FIN 300 Study Guide - Midterm Guide: Net Present Value, Tax Shield, 1Time Airline

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1 May 2017

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Book value represents sunk cost of asset; market value represents opportunity cost of asset. Capital cost allowances depreciation for tax purposes in canada; allowable reduction that reduces taxes. Net working capital (nwc) = current assets - current liabilities. Operating cash flow = ebit + depreciation - taxes. Capital spending/net investment in fixed assets = end. Cffa = cash flow from assets/cash flow to investors/free cash. Flow = operating cash flow - net capital spending - changes in net. Cffa = interest paid +net income - change in lt debt - change in total equity. Cffa = interest paid - net cash from financing. Cash flow to creditors/bondholders = interest paid - net new. Cash flow to shareholders = dividends paid - net new equity (cid:894)nne= i(cid:374) (cid:272)o(cid:373)(cid:373)o(cid:374) shares(cid:895) Common-size statements: express statement of financial position (bs) as a % of total assets; express statement of comprehensive. Common-base year financial statements: all items relative to base year amount.

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Given the financial statements for Jones Corporation and SmithCorporation:

JONES CORPORATION
Current Assets					Liabilities
Cash			$	22,000	Accounts payable	$	127,000
Accounts receivable				81,100	Bonds payable (long term)		85,600
Inventory				50,000
Long-Term Assets					Stockholders' Equity
Gross fixed assets	$	526,000			Common stock	$	150,000
Less: Accumulated depreciation		150,700			Paid-in capital		70,000
Net fixed assets*				375,300	Retained earnings		95,800
Total assets			$	528,400	Total liabilities and equity	$	528,400


Sales (on credit)	$	1,326,000
Cost of goods sold		790,000
Gross profit	$	536,000
Selling and administrative expense^â		304,000
Depreciation expense		59,800
Operating profit	$	172,200
Interest expense		14,500
Earnings before taxes	$	157,700
Tax expense		99,600
Net income	$	58,100

*Use net fixed assets in computing fixed asset turnover.
â Includes $13,500 in lease payments.

SMITH CORPORATION
Current Assets					Liabilities
Cash			$	38,400	Accounts payable	$	83,300
Marketable securities				12,700	Bonds payable (long term)		217,000
Accounts receivable				74,300
Inventory				83,700
Long-Term Assets					Stockholders' Equity
Gross fixed assets	$	504,000			Common stock	$	75,000
Less: Accumulated depreciation		255,800			Paid-in capital		30,000
Net fixed assets*				248,200	Retained earnings		52,000
Total assets			$	457,300	Total liabilities and equity	$	457,300

*Use net fixed assets in computing fixed asset turnover.

SMITH CORPORATION
Sales (on credit)	$	1,100,000
Cost of goods sold		640,000
Gross profit	$	460,000
Selling and administrative expense^â		272,000
Depreciation expense		56,500
Operating profit	$	131,500
Interest expense		24,300
Earnings before taxes	$	107,200
Tax expense		56,500
Net income	$	50,700

^âIncludes $13,500 in lease payments.

a. Compute the following ratios. (Use a360-day year. Do not round intermediate calculations. Input yourprofit margin, return on assets, return on equity, and debt tototal assets answers as a percent rounded to 2 decimal places.Round all other answers to 2 decimal places.)

	Jones Corp.		Smith Corp.
Profit margin		%		%
Return on assets (investments)		%		%
Return on equity		%		%
Receivable turnover		times		times
Average collection period		days		days
Inventory turnover		times		times
Fixed asset turnover		times		times
Total asset turnover		times		times
Current ratio		times		times
Quick ratio		times		times
Debt to total assets		%		%
Times interest earned		times		times
Fixed charge coverage		times		times

ceruleanpug223

6. The Santa Fe Mutual Automobile Insurance Company has the following financial statements. 2016 2015

Net Premiums Written 48,612 47,398

-------------------------------------------------------------------------------

Income Statement ($ mils.)

Premiums Earned 37,094 36,297

Loss Expenses 25,379 23,771

Operating Expenses 15,921 15,484

Total Policy Expenses 41,300 39,255

Net Underwriting Gain/Loss (4,206) (2,958)

Net Investment Income 5,340 3,512

Operating Income before taxes 1134 554

Dividends to Policyholders 0 0

Income Tax Recovered (Plus) 1,003 492

Net Income $2,137 $1,046

Ave Investment Yield 6.29% 3.83%

Balance Sheet (mils.) 2016 2015

Assets

Cash & ST Investments 1,345 1,397

Bonds 41,766 43,834

Common & Preferred Stock 43,120 47,863

Equity in Insurance Subsidiaries 34,842 31,529

Other Assets 17,422 14,175

Total Assets $138,495 $138,798

Liabilities

Claims & Claim Expenses 28,566 28,534

Unearned Premiums 11,518 11,101

Other Liabilities 15,780 19,568

Total Liabilities 55,864 59,203

Equity Accounts 82,631 79,595

Total Liabs. & Equity 138,495 138,798

6a. Calculate and evaluate the Net Underwriting Margin (NUM); Loss Ratio

Expense Ratio; Combined Ratio; and Overall Profitability Ratio for each year

using the information in the income statement above. Also calculate the firmâs OPM, OROA, ROA, ROE, and equity multiplier (EM).

Recall NUM = (Premiums Earned â Total Policy Expenses) / Total Assets

NUM 2016 __________ NUM 2015 ______________

Recall: expense ratio = (operating expenses/net premiums written) and loss ratio = (loss expenses/premium earned), and combined ratio = (loss ratio + expense ratio), and overall profitability ratio = {[100% - Combined Ratio%] + (Investment Yield% } for the firm each year) Also calculate asset turnover (revenues/total assets), net profit margin [net income/revenues], OROA (operating income/total assets), return on assets (net income/total assets) and return on equity (net income/equity accounts) & equity multiplier (total assets / equity).

2016 2015

Expense ratio

Loss ratio

Combined ratio

Average Investment Yield

Overall Profitability

Dupont Analysis:

Asset Turnover

Net Profit Margin

OROA

ROA

ROE

Equity Multiplier (EM)

6b. Analyze the trends in all of the ratios, and the other financial information provided. What do they reveal for trends over time including trends as well on the firmâs balance sheet? What areas of strength & weakness are revealed? What advice for improvement would you give?

Part 5: Module 7: Mutual Funds & Security Firms (see Module 7 lecture notes, pp. 10 to 12)

7. a. Briefly discuss different types of mutual funds that mutual fund companies offer including: (1) index funds, (2) actively managed diversified funds; (3) mutual funds with a diversified allocation; (4) sector investing; (5) style investing including different types of style investing (value, growth, blend, aggressive growth); (6) hybrid asset allocation or balanced funds; (7) target date funds; (8) Socially Responsible Mutual funds (often called impact funds).; and (9) Multi-alternative Strategy Funds and Commodity Funds.

b. Why are index funds cheaper than actively managed funds?

pinkkoala157

Millions of USD (except for per share items)	2015	2014
Sales	$ 114,826	$ 114,960
Cost of Goods Sold	86,483	86,714
Gross Profit	28,343	28,246
Selling/General/Admin. Expenses, Total	22,663	22,053
Operating Income	5,680	6,193
Interrest and Taxes	2,336	2,600
Net Income	$ 3,344	$ 3,593


Market Price/Share	$ 65.68	$ 84.26
Shares Outstanding	3,210	3,210

Millions of USD (except for per share items)	As of 2015	As of 2014
Cash & Equivalents	$ 7,759	$ 6,012
Total Receivables, Net	5,813	6,096
Total Inventory	46,310	45,315
Prepaid Expenses	2,251	1,811
Total Current Assets	62,133	59,687
Property/Plant/Equipment, Total - Gross	138,614	142,830
Total Assets	$ 200,747	$ 202,517

Accounts Payable	37,224	36,347
Accrued Expenses	18,685	17,807
Notes Payable/Short Term Debt	799	3,517
Current Port. of LT Debt/Capital Leases	6,468	3,566
Other Current liabilities, Total	6,448	6,684
Total Current Liabilities	69,624	67,921
Total Long Term Debt	42,964	48,233
Deferred Income Tax	8,169	8,164
Minority Interest	3,416	5,111
Total Liabilities	124,173	129,429
Total Equity	76,574	73,088
Total Liabilities & Shareholders' Equity	200,747	202,517
	-	-
Total # Common Shares Outstanding	$ 3,227	$ 3,230

Category	Two Ratios from Each Category	Ratio	Formula	2015	2014
Liquidity	Current and Quick Ratio	Current	Current Assests/Current Liabilites
		Quick	(CA - Inventories)/Current Liabilites
Asset Management	Total Assets Turnover, Total Fixed Asset Turnover	Total Assets Turnover,	Sales/Total Assets
		Total Fixed Asset Turnover	Sales/Total Fixed Assets
Debt Management	Debt to Assets and Debt to Equity	Debt to Assets	Total Liabilities / Total Assests
		Debt to Equity	Total Liabilities / Common Stockholders Equity
Profitability Ratio	Return on Assets and Return on Equity	Return on Assets	Net Income/Total Assets
		Return on Equity	Net Income/Common Equity
Market Ratio	Earnings Per Share and Price to Earnings Ratio	Earnings Per Share	Net Income / Common Shares Outstanding
		Price to Earnings Ratio	Market Price of Shares/Earning Per Share

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FIN 300 Study Guide - Midterm Guide: Net Present Value, Tax Shield, 1Time Airline

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