PRESTON UNIVERSITY

ASSIGNMENT FOR DISTANCE LEARNING PROGRAM

EMBA/MBA-Program
FINANCIAL ANALYSIS
Quarter: Fall 2015 Deadline for Submission of Assignment: November 10, 2015

Attempt all questions given below. Your answers should not be copied, word-forword, from the textbook. You may use the terms, concepts, examples from the
textbook, but these must be written as your own, independent expression.
Q.1)

Cordillera Carson Company has the

2010 (in thousands):
BALANCE SHEET
Cash
$ 400
Accounts Receivable
1,300
Inventories
2,100
Current assets
$ 3,800
Net fixed assets
3,320
Total assets
$ 7,120

following balance sheet and income statement for

INCOME STATEMENT
Net Sales (all credit)
$ 12,680
Cost of goods sold
8,930
Gross profit
$ 3,750
Selling, general and
administration expenses
2,230
Interest expense
460

Accounts payable
$ 320
Profit before taxes
$ 1,060
Accruals
260
Taxes
390
Short-term loans
1,100
Profit after taxes
$ 670
Current liabilities
$ 1,680
Long-term debt
2,000
Net Worth
3,440
Notes:(i) current periods depreciation is $480.
Total liabilities & net worth
$ 7,120
(ii) ending inventory for 2009 was $1,800.
On the basis of above information, compute the following ratios:
a)
The current ratio
b) The acid-test ratio
c)
The average collection period
d) The inventory turnover ratio
e)
The debt-to-net worth ratio
f) Long-term debt to total-capitalisation ratio
g)
The gross profit margin
h) The net profit margin, and
i)
The return on equity.
Q.2)
Prepare a cash budget for the Ace Manufacturing Company, indicating receipts and
disbursements for May, June, and July. The firm wishes to maintain at all times a minimum cash
balance of $ 20,000. Determine whether or not borrowing will be necessary during the period,
and if it is, when and for how much. As of April 30, the firm had a balance of $ 20,000 in cash.
ACTUAL SALES
January
February
March
April

Rs
50,000
50,000
60,000
60,000

FORECASTED SALES
May
June
July
August

Rs
70,000
80,000
100,000
100,000

Accounts receivable: 50 percent of total sales are for cash. The remaining 50 percent
will be collected equally during the following 2 months (no bad-debt loss).

Cost of goods manufactured: 70 percent of sales. 90 percent of this cost is paid the
following month and 10% in the second month.

Selling, general, and administrative expenses: $ 10,000 per month plus 10 percent of
sales. All of these expenses are paid during the month of incurrence.

Interest payments: A semi-annual interest payment on $ 150,000 of bonds outstanding

(12 percent coupon) is paid during July. An annual $ 50,000 sinking-fund payment is
also made at that time.

Dividends: A $ 10,000 dividend payment will be declared and made in July.

Capital expenditures: $40,000 will be invested in plant and equipment in June.

Taxes: Income tax payments of $1,000 will be made in July.

Q. 3)

The following information is available for a Company:

BALANCE SHEET DECEMBER 31, 2010 (IN THOUSANDS)

Cash and marketable securities

Accounts receivable
Inventories
Current assets
Net fixed assets
Total assets

$ 500
?
?
?
?

Accounts payable
Bank loan
Accruals
Current liabilities
Long term debt
Common stock & retained earnings
? Total liabilities & equity

$ 400
?
200
?
2,650
3,750
?

INCOME STATEMENT FOR 2010 (IN THOUSANDS)

Credit sales
$ 8,000
Cost of goods sold
?
Gross profit
?
Selling & administrative expenses
?
Interest expense
400
Profit before taxes
?
Taxes (44% rate)
?
Profit after taxes
?
OTHER INFORMATION
Current ratio
3 to 1
Depreciation
$ 500
Net profit margin
7%
Total liabilities/shareholders' equity
1 to 1
Average collection period
45 days
Inventory turnover ratio
3 to 1
Assuming that sales and production are steady throughout a 360-day year, complete the
balance sheet and income statement for the Company.
Q.4) Thoma Pharmaceutical Company may buy an equipment costing $60,000. This
equipment expected to reduce clinical staff labour costs by $ 20,000 annually. The equipment
has a useful life of 5 years, but depreciation will be charged according to the following rates:
Year-1
33.33%
Year-2
44.45%
Year-3
14.81%
Year-4
7.41%
No salvage value is expected at the end. The corporate tax rate for Thoma is 38 percent and its
required rate of return is 15 percent. (If profits after taxes on the project are negative in any
year, the firm will offset the loss against other firm income for that year.) What are the relevant
Cash Flows?
Q.5) The City of San Jose must replace a number of its concrete mixer trucks with new trucks.
It has received two bids and has evaluated closely the performance characteristics of the various
trucks. The Rockbuilt truck, which costs $74,000, is top-of-the-line equipment. The truck has a
life of 8 years, assuming that the engine is rebuilt in the fifth year. Maintenance costs of $2,000
a year are expected in the first 4 years, followed by total maintenance and rebuilding costs of

$13,000 in the fifth year. During the last 3 years, maintenance costs are expected to be $4,000 a
year. At the end of 8 years the truck will have an estimated scrap value of $9,000.
A bid from Bulldog Trucks, Inc. is for $59,000 a truck. Maintenance costs for the truck will be
higher. In the first year they are expected to be $3,000, and this amount is expected to increase
by $1,500 a year through the eighth year. In year 4 the engine will need to be rebuilt, and this
will cost the company $15,000 in addition to maintenance costs in that year. At the end of 8
years the Bulldog truck will have an estimated scrap value of $5,000.
Required:
What are the relevant cash flows related to the truck of each bidder? What are the cash-flow
savings each year that can be obtained by going with the more expensive truck?
Q.6 a) The probability distribution of possible net present values for project X has an expected
value of Rs 20,000 and a standard deviation of Rs 10,000. Assuming a normal distribution,
calculate the probability that the net present value will be zero or less, that it will be greater than
Rs 30,000, and that it will be less than Rs 5,000.
Q.6 b) SJN Inc. is faced with several possible investment projects. For each, the total cash
outflow required will occur in the initial period. The cash outflow, expected net present values,
and standard deviations are given in the following table. All projects have been discounted at
the risk-free rate, and it is assumed that the distributions of their possible net present values are
normal.
Expected
Standard
Project
Cost
NPV
Deviation
A
100,000
10,000
20,000
B
50,000
10,000
30,000
C
200,000
25,000
10,000
D
10,000
5,000
10,000
E
500,000
75,000
75,000
What is the probability that each of the projects will have a net present value of zero or less
?
Q.7) The Manna Company was recently formed to manufacture a new product. It has the
following capital structure in market value terms:
Sources of Financing
13% Debentures of 2005
12% Preferred stock
Common stock
Total

Amount (Rs)
6,000,000
2,000,000
8,000,000
16,000,000

The company has a marginal tax rate of 40 percent. A study of publicly held companies in this
line of business suggests that the required return on equity is about 17 percent. Compute the
firm's present weighted average cost of capital.
Q.8) The R-Bar-M Ranch in Montana would like a new mechanised barn, which will require a
$600,000 initial cash outlay. The barn is expected to provide after tax annual cash savings of
$90,000 indefinitely (for practical purposes of computation, forever). The ranch, which is
incorporated and has a public market for its stock, has a weighted-average cost of capital of
14.5%. For this project, Mark O. Witz, the president, intends to provide $200,000 from a new
debt issue and another $200,000 from a new issue of common stock. The balance of the
financing would be provided internally by retaining earnings.
The present value of the after-tax floatation costs on the debt issue amount to 2% of the total
debt raised, whereas floatation costs on the new common stock issue come to 15% of the issue.

What is the net present value of the project after allowance for floatation costs? Should the
ranch invest in the new barn?
Q.9) The Power Corporation currently has 100,000 shares of common stock outstanding with
a market price of Rs 60 per share. It also has Rs 2 million in 6% bonds. The company is
considering a Rs 3 million expansion program that it can finance with (a) all common stock at
Rs 60 a share, (b) 8% bonds.

Required
a)
For an expected EBIT level of Rs 1 million after the expansion program, calculate the
earnings per share for each method of financing. Assume a corporate tax rate of 50 percent.
b)
What is the indifference point between alternatives? Construct an EBIT-EPS chart.
What is your interpretation of them?
Q.10)
Stinton Company is presently family owned and has no debt.
The company is considering going public by selling some of their stock in the
company. Investment bankers tell them the total market value of the
company is Rs10 million if no debt is employed. In addition to selling stock,
the family wishes to consider issuing debt that, for computational purposes,
would be perpetual. The debt then would be used to purchase stock, so the
size of the company would stay the same. Based on various valuation
studies, the net tax advantage of debt is estimated at 22 percent of the
amount borrowed when both corporate and personal taxes are taken into
account. The investment banker has estimated the following present values
(PV) for bankruptcy costs associated with various levels of debt:
DEBT
PV OF BANKRUPTCY COSTS
Rs 1,000,000
0
Rs 2,000,000
50,000
Rs 3,000,000
100,000
Rs 4,000,000
200,000
Rs 5,000,000
400,000
Rs 6,000,000
700,000
Rs 7,000,000
1,100,000
Rs 8,000,000
1,600,000
Required: Given this information, what amount of debt should the family
choose?