PRESTON UNIVERSITYASSIGNMENT FOR DISTANCE LEARNING PROGRAM

EMBA/MBA-ProgramFINANCIAL ANALYSIS

Quarter: Fall 2015 Deadline for Submission of Assignment: November 10, 2015

Attempt all questions given below. Your answers should not be copied, word-for-word, 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 following balance sheet and income statement for 2010 (in thousands):

BALANCE SHEET INCOME STATEMENTCash $ 400 Net Sales (all credit) $ 12,680Accounts Receivable 1,300 Cost of goods sold 8,930Inventories 2,100 Gross profit $ 3,750 Current assets $ 3,800 Selling, general andNet fixed assets 3,320 administration expenses 2,230 Total assets $ 7,120 Interest expense 460

Accounts payable $ 320 Profit before taxes $ 1,060Accruals 260 Taxes 390Short-term loans 1,100 Profit after taxes $ 670 Current liabilities $ 1,680Long-term debt 2,000Net Worth 3,440 Notes:(i) current period’s 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 ratioc) The average collection period d) The inventory turnover ratioe) The debt-to-net worth ratio f) Long-term debt to total-capitalisation ratiog) The gross profit margin h) The net profit margin, andi) 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 Rs FORECASTED SALES RsJanuary 50,000 May 70,000February 50,000 June 80,000March 60,000 July 100,000April 60,000 August 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 $ 500 Accounts payable $ 400Accounts receivable ? Bank loan ?Inventories ? Accruals 200Current assets ? Current liabilities ?Net fixed assets ? Long term debt 2,650

Common stock & retained earnings 3,750Total assets ? Total liabilities & equity ?

INCOME STATEMENT FOR 2010 (IN THOUSANDS)Credit sales $ 8,000Cost 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 1Depreciation $ 500Net profit margin 7 %Total liabilities/shareholders' equity 1 to 1Average collection period 45 daysInventory turnover ratio 3 to 1Assuming 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 StandardProject Cost NPV DeviationA 100,000 10,000 20,000B 50,000 10,000 30,000C 200,000 25,000 10,000D 10,000 5,000 10,000E 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 Amount (Rs)13% Debentures of 2005 6,000,00012% Preferred stock 2,000,000Common stock 8,000,000Total 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.

Requireda) 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 COSTSRs 1,000,000 0Rs 2,000,000 50,000Rs 3,000,000 100,000Rs 4,000,000 200,000Rs 5,000,000 400,000Rs 6,000,000 700,000Rs 7,000,000 1,100,000Rs 8,000,000 1,600,000

Required: Given this information, what amount of debt should the family choose?