Engineering E2261: Introduction to Accounting and Finance

COLUMBIA UNIVERSITY, School of Engineering and Applied Science

Exam 2, 11/13/2012 Solutions

Instructor: Anthony Webster
________
UNI

_________________________
Please print your name

____________________________
Please sign your name

Notes:
Please clearly organize your work, write legibly, show your computations for numerical answers,
and list your key assumptions. Points will be deducted for submissions that are illegible and
difficult to follow. The exam has 80 points, plus 6 points of extra credit (for part 1-c).
Problem 1 of 2: Ratio Analysis
Hertz Inc. (HRZ) is a pet food and supply company. Its comp in the below analysis is
International SuperPet Holdings (ISH).
a) Fill in the missing ratios for HRZ. (18 points).
HRZ
Q8
DtEV = Total Debt/(Total Debt + MV{Equity}) % 83.42%
Comps DtEV
46.11%
ROE(mv) = NI(eop)/MV{Equity, bop} %
Comps ROE(mv)

Equity Ratio Analysis for Q1 Ending: 30-Jun-X0

Q4
Q3
Q2
Q1
TTM
77.17%
80.70%
81.62%
81.58%
81.58%
40.64%
45.02%
57.38%
54.00%
54.00%

Q7
83.78%
53.15%

Q6
77.69%
45.36%

Q5
77.22%
39.02%

-67.00%
12.36%

-38.78%
30.77%

-76.87%
26.56%

20.37%
20.85%

3.19%
17.99%

-42.88%
20.86%

11.89%
22.11%

0.12%
19.52%

-3.28
5.97

-3.07
6.61

-3.92
4.82

-3.60
4.01

610.47
4.03

610.47
4.03

8.12%
6.66%

8.23%
6.01%

10.88%
7.11%

4.91%
8.34%

5.01%
6.46%

7.99%
7.98%

-10.77%
34.06%

39.88%
31.95%

257.69%
33.43%

-11.59%
34.15%

-31.82
4.80

7.81
5.89

11.36
7.12

199.39
7.16

PE(ttm) = MV{Equity}/NI(ttm)
Comps PE(ttm)
DY = Div/MV{Equity} %
Comps DY
PR = Div/NI %
Comps PR
EVtEBITDA = (Total Debt(bop) + MV{Equity, bop})/EBITDA(eop)
-10.38
Comps EVtEBITDA
7.08

35.34
4.85

E2261 Exam 2

Page 1

41.35% 4880.00%
28.65%
32.13%
9.36
6.18

12.53
6.06

HRZ

Sales ($MM)
Comps Sales

Ratio Analysis for Q1 Ending: 30-Jun-X0

Q8

Q7

Q6

Q5

Q4

Q3

Q2

Q1

TTM

353
84

315
73

272
98

279
100

308
92

300
90

286
73

306
85

1,199
340

-12.65%
9.49%

-4.77%
23.52%

5.03%
-25.69%

9.73%
-14.73%

-1.54%
-4.17%

Sales Growth (Quarterly Y on Y)

Comps Sales Growth
Sales Growth (Q on Q)
Comps Sales Growth

-10.75%
-13.76%

-13.44%
34.94%

2.24%
1.73%

10.59%
-7.52%

-2.69%
-2.71%

-4.54%
-18.82%

6.82%
16.74%

-1.54%
-4.17%

ROE = NI/OE(bop) %
Comps ROE

-56.74%
9.04%

-29.24%
18.52%

-99.52%
19.92%

36.13%
20.24%

5.29%
18.67%

-52.12%
17.75%

16.86%
15.58%

0.22%
18.94%

Profit Margin = NI/Sales %

Comps Profit Margin

3.15%
13.40%

-6.45%
6.74%

-3.67%
9.68%

-11.17%
10.62%

2.73%
12.24%

0.43%
12.03%

-4.61%
14.54%

1.21%
11.28%

0.02%
12.44%

COGS Margin = COGS/Sales (%)

Comps COGS Margin
Gross Margin = (Sales - COGS)/Sales (%)
Comps Gross Margin

81.51%
74.85%
18.49%
25.15%

84.40%
77.17%
15.60%
22.83%

84.32%
79.61%
15.68%
20.39%

81.26%
77.05%
18.74%
22.95%

80.65%
77.68%
19.35%
22.32%

83.62%
76.95%
16.38%
23.05%

88.36%
75.31%
11.64%
24.69%

83.77%
72.27%
16.23%
27.73%

84.03%
75.62%
15.97%
24.38%

SGA Margin = SGA/Sales (%)

Comps SGA Margin

12.34%
12.10%

22.94%
15.41%

15.97%
11.62%

22.76%
12.83%

13.18%
11.59%

12.41%
14.48%

12.69%
13.31%

11.68%
12.34%

12.49%
12.91%

Interest Margin = Interest/Sales (%)

Comps Interest Margin

0.00%
2.14%

0.00%
2.06%

0.00%
1.53%

0.00%
1.40%

0.00%
1.63%

0.00%
1.89%

0.00%
2.19%

0.00%
2.82%

0.00%
2.12%

Tax Rate = Tax Expense/EBT (%)

Comps Tax Rate

5.93%
5.32%

38.30%
0.00%

2.91%
-23.19%

-51.71%
-2.33%

0.00%
-7.06%

6.67%
-14.29%

0.00%
-8.00%

0.00%
0.00%

50.00%
-7.01%

1.34
0.68

1.25
0.90

1.27
0.92

1.45
0.81

1.43
0.73

1.40
0.59

1.46
0.60

1.41
0.75

12.03%
5.16%
2.37%
10.26%
0.30%
18.36%

-8.64%
4.57%
6.23
1.40
32.00
83.11
10.72%
7.87%
3.94%
11.81%
0.44%
21.46%

-4.58%
8.75%
5.23
1.93
38.93
111.57
12.28%
9.20%
3.13%
9.38%
0.46%
13.89%

-14.21%
9.80%
5.43
2.01
39.53
109.86
12.08%
7.87%
4.29%
12.03%
0.33%
19.44%

3.95%
9.94%
6.10
1.83
37.49
95.60
11.19%
9.56%
3.51%
12.41%
0.36%
32.53%

0.62%
8.72%
6.14
1.86
35.93
92.13
10.30%
7.41%
4.32%
11.22%
0.53%
30.76%

-6.45%
8.54%
5.92
1.38
33.37
70.84
11.88%
9.50%
4.99%
13.48%
0.41%
29.42%

1.77%
6.71%
6.47
1.11
37.65
91.11
10.70%
10.93%
4.00%
12.89%
0.38%
11.08%

0.02%
9.30%
5.94
1.68
38.03
85.73
10.91%
10.94%
4.07%
12.33%
0.38%
11.08%

6.57
1.98

6.38
2.12

7.00
2.03

9.15
2.04

8.54
2.14

8.08
2.08

9.52
2.32

8.98
2.20

8.98
2.20

DtA = Total Debt/Total Assets %

Comps DtA

64.83%
31.65%

61.07%
32.27%

64.39%
30.62%

65.75%
30.50%

65.54%
33.19%

62.91%
33.50%

66.13%
40.90%

65.94%
36.95%

65.94%
36.95%

DtC = Total Debt/(Total Debt + Equity) %

Comps DtC

80.99%
38.50%

79.57%
40.57%

81.85%
38.37%

85.74%
38.31%

84.84%
41.54%

83.56%
41.06%

86.29%
48.70%

85.56%
44.80%

85.56%
44.80%

12.92
3.03

-4.05
6.61

-13.68
3.94

-6.82
3.47

16.38
4.11

85.82
4.43

-10.39
6.43

37.56
4.35

2704.00
5.00

20.63%
26.47%

32.94%
31.73%

25.38%
23.18%

34.56%
25.23%

22.30%
24.13%
7.62%
-15.00%

20.51%
28.22%
-229.33%
23.98%

19.94%
27.50%
-21.90%
-2.78%

19.61%
29.11%
88.93%
-10.20%

20.58%
27.14%
-277.13%
-34.46%

1.58
2.18

1.23
2.27

1.37
2.26

1.16
2.26

1.23
1.64

1.00
1.42

1.16
1.18

1.15
1.64

1.15
1.64

QR = (Current Assets - Inventory)/Current Liabilities1.35

Comps QR
2.11

1.08
2.20

1.20
2.19

0.99
2.21

1.05
1.61

0.83
1.39

1.00
1.16

0.98
1.57

0.98
1.57

39.61%
64.29%

22.38%
66.75%

31.88%
65.89%

20.27%
60.11%

26.93%
61.64%

10.58%
60.61%

23.17%
70.34%

22.63%
44.58%

22.63%
44.58%

-2.50
13.80

43.60
7.00

-25.70
-2.10

11.40
19.30

15.60
-28.70

43.20
-6.30

-35.60
-41.70

14.80
-6.60

38.00
-83.30

#DIV/0!
6.22

#DIV/0!
3.53

#DIV/0!
5.60

#DIV/0!
7.14

#DIV/0!
6.67

#DIV/0!
5.53

#DIV/0!
5.69

#DIV/0!
4.79

#DIV/0!
5.56

146.03%
548.28%

-137.50%
520.00%

136.36%
438.71%

-150.00% 2320.00%
129.91%
36.04%

320.41%
47.65%

53.33%
23.12%

441.46%
79.33%

502.61%
39.58%

0.00%
4.42%

0.00%
4.28%

0.00%
4.33%

0.00%
4.14%

0.00%
3.85%

0.00%
4.10%

0.00%
5.19%

83.60% 119.53%
427.27% 1020.00%

448.48%
325.00%

389.47% 1480.00%
50.49%
12.62%

289.80%
17.08%

940.00%
7.01%

353.66%
27.17%

500.87%
13.25%

Asset Efficiency Ratio = Sales/Assets(bop)

Comps AER
ROA = NI/Assets(bop) %
Comps ROA
FAE = Sales/Net PPE(bop)
Comps FAE
INV-E = COGS/INV(bop)
Comps INV-E
AR-T = AR(eop)/Sales %
Comps AR-T
AP-T = AP(eop)/COGS %
Comps AP-T
CL = (Cash + ST Inv)/Sales %
Comps CL
FLR = Assets(eop)/OE(eop)
Comps FLR

DtEBIT = Total Debt(eop)/EBIT

Comps DtEBIT
SDItC = (SGA + Deprec + Interest)/COGS %
CompsSDItC
Del(EBIT)/Del(Sales)
Comps Del(EBIT)/Del(Sales)
CR = Current Assets/Current Liabilities
Comps CR

WCR = WorkingCapital/WCAssets %
Comps WCR
NOCF = OCF - Capx
Comps NOCF
Fixed Coverage Ratio = EBIT/Interest
Comps FCR
EBITDA-S = EBITDA/(Interest + CAPX) %
Comps EBITDA-S
Interest Rate = INT/Total Debt (bop)
Comps Interest Rate
DT = Depreciation /CAPX %
Comps DT

0.00%
4.23%

E2261 Exam 2

Page 2

Balance Sheet ($MM UON)

HRZ

Assets
Cash
Accounts Receivable
Short-Term Investments
Inventory
Other Current Assets
Total Current Assets

Q8
4.2
169.7
0.0
33.2
21.4
228.5

Q7
5.5
135.0
0.0
23.6
22.7
186.8

Q6
5.0
133.8
0.0
22.9
30.3
192.0

Q5
3.7
134.6
0.0
26.5
23.2
188.0

Q4
4.4
137.9
0.0
27.9
22.9
193.1

Q3
6.4
123.5
0.0
30.3
16.5
176.7

Q2
4.7
135.9
0.0
27.2
30.7
198.5

Q1
4.6
130.8
0.0
28.0
25.7
189.1

TTM
4.6
130.8
0.0
28.0
25.7
189.1

Net Fixed Assets

Other Assets
Total Assets

202.0
509.8
940.3

208.5
477.3
872.6

205.1
478.2
875.3

202.0
460.8
850.8

195.2
451.3
839.6

193.4
448.4
818.5

188.9
448.5
835.9

190.0
441.1
820.2

190.0
441.1
820.2

Liabilities
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities

Q8
27.3
6.5
110.7
144.5

Q7
41.9
6.6
103.1
151.6

Q6
28.8
9.7
102.0
140.5

Q5
38.8
12.8
111.1
162.7

Q4
34.9
15.9
106.2
157.0

Q3
43.3
18.8
114.7
176.8

Q2
50.5
18.8
102.0
171.3

Q1
41.0
18.8
105.3
165.1

TTM
41.0
18.8
105.3
165.1

Long-Term Debt
Other Liabilities
Total Liabilities

603.1
49.6
797.2

526.3
57.9
735.8

553.9
55.9
750.3

546.6
48.5
757.8

534.4
49.9
741.3

496.1
44.3
717.2

534.0
42.9
748.2

522.0
41.8
728.9

522.0
41.8
728.9

Shareholder's Equity
Equity (Common)

Q8
143.1

Q7
136.8

Q6
125.0

Q5
93.0

Q4
98.3

Q3
101.3

Q2
87.8

Q1
91.3

TTM
91.3

Total Liabilities + Shareholder's Equity

940.3

872.6

875.3

850.8

839.6

818.5

836.0

820.2

820.2

Q8

Q7

Q6

Q5

Q4

Q3

Q2

Q1

HRZ
TTM

352.6
287.4
43.5
0.0
9.9
11.8
0.7
0.0
11.1

314.7
265.6
72.2
0.0
9.8
-32.9
-12.6
0.0
-20.3

272.4
229.7
43.5
0.0
9.5
-10.3
-0.3
0.0
-10.0

278.5
226.3
63.4
0.0
9.3
-20.5
10.6
0.0
-31.1

308.0
248.4
40.6
0.0
10.6
8.4
0.0
0.0
8.4

299.7
250.6
37.2
0.0
10.4
1.5
0.1
0.1
1.3

286.1
252.8
36.3
0.0
10.3
-13.3
0.0
-0.1
-13.2

305.6
256.0
35.7
0.0
10.3
3.6
0.0
-0.1
3.7

1,199.4
1,007.8
149.8
0.0
41.6
0.2
0.1
-0.1
0.2

Income Statement
($MM UON)
Revenues
COGS
SGA
INT
Other Expenses/(Income)
Pretax Income
Tax
After Tax Expenses/(Income)
Net Income

E2261 Exam 2

Page 3

Cash Flow Statement ($MM UON)

HRZ

Cash Flow (Ops)

NI
Dprec
Other Operating Flows
CF Ops

Q8
11.1
15.8
-10.5
16.4

Q7
-20.3
15.3
61.4
56.4

Q6
-10.0
14.8
-27.2
-22.4

Q5
-31.1
14.8
31.5
15.2

Q4
8.4
14.8
-6.6
16.6

Q3
1.3
14.2
32.6
48.1

Q2
-13.2
14.1
-35.0
-34.1

Q1
3.7
14.5
0.7
18.9

TTM
0.2
57.6
-8.3
49.5

Cash Flow (Inv)

CAPX
Other Investing Flows
CF Inv

Q8
-18.9
0.2
-18.7

Q7
-12.8
0.2
-12.6

Q6
-3.3
0.1
-3.2

Q5
-3.8
0.7
-3.1

Q4
-1.0
0.1
-0.9

Q3
-4.9
0.3
-4.6

Q2
-1.5
0.1
-1.4

Q1
-4.1
1.3
-2.8

TTM
-11.5
1.8
-9.7

Q8

Q7

Q6

-17.5

-42.4

25.1

Q5
3.4
-16.8
-13.4

Q4
3.4
-18.5
-15.1

Q3
3.4
-44.8
-41.4

Q2
1.5
32.3
33.8

Q1
1.5
-17.7
-16.2

TTM
9.8
-48.7
-38.9

-19.8

1.4
4.2

-0.5
5.5

-1.3
5.0

0.6
3.7

2.1
4.4

-1.7
6.4

-0.1
4.7

0.9
3.7

4.2

5.5
1.3

5.0
-0.5

3.7
-1.3

4.4
0.7

6.4
2.0

4.7
-1.7

4.6
-0.1

4.6
0.9

Q8
4
30.3

Q7
3.4
30.34

Q6
5.32
30.42

Q5
5.42
30.44

Q4
5.35
30.43

Q3
4.04
30.48

Q2
4.08
30.52

Q1
3.99
30.6

TTM
3.99
30.6

Cash Flow (Fin)

Dividends
Other Financing Flows
CF Fin
Change in Cash
Cash BOP
Cash EOP
Check on Change in Cash

Market Data
$MM except per share items
Stock Price
Average No. Shares
Stock Price Dates

28-Nov-08 27-Feb-09 29-May-09 31-Aug-09 30-Nov-09 26-Feb-10 28-May-10 31-Aug-10 31-Aug-10

b) Answer the following questions, in as few words as possible (9 points).

i.
Which company uses its assets most efficiently?

ii.

As an expert pet supply analyst, you believe that industry participants must generally
maintain a cash level of at least 5.0% to be safe. Despite HRZs low cash level, might it
have enough quick access to cash for you to consider it safe? Why or why not?

iii.

As of the most recently reported quarter, which company has the better Working Capital
ratio? Why do you say its better?

E2261 Exam 2

Page 4

c) Extra Credit (6 points).

i.
Using the as-provided data in HRZs income statements (data provided by Reuters), do you
have 1) no faith, 2) some faith, or 3) complete faith in HRZs as-computed SDItC ratios?

ii.

Describe in one sentence how you might improve HRZs SDItC ratios, and where you
would go to get the needed data.

E2261 Exam 2

Page 5

Problem 2 of 2: Silicon Miniature Products, Inc. (SMP).

SMP is a publically-traded company that makes sensors for smartphones (GPS, accelerometers,
etc).
SMP recently reported this financial statement:
SMP Balance Sheet
($MM UON)
Assets
Current Assets
Cash
Accounts Rec.
Inventory
Misc. Asset

As of 3/31/20X0

3,000
4,000
3,000
1,000

Liabilities
Current Liabilities
Accounts Payable
Loan Payable

5,000
1,000

Noncurrent Liabilities
Pension Obligations

6,000

Noncurrent Assets
PPE
Less Deprecation
Net PPE
Goodwill

20,000
-8,000
12,000
4,000

Total Liabilities

12,000

Owners' Equity

15,000

Total Assets

27,000

Total L+OE

27,000

SMP also reported these notes to accompany the balance sheet ($MM UON):
Its PPE was established with a useful life of 5 quarters and $10,000 salvage value; the company uses
linear depreciation.
Its Loan obligation pays interest of $20 per quarter, and the principal ($1,000) must be paid on
12/31/20X0.
Its inception-to-date PIC was 1,000 and its inception-to-date dividends totaled 4,000.

E2261 Exam 2

Page 6

During the second quarter of 20X0 (Q2-20X0, ending 6/30/20X0), the company experienced the following
($MM UON):
1. Purchased inventory costing 4,000 on credit (ie: was invoiced).
2. Sold 20,000 of goods to customers, issued invoices for this amount, and noted that its total
inventory cost for these sales was 5,000.
3. Received invoices for 2,000 for some administrative costs in the quarter.
4. Paid 2,000 cash for Q2-20X0 R&D expenses. (R&D is not part of SGA for SMP).
5. Estimated (noted) Q2 taxes at $200.
6. Dealt with (in accounting terms) its PPE, associated depreciation, etc.
7. Noted that interest had accrued on its Loan Payable.
8. Paid its Q2 taxes (IE: paid $200).
Find:
a) (4 points) Fix the incorrect journal entries below. Journal entries (or parts of journal entries) from just
two economic events are wrong. (Hint: search one economic event at a time, and stop after you have
found two events with incorrect entries).
Event

Dr/Cr

Amount

Account

dr
cr

4,000
4,000

Inventory
AP

dr
cr
dr
cr

20,000
20,000
5,000
5,000

dr
cr

2,000
2,000

SGA Expense
AP

dr
cr

2,000
2,000

R&D Expense
Cash

dr
cr

200
200

dr
cr
dr
dr
cr

2,000
2,000
10,000
10,000
20,000

dr
cr

20
20

dr
cr

200
200

AR
Revenue
COGS Expense
Inventory

Tax expense
Accrued tax liability
Deprec. Expense
Accumulated Depreciation
Equipment held for sale
Accumulated Depreciation
PPE
Interest Expense
Accrued Interest Liability
Accrued tax liability
Cash

E2261 Exam 2

Page 7

b) (12 points) Using the corrected journal entries above (and anything else you need), create a
Delta Balance Sheet (BS) for SMPs Q2-20X0. IE: Create a report showing the changes to
SMPs balance sheet in Q2-20X0. You may report Owners Equity via a single account (IE:
Net Income), or you may show as many individual Equity accounts as you like. You do not
have to show any accounts (A/L/or E) that experienced no change during the quarter.

BS
Assets
Cash
AR
Inventory
Equipment held for sale
PPE
Accumulated Depreciation
Total Assets
Liabilities
Accrued Liabilities
AP
Equity
NI
Total Liabilities + Equity

(2,200)
20,000
(1,000)
10,000
(20,000)
8,000
14,800

20
6,000

8,780
14,800

c) (18 points) Prepare a Q2-20X0 Sources and Uses Statement for SMP. Show Net Income (NI)
as a single number, instead of showing individual Revenue and Expense accounts.
Sources and Uses Statement

Q2-20X0

Sources
Cash
Inventory
PPE
Accrued Liabilities
AP
NI
Total Sources

2,200
1,000
20,000
20
6,000
8,780
38,000

Uses
AR
Accumulated Depreciation
Equipment held for Sale
Total Uses

20,000
8,000
10,000
38,000

E2261 Exam 2

Page 8

d) (19 points) Compute an indirect cash-flow statement for SMPs Q2-20X0. In the Operating
portion, be sure to show a sub-total for cash-associated income.
Indirect CFS

Q2-20X0

Cash flow from Operations

NI
+ Deprec
= Cash-Associated Income

8,780
2,000
10,780

- W Cap
= Cash from operations

-12,980
(2,200)

Cash from Investing (by inspection)

Cash from Financing (by inspection)
Total Cash Flow

Changes in Working Cap

W-Cap Assets
Cash
Accounts Rec.
Inventory
W Cap Liabilities
Accrued Liabilites
Accounts Payable
W Cap (Not Including Cash)

0
0
(2,200)

NA
20,000
-1,000

20
6,000
12,980

E2261 Exam 2

Page 9