Download Value of A Firm: XYZ, Inc. GB550 Financial ManagementUnit 2 and more Lecture notes Accounting in PDF only on Docsity! VALUE OF A FIRM: XYZ, INC. 1 Value of A Firm: XYZ, Inc. GB550 Financial Management Unit 2 Assignment Purdue Global University VALUE OF A FIRM: XYZ, INC. 2 Value of A Firm: XYZ, Inc. 1. Complete problem: Total Net Operating Capital XYZ, Inc. reported $20 million in operating current assets, $25 million in net fixed assets, and $6 million in operating current liabilities. How much total net operating capital does XYZ, Inc. have? $39 million Show your work. NOWC = Operating Current Assets - Operating Current Liabilities NOWC = $20 million - $6 million NOWC = $14 million Total Net Operating Capital = NOWC + Operating long-term assets Total Net Operating Capital = $14 million + $25 million Total Net Operating Capital = $39 million 2. Complete problem: Balance Sheet Analysis Complete the balance sheet and sales information in the table that follows for XYZ, Inc., using the following financial data: Show your work. Total assets turnover ratio equation to arrive at Sales: Total Assets Turnover Ratio = Sales/Total Assets 1.5 = Sales/400,000 400,000 x 1.5 = (Sales/400,000) x (400,000/1) Sales = $600,000 VALUE OF A FIRM: XYZ, INC. 5 Common Stock = $140,000 Total assets turnover:1.5 Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25% Total liabilities-to-assets ratio: 40% Quick ratio: 0.80 Days sales outstanding (based on 365-day year): 36.5 days Inventory turnover ratio: 3.75 Partial Income Statement Information ________________________________________________________________________ Sales $600,000 Cost of goods sold $450,000 Balance Sheet Information ________________________________________________________________________ Cash $28,000 Accounts payable $110,000 Accounts receivable $60,000 Long-term debt $50,000 Inventories $120,000 Common stock $140,000 Fixed assets $192,000 Retained earnings $100,000 Total assets $400,000 Total liabilities and equity $400,000 VALUE OF A FIRM: XYZ, INC. 6 3. Complete problem: Yield to Maturity for Annual Payments XYZ Corporation’s bonds have 14 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $950. What is their yield to maturity? Show your work. YTM = ((Annual Interest + (Redemption Value-Market Value))/# years)) / ((Redemption Value + Market Value)/2)) ~ YTM = ((100 + (1000-950)/14)) / ((1000 + 950)/2)) = 10.62% 4. Complete problem: Required Rate of Return Suppose rRF = 6%; rM = 10%; and rA = 14%. Show you work: rA = rRF + B(rM-rRf) 14% = 6% + B(10%-6%) 14%-6% = B x 4% B = 8%/4% B = 2 Required rate of return is 14% @ B = 2. If stock A’s beta were 2, then A’ Required Rate of Return is 14%. VALUE OF A FIRM: XYZ, INC. 7 5. Complete problem: Portfolio Beta You have a $4 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with a beta of 0.9 and using the proceeds to purchase another stock with a beta of 1.4. What will the portfolio’s new beta be after these transactions? Show your work: Weight of sold or purchased shares = $100,000/$4,000,000 = 2.5% Weight of rest of Portfolio = 1-2.5% = 97.50% Portfolio Beta = Money weighted avg of stock beta Existing Beta: 1.1 = (97.50% *Bm) + (2.50% *0.9) Bm = (1.0775/97.50%) = 1.1051 Portfolio after including new stock with 1.40 beta: Beta New Portfolio = (97.50% * 1.1051) + (2.50%*1.40) New Beta Portfolio = 1.1125
