Business 2019 Finance I Lakehead University

Transcription

1 Business 2019 Finance I Lakehead University Special Exam Part I: Short Answer Questions (20 points) 1. (10 points) Consider the cash flow statements in Table 1. Calculate, for each firm, operating cash flow, additions to net working capital, capital spending and cash flow from assets. Each firm s interest expense is 50. Firm A Firm B Net income Add: Depreciation Deferred taxes Net cash from operations Changes in non-cash working capital (200) (200) Cash flow from operating activities Cash flow from investing activities (500) (500) Cash flow from financing activities 100 (100) Net change in cash Cash, beginning of the year Cash, end of the year Table 1: Cash flow statements for Question (10 points) A firm purchases an asset for $50,000 and resells it five years later for $60,000. If the undepreciated capital cost of the asset is $30,000 at the time of the sale, then, according to CCA rules, the $30,000 profit on the sale will be taxed as capital gain and the remaining $30,000 will be taxed as income if the asset class is terminated. 1

2 Part II: Problems (80 points) 1. Financial Statements and Cash Flow This problem is based on Table 2 and the following information: Eastjet s cash flow from assets was -$100 in 2002, the interest rate on its long-term debt is 12%, the tax rate is 35% and Eastjet always pays 50% of its net income as dividends. (a) (10 points) Complete Eastjet s balance sheets and income statement. (b) (5 points) Compute Eastjet s operating cash flow, cash flow to bondholders and cash flow to shareholders. (c) (5 points) Using the industry ratios in Table 3, discuss Eastjet s long-term solvency and profitability in Financial Planning Using the financial statements for Dalton s Enterprises in Table 4, answer the following questions: (a) (10 points) Construct Dalton s pro forma financial statements using the following assumptions and guidelines: Due to the volatility of its sales, Dalton cannot rely on this year s sales only to predict future sales. follows: More specifically, expected sales are calculated as S t = 1.25 [ 1 5 ] 5 S t i. That is, sales are expected to be 25% greater than the average sales over the last five years. Sales in 1998, 1999, 2000 and 2001 were 1,500, 1,200, 1,600 and 1,400, respectively. COGS, on the other hand, is given by the equation where S t denotes sales at time t. i=1 COGS t = S t, All current assets and liabilities are constant fractions of sales. Depreciation is a constant fraction of net fixed assets. Net fixed assets are a constant fraction of total assets. The capital intensity ratio is not expected to change. 2

3 The interest rate on long-term debt is not expected to change. The tax rate and the dividend payout ratio are not expected to change. The long-term debt/equity ratio must remain constant. Carefully explain each step of your answer. (b) (10 points) Suppose the firm was operating at 90% capacity in 2002 and it wants to invest as little as possible in net fixed assets. That is, if net fixed assets increase, it is because the firm operates at full capacity in Using the assumptions and guidelines in (a) except for the capital intensity ratio, construct the firm s pro forma financial statements in this case. (c) (10 points) Suppose the firm was operating at 90% capacity in 2002 and it wants to operate at 85% capacity in Using the assumptions and guidelines in (a) except for the capital intensity ratio, construct the firm s pro forma financial statements in this case. (d) (10 points) Suppose sales in 2003 happen to be 1,600 instead of the predicted level. Construct Dalton s 2003 financial statements in this case, assuming that the firm s net fixed assets and long-term debt have been determined at the beginning of the year, i.e. using the assumptions in (a). You can also use the assumptions in (a) for all current assets and liabilities. Find at least five (5) of the company s ratios that are affected by this forecasting error. How do the actual ratios compare with their expected values? 3. Discounted Cash Flow Valuation Bill Lesuk plans to retire in exactly 30 years. His retirement goal is to create a fund that will pay $75,000 per year for 30 years. During his retirement years, Bill s money will be in an account expected to return, on average, 6% annually. (a) (5 points) How large must Bill s fund be when he retires in order to make the desired payments throughout his retirement? (b) (5 points) Suppose Bill makes equal contributions to his retirement fund at the end of each year until the day he retires. What must each contribution be for Bill to meet his retirement goal if the annual return on his fund is 8%? (c) (5 points) Suppose Bill contributes to his retirement fund at the end of each year until the day he retires and each contribution is always 10% greater than the 3

4 previous one. What must the first contribution be for Bill to meet his retirement goal if the annual return on his fund is 8%? (d) (5 points) Suppose Bill makes growing contributions to his fund as in (c) and that his employer always matches Bill s contribution. That is, if Bill deposits $100 dollars in his fund in a given year, then his employer also deposits $100 into the fund. In this case, What must Bill s first contribution be to meet his retirement goal if the annual return on his fund is 8%? 4

5 Eastjet, Inc and 2001 Balance Sheets Assets Current assets 5,000 4,000 PP&E Accumulated depreciation (1,685) (1,425) Net fixed assets Total assets Liabilities and Owners Equity Current liabilities 4,000 3,500 Long-term debt 8,000 8,000 Common stock 2,500 Accum. retained earnings 3,000 Total liabilities and equity Eastjet, Inc Income Statement Sales 7,500 Cost of goods sold 3,800 Depreciation Other expenses 500 EBIT Interest Taxable income Taxes (30%) Net income Table 2: Balance sheets and income statement for Problem 1. Eastjet s Industry Ratios in 2002 Current ratio 1.80 Fixed asset turnover 0.86 Total asset turnover 0.62 Debt-equity ratio 1.21 Total Debt ratio 0.50 Times interest earned 4.66 Gross profit margin (%) 42.3 Net profit margin (%) 18.2 Return on assets (%) 10.6 Return on equity (%) 19.7 Table 3: Industry ratios for Problem 1. 5

6 Dalton Enterprises Balance Sheet as of December 31, 2002 Assets Liabilities and Owners Equity Cash 200 Accounts payable 400 Accounts receivable 400 Taxes payable 100 Inventory 400 Total current liabilities 500 Total current assets 1,000 Long-term debt 1,000 Net fixed assets 2,000 Common stock 500 Accum. retained earnings 1,000 Total assets 3,000 Total liabilities and equity 3,000 Dalton Enterprises 2002 Income Statement Sales 1,500 COGS 750 Depreciation 500 EBIT 250 Interest 100 Taxable income 150 Taxes 60 Net income 90 Dividends 30 Earnings retained 60 Table 4: Financial statements for Problem 2. 6