FIN 260 Lecture Notes - Lecture 13: Current Liability, Retained Earnings, Shares Outstanding
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This question has been answered totally from 1-8 questions in previuos requested, the only part ( need to answer ) I need to help me with that to have completed the calculations, provide a brief, two- to four-sentence rationale for how these calculations can be used in analyzing the financial position of a company and why they are important. Your rationale should explain what information the ratio provides to the reader and how the reader may use that information.
I will repeat tyoing the question for make it clearing .
Analysis of Financial Statements
Balance Sheets
EXHIBITS: INPUT DATA (XYZ)
Table 1 Balance Sheets
Assets | 2013E | 2012 | 2011 |
cash | $ 85,632 | $7,282 | $57,600 |
Acount Receivable | 878,000 | 632,160 | 351,200 |
Inventories | 1,716,480 | 1,287,360 | 715,200 |
Total current assets | $2,680,112 | $1,926,802 | $ 1,124,000 |
Gross fixed assets | 1,197,160 | 1,202,950 | 491,000 |
Less: accumulated depreciation | 380,120 | 263,160 | 146,200 |
Net fixed assets | $ 817,040 | $ 939,790 | $ 344,800 |
Total assets | $3,497,152 | $2,866,592 | $ 1,468,800 |
Liabilities and equity | |||
Accounts payable | $ 436,800 | $ 524,160 | $ 145,600 |
Notes payable | 300,000 | 636,808 | 200,000 |
Accruals | 408,000 | 489,600 | 136,000 |
Total current liabilities | $1,144,800 | $1,650,568 | $ 481,600 |
Long term bonds | 400,000 | 723,432 | 323,432 |
Total debt | $1,544,800 | $2,374,000 | $ 805,032 |
Common stock (100,000 shares) | 1,721,176 | 460,000 | 460,000 |
Retained earnings | 231,176 | 32,592 | 203,768 |
Total common equity | $1,952,352 | $ 492,592 | $ 663,768 |
Total liabilities and equity | $3,497,152 | $2,866,592 | $ 1,468,800 |
Analysis of Financial Statements
Income Statements
Table 2
Income Statements
2013E | 2012 | 2011 | |
Sales | $7,035,600 | $6,034,000 | $ 3,432,000 |
Cost of goods sold | 5,875,992 | 5,528,000 | 2,864,000 |
Other expenses | 550,000 | 519,988 | 358,672 |
Total operating exp. excl. depreciation and amortization | $6,425,992 | $6,047,988 | $ 3,222,672 |
EBITDA | $ 609,608 | $(13,988) | $ 209,328 |
Depreciation and amortization | 116,960 | 116,960 | 18,900 |
Earnings before interest and taxes (EBIT) | $492,648 | $(130,948) | $190,428 |
Interest expense | 70,008 | 136,012 | 43,828 |
Earnings before taxes (EBT) | $ 422,640 | $ (266,960) | $ 146,600 |
Taxes (40%) | 169,056 | (106,784) | 58,640 |
Net Income | $ 253,584 | $ (160,176) | $ 87,960 |
Earnings per share (EPS) | $ 1.014 | $ (1.602) | $ 0.880 |
Dividends per share (DPS) | $ 0.220 | $ 0.110 | $ 0.220 |
Book value per share (BVPS) | $ 7.809 | $ 4.926 | $ 6.638 |
Stock price | $ 12.17 | $ 2.25 | $ 8.50 |
Shares outstanding | 250,000 | 100,000 | 100,000 |
Tax rate | 40.00% | 40.00% | 40.00% |
Lease payments | $ 40,000 | $ 40,000 | $ 40,000 |
Sinking fund payments | 0 | 0 | 0 |
Analysis of Financial Statements
Ratio Analysis
2013E | 2012 | 2011 | Industry Average | |
Current ratio | * | 1.2 | 2.3 | 2.7 |
Quick ratio | * | 0.4 | 0.8 | 1.0 |
Inventory turnover | * | 4.7 | 4.8 | 6.1 |
Days sales outstanding (DSO) | * | 38.2 | 37.4 | 32.0 |
Fixed assets turnover | * | 6.4 | 10.0 | 7.0 |
Total assets turnover | * | 2.1 | 2.3 | 2.6 |
Debt-to- assets ratio | * | 82.8% | 54.8% | 50.0% |
Times interest earned (TIE) | * | -1.0 | 4.3 | 6.2 |
Operating margin | * | -2.2% | 5.6% | 7.3% |
Profit margin | * | -2.7% | 2.6% | 3.5% |
Basic earning power (BEP) | * | -4.6% | 13.0% | 19.1% |
Return on assets(ROA) | * | -5.6% | 6.0% | 9.1% |
Return on equity (ROE) | * | -32.5% | 13.3% | 18.2% |
Price/earnings (P/E) | * | -1.4 | 9.7 | 14.2 |
Market/book (M/B) | * | 0.5 | 1.3 | 2.4 |
Book value per share (BVPS) | * | $4.93 | $6.64 | n.a. |
Requiremnts:
1. Calculate XYZâs 2013 current and quick ratios based on the projected balance sheet and income statement data.
2. Calculate the 2013 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover.
3. Calculate the 2013 debt-to-assets and times-interest-earned ratios.
4. Calculate the 2013 operating margin, profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE).
5. Calculate the 2013 price/earnings ratio, and market/book ratio.
6. Use the extended DuPont equation to provide a summary and overview of XYZâs financial condition as projected for 2013.
7. Use the following simplified 2013 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change âripple throughâ the financial statements (shown in thousands below) and influence the stock price?
Accounts receivable $878 Debt $1,545
Other current assets 1,802
Net fixed assets 817 Equity 1,952
Total assets $3,497 Liabilities plus equity $3,497
First, we need to calculate XYZâs daily sales.
Daily sales = Sales / 365
Daily sales = $7,035,600 / 365
Daily sales = $19,275.62
Target A/R = Daily sales à Target DSO
Target A/R = $19,276 Ã 32
Target A/R = $616,820
Freed-up cash = old A/R â new A/R
Freed-up cash = $878,000 â $616,820
Freed-up cash = $261,180
Note : All questions from 1-8 has been answered, but the only part I need help with to write the analysis or to provide a brief, two- to four-sentence rationale for how these calculations can be used in analyzing the financial position of a company and why they are important.
Making Long Term FM Decisions - Integrative Case
Introduction: As a special analytical group set up by ACME Iron by the firmâs Controller, you have been tasked to respond to the following issues raised in a meeting with the CFO.
You must look over several prospective financial strategies to aid in the successful growth of ACME Iron: Capital investment analysis; CAPM â Capital Asset Pricing Model determination for the company; WACC â Weighted Average Cost of Capital computations; EVA â Economic Value Analysis; MVA â Market Value Added; Capital structure of the company; Dividend policy; Stock repurchase and option pricing strategy; Bankruptcy risk analysis; Decision Tree Creation; Real option analysis of projects
The CFO wants to test you out on a simple project in the first task before you get into preparing items for his board presentation in subsequent tasks and projects. He wants to see how well you perform tasks as well as how accurate and thoughtful you are in your work. Details are important to him as well as good organization/presentation and communication.
Financial Statements for use on Tasks
ACME Iron | Balance Sheet | ||
Assets | |||
Current assets: | 2014 | 2015 | change |
Cash | 500,000 | 600,000 | 100,000 |
Investments | 1,000,000 | 1,025,000 | 25,000 |
Inventories | 110,000,000 | 117,000,000 | 7,000,000 |
Accounts receivable | 11,750,000 | 12,500,000 | 750,000 |
Pre-paid expenses | 2,500,000 | 2,600,000 | 100,000 |
Other | 0 | 0 | - |
Total current assets | 125,750,000 | 133,725,000 | 7,975,000 |
Fixed assets: | 2014 | 2015 | change |
Property and equipment | 165,000,000 | 175,000,000 | 10,000,000 |
Leasehold improvements | 0 | 0 | - |
Equity and other investments | 55,000,000 | 65,000,000 | 10,000,000 |
Less accumulated depreciation | 15,000,000 | 15,500,000 | 500,000 |
Total fixed assets | 235,000,000 | 255,500,000 | 20,500,000 |
Other assets: | 2014 | 2015 | change |
Goodwill | 75,000,000 | 70,000,000 | (5,000,000) |
Total other assets | 75,000,000 | 70,000,000 | (5,000,000) |
Total assets | 435,750,000 | 459,225,000 | 23,475,000 |
Liabilities and owner's equity | |||
Current liabilities: | 2014 | 2015 | change |
Accounts payable | 40,500,000 | 42,400,000 | 1,900,000 |
Accrued wages | 85,000,000 | 90,500,000 | 5,500,000 |
Accrued compensation | 10,000,000 | 10,855,000 | 855,000 |
Income taxes payable | 4,024,000 | 4,697,000 | 673,000 |
current portion of LT debt | 5,500,000 | 10,350,000 | 4,850,000 |
Other | 0 | 0 | - |
Total current liabilities | 145,024,000 | 158,802,000 | 13,778,000 |
Long-term liabilities: | 2014 | 2015 | change |
Long term debt | 125,000,000 | 130,000,000 | 5,000,000 |
Total long-term liabilities | 125,000,000 | 130,000,000 | 5,000,000 |
Owner's equity: | 2014 | 2015 | change |
Common stock | 122,000,000 | 122,000,000 | - |
Preferred stock | 16,725,000 | 16,725,000 | - |
Accumulated retained earnings | 27,001,000 | 31,698,000 | 4,697,000 |
Total owner's equity | 165,726,000 | 170,423,000 | 4,697,000 |
Total liabilities and owner's equity | 435,750,000 | 459,225,000 | 23,475,000 |
Income Statement
ACME Iron
December 2015
Financial Statements in '000s of U.S. Dollars
REVENUE | ||
Gross Sales | 250,000 | |
Less: Sales Returns & Allowances | 2,500 | |
Net Sales | 247,500 | |
COST OF GOODS SOLD | ||
Beginning Inventory | 7,500 | |
Add: Purchases | 4,500 | |
Freight-in | 0 | |
Direct Labor | 75,000 | |
Indirect Expenses | 15,000 | |
Inventory Available | 102,000 | |
Less: Ending Inventory | ||
Cost of Goods Sold | 102,000 | |
Gross Profit (Loss) | 145,500 | |
EXPENSES | ||
Advertising | 7,500 | |
Amortization | 0 | |
Bad Debts | 5,000 | |
Depreciation | 500 | |
Dues and Subscriptions | 0 | |
Employee Benefit Programs | 18,750 | |
Insurance | 2,500 | |
Interest | 10,350 | |
Legal & Professional Fees | 100 | |
Licenses & Fees | 0 | |
Miscellaneous | 10 | |
Office Expenses | 100 | |
Payroll Taxes | 5,625 | |
Postage | 3 | |
Rent | 0 | |
Repairs & Maintenance | 5,000 | |
Supplies | 2,000 | |
Telephone | 120 | |
Travel | 1,750 | |
Utilities | 50,000 | |
Vehicle Expenses | 450 | |
Wages | 25,000 | |
Total Expenses | 134,758 | |
Net Operating Income | 10,742 | |
OTHER INCOME | ||
Gain (Loss) on Sale of Assets | 0 | |
Interest Income | 1,000 | |
Total Other Income | 1,000 | |
TAXES | 4,697 | |
Net Income (Loss) | 7,045 |
TASK 2
In this task we are examining the current capital structure of ACME Iron and determining the WACC of the company. Assume that ACMEâs tax rate is 40%.
To compute the WACC you must first find the after-tax cost of debt, the cost of equity and the proportions of debt and equity in the firm. You can assume that the cost of debt before tax is 8% for the firm. Please clearly show how you derive each of these values:
After-tax cost of debt =
Cost of equity =
Proportions of debt and equity in the firm =
How do we compute the WACC in this circumstance? Why do we need to be concerned with the WACC?
Any insights into the capital structure of ACME Iron?
The weighted average cost of capital is the weighted average of the cost of equity and the after-tax cost of debt. Another way of looking at this is computing the effect of the capital structure on expected returns by investors.
WACC= S/B+S x Rs + B/B+S x RB x (1 â tc )
Where
S = value of equity
B = value of debt
Rs = cost of equity
After tax cost of debt: RB x (1 â tc )
Helpful Hint: One thing to bring up here is WACC is needed to determine risk on several levels. To determine risk we need to remember the following items:
1. Risk is deviation from expectations.
2. We need to set expectations for our investments in relation to risk and return. Higher risk = higher return.
3. Capital is obtained from the marketplace in two forms; equity and debt. This is the capital structure of a corporation and impacts the profits of a company depending on how this is managed.
4. We use our cost of capital to discount any cash flows from new investments (NPV and IRR analysis).
5. If cost of capital rises then our risk rises and the projects we undertake to increase sales and return to our investors is reduced.
6. If debt rises then our obligation to make payments on interest increases and profits can decrease if sales do not increase rapidly enough.
7. If risk increases our beta will increase to show the increase in risk. This will increase our required rate of return to stockholders (CAPM) and thus increase our required rate of return we must use in discounting future cash flows.
TASK 3
Acme is planning construction of a new loading ramp for its single iron mill. The initial cost of the investment is $1 million. Efficiencies from the new ramp are expected to reduce costs by $100,000 for the life of the plant which is currently estimated at another 30 years.
When will this project break-even on a simple cash basis and a discounted cash basis.
What is the NPV of the project if Acme has an after tax cost of debt of 8% and a cost equity of 12% (they are currently funded equally by debt and equity)?
Helpful Hint: The first step in conducting an NPV analysis is to include all the relevant cash flows. This includes savings from taxes and any expenses directly related to the venture. We reject any project with a negative NPV.