FIN 322 Study Guide - Final Guide: Accounts Payable, Secured Loan, Current Liability
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Total Current Asset Current Ratio Effect on Net Income
a | Cash is acquired through issuance of additional common stock | ____ | ____ | ____ | |||||
b | Merchandise is sold for cash | ____ | ____ | ____ | |||||
c | Federal income tax due for the previous year is paid | ____ | ____ | ____ | |||||
d | A fixed asset is sold for less than book value | ____ | ____ | ____ | |||||
e | A fixed asset is sold for more than book value | ____ | ____ | ____ | |||||
f | Merchandise is sold on credit | ____ | ____ | ____ | |||||
g | Payment is made to trade creditors for previous purchases | ____ | ____ | ____ | |||||
h | A cash dividend is declared and paid | ____ | ____ | ____ | |||||
I | Cash is obtained through short- term bank loans | ____ | ____ | ____ | |||||
J | Short- term notes receivable are sold at a discount | ____ | ____ | ____ | |||||
k | Marketable securities are sold below cost | ____ | ____ | ____ | |||||
L | Advances are made to employees | ____ | ____ | ____ | |||||
m | Current operating expenses are paid | ____ | ____ | ____ | |||||
n | Short- term promissory notes are issued to trade creditors in exchange for past due accounts payable | ____ | ____ | ____ | |||||
o | 10- year notes are issued to pay off accounts payable | ____ | ____ | ____ | |||||
p | A fully depreciated asset is retired | ____ | ____ | ____ |
4 DEBT RATIO- Bartley Barstools has an equity multiplier of 2.4, and its assets are financed with some combination of long-term debt and common equity. What is its equity ratio? What is its debt ratio?
6 MARKET/BOOK RATIO- Jaster Jets has $10 billion in total assets. Its balance sheet shows $1 billion in current liabilities, $3 billion in long-term debt and $6 billion in common equity. It has 800 million shares of common stock outstanding, and its stock price is $32 per share. What is Jaster
Springfield Bank is evaluating Creekâ Enterprises, which hasrequested a $ 3,720,000 loan, to assess theâ firm's financialleverage and financial risk. On the basis of the debt ratios forâCreek, along with the industry averages andâ Creek's recentfinancialâ statements, evaluate and recommend appropriate action onthe loan request.
Industry averages | |||
Debt ratio | 0.47 |
Times interest earned ratio | 7.29 |
âFixed-payment coverageratio 2.03 |
Creek Enterprises Incomeâ Statement:
Creek Enterprises Income Statement for the Year Ended December31, 2019
Sales revenue $30,045,000
Less: Cost of goods sold 20,995,000
Gross profits $9,050,000
Less: Operating expenses
Selling expense $2,968,000
General and administrative expenses 1,832,000
Lease expense 237,000
Depreciation expense 999,000
Total operating expense 6,036,000
Operating profits $3,014,000
Less: Interest expense 1,002,000
Net profits before taxes $2,012,000
Less: Taxes (rate=21%) 422,520
Net profits after taxes $1,589,480
Less: Preferred stock dividends 103,700
Earnings available for common stockholders $1,485,780
Creek Enterprises Balanceâ Sheet:
Creek Enterprises Balance Sheet December 31, 2019
Assets Liabilities and Stockholders' Equity
Current assets Current liabilities
Cash $952,000 Accountspayable $7,969,000
Marketable securities 3,018,000 Notes payable 7,991,000
Accounts receivable 11,962,000 Accruals 539,000
Inventories 7,543,000 Total current liabilities $16,499,000
Total current assets $23,475,000 Long-term debt (includes
financialleases)** $19,493,500
Gross fixed assets (at cost)* Stockholders' equity
Land and buildings $10,997,000 Preferred stock (24,400
shares, $4.25 dividend) $2,462,000
Machinery and equipment 20,516,000 Common stock (1.07 million
Furniture and fixtures 8,043,000 shares at $5.25 par) 5,617,500
Gross fixed assets $39,556,000 Paid-in capital in excess of
par value 3,968,000
Less: Accumulated depreciation 13,005,000 Retained earnings 1,986,000
Net fixed assets $26,551,000 Total stockholders' equity $14,033,500
Total liabilitiesand
Total assets 50,026,000 stockholders' equity $50,026,000
*The firm has a 4-year financial lease requiring annualbeginning-of-year payments of $237,000. Three years of the leasehave yet to run.
**Required annual principal payments are $807,000.
Capital Budgeting Group Presentation Project
Instructions: This project requires you to apply the concepts and methods learned in the course. This is a group project.
Assignment: You are interested in proposing a new venture (Project I) to the management of your company. Pertinent financial information is given below.
Balance Sheet Data
Cash | 3,000,000 | Accounts Payable and Accruals | 14,000,000 |
Accounts Receivable | 24,000,000 | Notes Payable | 41,000,000 |
Inventories | 45,000,000 | Long-Term Debt | 50,000,000 |
Preferred Stock | 20,000,000 | ||
Net Fixed Assets | 128,000,000 | Common Equity | 75,000,000 |
Total Assets | 200,000,000 | Total Liabilities & Ownersâ Equity | 200,000,000 |
Last yearâs sales were $210,000,000.
The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 9 percent semi-annual coupon, and are currently selling for $870.73.
You also have 100,000 shares of perpetual preferred stock outstanding, which pays a dividend of $7.80 per share. The current market price is $94.00.
The company has 10 million shares of common stock outstanding with a current price of $15.00 per share. The stock exhibits a constant growth rate of 8 percent. The last dividend (D0) was $.90.
Your firm does not use notes payable for long-term financing.
The firmâs target capital structure is 25% debt, 5% preferred stock, and 70% common equity. The firm does not plan to issue new common stock.
Your firmâs federal + state marginal tax rate is 38%.
The firm has the following investment opportunities currently available in addition to the venture that you are proposing:
Project | Cost | IRR |
A | 17,000,000 | 21% |
B | 21,000,000 | 19% |
C | 16,000,000 | 15% |
D | 28,000,000 | 11% |
E | 25,000,000 | 8% |
All projects, including Project I, are assumed to be of average risk. Your venture would consist of a new product introduction (You should label your venture as Project I, for âintroductionâ). You estimate that your product will have a six-year life span, and the equipment used to manufacture the project falls into the MACRS 5-year class. The resulting MACRS depreciation percentages for years 1 through 6, respectively, are 20%, 32%, 19%, 12%, 11%, and 6%. Your venture would require a capital investment of $17,000,000 in equipment, plus $1,000,000 in installation costs. The venture would also result in an increase in accounts receivable and inventories of $1,000,000 (value at the end of year 6). At the end of the six-year life span of the venture, you estimate that the equipment could be sold at a $5,000,000 salvage value. Your venture would incur fixed costs of $1,000,000 per year, while the variable costs of the venture would equal 30 percent of revenues. You are projecting that revenues generated by the project would equal $6,000,000 in year 1, $14,000,000 in year 2, $15,000,000 in year 3, $16,000,000 in year 4, $11,000,000 in year 5, and $8,000,000 in year 6.
The following list of steps provides a structure that you should use in analyzing your new venture. Note: Carry all final calculations to two decimal places.
1. Find the costs of the individual capital components (15 points):
a. long-term debt
b. preferred stock
c. retained earnings (use DCF approach)
2. Determine the weighted average cost of capital. (5 points)
3. Compute the Year 0 investment for Project I. (5 points)
4. Compute the annual operating cash flows for years 1-6 of the project. (20 points)
5. Compute the non-operating (terminal) cash flow at the end of year 6. (10 points)
6. Draw a timeline that summarizes all of the cash flows for your venture. (5 points)
7. Compute the IRR, payback, discounted payback, and NPV for Project I. (20 points)
8. Prepare a report for the firmâs CEO indicating which projects should be accepted and why. (45 points)
9. Conclude the project with your reflections on what you have learned from this course and how it has affected your view of your own job and career. (45 points)
10. A 15-20 minute presentation will report out on items 1-9. (65 pts.)
Please Note: Complete the capital budgeting group project according to the instructions contained in the syllabus, and upload all documentation and calculations into this assignment folder. There will be only one submission per group, and submitter will be chosen by the group. Please let the instructor know who will be submitting the group project to Moodle.