# FIN 534 – Homework Set #1 Solution

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Use the following information for Questions 1 through 4:

Assume that you recently graduated and have just reported to work as an investment advisor at the one of the firms on Wall Street. You have been presented and asked to review the following Income Statement and Balance Sheets of one of the firm’s clients. Your boss has developed the following set of questions you must answer.

1. What is the free cash flow for 2014?
1. Suppose Congress changed the tax laws so that Berndt’s depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?
1. Calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2013?
1. Use the extended DuPont equation to provide a summary and overview of company’s financial condition as projected for 2014. What are the firm’s major strengths and weaknesses?
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## Description

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.

Use the following information for Questions 1 through 4:

Assume that you recently graduated and have just reported to work as an investment advisor at the one of the firms on Wall Street. You have been presented and asked to review the following Income Statement and Balance Sheets of one of the firm’s clients. Your boss has developed the following set of questions you must answer.

# Income Statements and Balance Sheet

 Balance Sheet 2012 2013 2014 Cash \$9,000 \$7,282 \$14,000 Short-term investments 48,600 20,000 71,632 Accounts receivable 351,200 632,160 878,000 Inventories 715,200 1,287,360 1,716,480 Total current assets \$1,124,000 \$1,946,802 \$2,680,112 Gross fixed assets 491,000 1,202,950 1,220,000 Less: Accumulated depreciation 146,200 263,160 383,160 Net fixed assets \$344,800 \$939,790 \$836,840 Total assets \$1,468,800 \$2,886,592 \$3,516,952 Liabilities and Equity Accounts payable \$145,600 \$324,000 \$359,800 Notes payable 200,000 720,000 300,000 Accruals 136,000 284,960 380,000 Total current liabilities \$481,600 \$1,328,960 \$1,039,800 Long-term debt 323,432 1,000,000 500,000 Common stock (100,000 shares) 460,000 460,000 1,680,936 Retained earnings 203,768 97,632 296,216 Total equity \$663,768 \$557,632 \$1,977,152 Total liabilities and equity \$1,468,800 \$2,886,592 \$3,516,952

 Income Statements 2012 2013 2014 Sales \$3,432,000 \$5,834,400 \$7,035,600 Cost of goods sold except depr. 2,864,000 4,980,000 5,800,000 Depreciation and amortization 18,900 116,960 120,000 Other expenses 340,000 720,000 612,960 Total operating costs \$3,222,900 \$5,816,960 \$6,532,960 EBIT \$209,100 \$17,440 \$502,640 Interest expense 62,500 176,000 80,000 EBT \$146,600 (\$158,560) \$422,640 Taxes (40%) 58,640 -63,424 169,056 Net income \$87,960 (\$95,136) \$253,584

 Other Data 2012 2013 2014 Stock price \$8.50 \$6.00 \$12.17 Shares outstanding 100,000 100,000 250,000 EPS \$0.88 (\$0.95) \$1.104 DPS \$0.22 0.11 0.22 Tax rate 40% 40% 40% Book value per share \$6.64 \$5.58 \$7.909 Lease payments \$40,000 \$40,000 \$40,000

 Ratio Analysis 2012 2013 Industry Average Current 2.3 1.5 2.7 Quick 0.8 0.5 1.0 Inventory turnover 4 4 6.1 Days sales outstanding 37.3 39.6 32.0 Fixed assets turnover 10 6.2 7.0 Total assets turnover 2.3 2 2.5 Debt ratio 35.60% 59.60% 32.0% Liabilities-to-assets ratio 54.80% 80.70% 50.0% TIE 3.3 0.1 6.2 EBITDA coverage 2.6 0.8 8.0 Profit margin 2.60% −1.6% 3.6% Basic earning power 14.20% 0.60% 17.8% ROA 6.00% −3.3% 9.0% ROE 13.30% −17.1% 17.9% Price/Earnings (P/E) 9.7 −6.3 16.2 Price/Cash flow 8 27.5 7.6 Market/Book 1.3 1.1 2.9

1. What is the free cash flow for 2014?

1. Suppose Congress changed the tax laws so that Berndt’s depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow?

1. Calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2013?

1. Use the extended DuPont equation to provide a summary and overview of company’s financial condition as projected for 2014. What are the firm’s major strengths and weaknesses?