decreased. b. Profitability increased because leverage increased and overall efficiency increased. c. Profitability increased because leverage increased enough to compensate for the decrease in overall efficiency. d. Profitability increased because overall efficiency increased enough to compensate for the decrease in leverage. e. Profitability increased because leverage decreased enough to compensate for the increase in overall efficiency. *** This is the end of the Buff Co. Questions *** 19. Which of the following is a Capital Budgeting Decision (as opposed to a Capital Structure Decision or Working Capital Management Decision)? I. Deciding whether to sell new bonds in order to buy back stock. II. Deciding whether to sell new stock in order to buy back bonds. III. Deciding to buy another factory to expand production. IV. Deciding to buy inventory using credit from suppliers instead of cash. a. I only b. II only c. I and II only d. III only e. IV only 20. A Noncash Item on the Income Statement is defined as: I. The daily increase or decrease in the accounts payable. II. The daily increase or decrease in the accounts receivable. III. An expense charged against sales that does not affect cash flows. a. I only b. II only c. III only d. I and II only e. I, II and III Use the information in the following partial financial statements to answer the next 2 questions: 6 Partial Income Statement Partial Balance Sheet Cash Sales $500,000 A/R $12,000 Credit Sales $360,000 Inv $32,000 COGS $256,000 A/P $64,000 SG&A $90,000 21. On average, how long did it take the company to collect credit sales cash from its customers? a. 6.0 Receivables Turnover = Credit Sales/(A/R) = $360/$12 = 30 times b. 12.2 Days’ Sales in Receivables = 365/Receivables Turnover = 365/30 = 12.2 c. 30.4 d. 60.8 e. 73.0 22. On average, how many times in the last year did the company sell the amount of inventory it currently has on hand? a. 2.00 Inventory Turnover = COGS/Inv = $256/$32 = 8 times b. 4.00 c. 8.00 d. 12.2 e. 45.6 23. A firm’s balance sheet shows $100 of cash, $100 of Inventory, $100 of Accounts Receivable and $100 of Accounts Payable. These are the firm’s only short-term assets and liabilities. Which of the following happens if the firm pays cash to buy $50 of inventory. a. The Current Ratio decreases and the Quick Ratio increases. b. The Current Ratio does not change and the Quick Ratio decreases. c. The Current Ratio does not change and the Quick Ratio increases. d. The Current Ratio increases and the Quick Ratio increases. e. The Current Ratio increases and the Quick Ratio decreases. 24. A firm faces the tax rates shown in the table below. Its taxable income for 2013 is $180,000. Compute its 2013 tax expense. Taxable Income Tax Rate 0 – 50,000 15% 50,001 – 100,000 20% 100,001 + 35% a. $28,000 50,000 x 0.15 = 7,500 b. $36,000 (100,000 – 50,000) x 0.20 = 10,000 c. $45,500 (180,000 – 1000,000) x 0.35 = 28,000 d. $63,000 7,500 + 10,000 + 28,000 = 45,500 e. $90,500 7 33. Assume that on average house prices will increase at a rate of 3.00% per year. If you buy a $200,000 house and live in it for 10 years, at what price can you expect to sell your house? a. $60,000 N = 10 PV = 200 I/Y = 3 FV = -268,783 b. $206,000 c. $260,000 d. $268,783 e. $280,783 34. You believe that an investment will be worth $100,000 in five years. Investments of similar risk pay 8%. Given your time horizon of five years and a required return of 8%, which of the following prices is the most that you would pay for the investment? a. $55,000 N = 5 FV = 100000 I/Y = 8 PV = -68,058 b. $60,000 If you pay 70,000  N = 5 PV = -70000 FV = 100000 I/Y = 7.39% c. $65,000 If you pay 70,000, then you earn only 7.39% < 8.00% d. $70,000 e. $75,000 35. Calculate the number of years required for bank account to grow from $20,000 to $49,293 if the account earns 4% per year. a. 18 PV = 20000 FV = 49293 I/Y = 4 N = 23 b. 23 c. 27 d. 36 e. No Solution. ($20,000 will never grow to $49,293) 36. To fund your retirement in 45 years, you will pay $10,000 for an investment that you expect will earn 8% each year. Use the rule of 72’s to estimate the number of times you expect the investment to double in value over the next 45 years. What is the estimated expected future value of your $10,000 in 45 years? a. Double 2 times, so the estimated value is $40,000 72/8 = 9  Double every 9 years b. Double 3 times, so the estimated value is $80,000 45/9 = 5  Double 5 times in 45 years c. Double 4 times, so the estimated value is $160,000 10,000 x 25 = $320,000 d. Double 5 times, so the estimated value is $320,000 e. Double 6 times, so the estimated value is $640,000 10 Financial Statements for Buff Co. Income Statement 2013 2012 Balance Sheet 2013 2012 Revenue $7,000 $5,400 Cash and Other Current Assets $1,350 $1,100 COGS $2,500 $1,800 Accounts Receivables $300 $400 SG&A $700 $450 Inventory $700 $500 Dep & Amort $500 $360 Total Current Assets $2,350 $2,000 Interest Expense $150 $90 Tax Expense $1,100 $900 PPE Net $4,550 $4,000 Net Income $2,050 $1,800 Goodwill, Net $0 $0 Other Long-Term Assets $0 $0 Total Dividends $615 $720 Total Long-Term Assets $4,550 $4,000 Retained Earnings $1,435 $1,080 Total Assets $6,900 $6,000 Accounts Payable $700 $800 Other Current Liabilities $400 $200 Total Current Liabilities $1,100 $1,000 Long-Term Debt $2,000 $1,200 Other Long-Term Liabilities $0 $0 Total Long-Term Liabilities $2,000 $1,200 Total Liabilities $3,100 $2,200 Common Stock, Net of Repurchases $565 $2,000 Retained Earnings $3,235 $1,800 Total Equity $3,800 $3,800 Total Liabilities and Equity $6,900 $6,000 11