I-Asgn10_从业资格考试_资格考试认证_教育专区.doc

Corporate Finance FundamentalsAssignment 10 1 LESSON 10 Assignment Question 1 60 marks Computer question In early 2007 Jane Lender an officer of the Commerce Bank was evaluating the account of Johnson Lumber Co which uses a line of credit to manage its seasonal requirements This year the company needed more than its usual credit limit and unlike previous years the account was not paid off Jane has been asked by her manager to study the account and prepare a report Jane studied the file and found that the company was managed by professional managers with backgrounds in marketing and production She also identified that the firm s profits had been growing steadily though not spectacularly considering the inflation rate Jane is aware that her manager will require financial analysis to back up her report Also considering the executive attention span she decided to keep her report brief The Income Statement and Balance Sheet of Johnson Lumber Co is given below JOHNSON LUMBER CO Income Statement for years ended October 31 2004 2006 thousands of dollars 200420052006 Net sales 9 000 10 500 13 500 Cost of goods sold Material and labour7 7259 00011 625 Overhead180255285 Earnings before interest and tax1 0951 2451 590 Interest expenses454590 Earnings after taxes1 0501 2001 500 Taxes at 50 525600750 Earnings after tax525600750 Dividends390450450 Retained earnings 135 150 300 The net sales is arrived after a quantity discount of 90 105 and 160 respectively in 2004 2005 and 2006 Overhead includes the following depreciation Plant120135165 Equipment526075 Corporate Finance FundamentalsAssignment 10 2 JOHNSON LUMBER CO Balance Sheet as at October 31 2004 2006 200420052006 ASSETS Cash 271 241 121 Marketable securities315150 Accounts receivable1 4101 5151 785 Inventories1 5151 7251 965 Total current assets3 5113 4963 871 Loans to dealers150150225 Plant net of depreciation 1 6501 8002 700 Equipment net of depreciation 1 3501 4251 515 Total fixed assets3 1503 3754 440 Total assets 6 661 6 871 8 311 LIABILITIES AND EQUITY Accounts payable 1 305 1 515 1 680 Notes payables15000 Bank loan00975 Total current liabilities1 4551 5152 655 Ordinary shares1 2061 2061 206 Retained earnings4 0004 1504 450 Total Liabilities and equity 6 661 6 871 8 311 There are two sections to this question Section 1 pertains to the financial analysis as specified in the text Section 2 is an additional analysis specified in this assignment Required Section 1 10 marks Prepare an analysis of the financial performance of the three years 2004 2006 and comment on Johnson s current financial situation Your analysis should be based on the cash flow statement CFS for the period from October 31 2004 to October 31 2006 and basic ratios for the three years of data as supplied below This section requires your skills with financial ratios and working capital management Corporate Finance FundamentalsAssignment 10 3 JOHNSON LUMBER Cash Flow Statement two years ended October 31 2006 000s Net income from operations 1 350 OPERATING ACTIVITIES Adjustments to convert to cash basis Accounts receivable increase 375 Marketable securities decrease315 Inventories increase 450 Accounts payable increase375 135 Depreciation435 300 1 650 FINANCING ACTIVITIES Notes payable decrease 150 Bank loan increase975 Dividends 900 75 INVESTING ACTIVITIES Loans to dealers increase 75 Plant increase 1 350 Equipment increase 300 1 725 Decrease in cash 150 Cash and cash equivalents at October 31 2004271 Cash and cash equivalents at October 31 2006 121 RATIO ANALYSIS 200420052006 Liquidity ratios Current2 412 311 46 Quick1 371 170 72 Inventory turnover5 105 225 92 Accounts receivable turnover6 386 937 56 Profitability ratios Times interest earned24 3327 6717 67 Asset turnover1 351 531 62 Net operating margin0 120 120 12 Earnings power ratio0 160 180 19 Corporate Finance FundamentalsAssignment 10 4 Note No worksheet has been provided for analyzing Section 1 You may wish to construct your own or answer the question manually Section 2 50 marks total Use a worksheet to develop pro forma financial statements for the next five years 2007 2011 for Johnson Then perform what if analyses with the pro forma financial statements Modify the LXQ1 worksheet in the file FN1LXQ1 to complete this section Base plan 14 marks The following additional information is required to complete this section using the worksheet LXQ1 All dollar amounts are expressed in 000s 1 Corporate tax rate is 50 2 Depreciation capital cost allowance is calculated by applying the depreciation CCA rate on non current assets The average depreciation rate is 5 In the year of acquisition depreciation is allowed only for a half year for new capital expenditures row 34 3 Cost of goods sold is 80 of sales for the same year 4 Salaries and administration costs are 8 of sales for the same year 5 Inventory is maintained at 15 of next year s sales 6 Accounts payable is 15 of cost of goods sold for the same year 7 Accounts receivable is 15 of sales for the same year 8 Johnson s target level of cash and marketable securities is 2 of sales for the same year 9 Johnson projects its sales to grow at 20 per year over the preceding year for both 2007 and 2008 and slow to 5 per year for 2009 to 2011 10 Interest rates are forecasted at 9 for 2007 10 for 2008 and 12 thereafter 11 Johnson plans to incur no long term debt for the five years starting 2007 12 No new equity issues have been planned for the five years starting 2007 13 New capital expenditures for the five years from 2007 to 2011 will be 800 1 400 1 000 1 000 and 1 000 respectively 14 Dividends will be maintained at 300 for 2007 to 2011 After entering the preceding information in the worksheet analyze the pro forma financial information Comment on Johnson s financial plan and discuss some of the financial ratios and key financial information Procedure 1 Open the file FN1LXQ1 The file has only one worksheet LXQ1 2 Before making any changes to this worksheet analyze the printed copy of this worksheet presented as Attachment A at the end of this assignment You may find the printed copy which shows column and row borders useful in working through various parts of the question Corporate Finance FundamentalsAssignment 10 5 3 Examine the layout of the worksheet It resembles the worksheet used in Computer illustration 10 2 of the Lesson Notes The current data pertaining to 2006 has been pre entered in cells B13 to B20 Most parts of the pro forma financial statements and ratio analysis have also been pre entered 4 Enter appropriate information or formulas in the following cells B8Corporate tax rate B9Depreciation CCA rate G10 to G20The various percentages B26 to G26Sales growth multiple for calculating projected sales B27 to G27Projected sales B28 to G28Interest rates C32 to G32Long term debt C33 to G33New equity C34 to G34New capital expenditures C35 to G35Dividends B41 to G41Target cash and marketable securities B43 to G43Accounts receivable B48 to G48Accounts payable C60 to G60Capital cost allowance 5 After completing the worksheet save a copy This copy will be used as a basis for each of the scenarios in the next section 6 Copy and paste cells A1 to G66 into your Word document Then copy and paste cells A69 to G76 into your Word document 7 Display the formulas in your completed worksheet Copy and paste the formulas in cells B38 to D76 to your Word document What if analysis 36 marks 6 marks each After reviewing the five year financial forecast Ms Lender of the Commercial Bank makes several suggestions for Johnson Use your completed worksheet to analyze the following independent scenarios suggested by Ms Lender Assume long term debt is incurred at the beginning of a year Note 6 marks for each part s analysis and conclusions a Cut growth By reducing the firm s optimal capital budget Johnson can reduce new capital expenditures to 200 for all years which in turn will change the firm s sales Instead of the original growth rate 2007 net sales will increase 10 over 2006 and then grow at an annual rate of only 2 thereafter Corporate Finance FundamentalsAssignment 10 6 b Finance growth through long term debt Instead of cutting growth Johnson can try to finance growth by incurring long term debt with year end balances of 2 500 2 500 3 500 4 000 4 000 for 2007 to 2011 respectively c Finance growth through new equity financing Rather than financing growth using long term debt Johnson can issue new equity of 3 500 net proceeds in 2007 d Finance growth using a mix of long term debt and new equity Johnson can try to finance growth by issuing new equity of 1 750 in 2007 and long term debt with year end balances of 1 500 1 800 2 500 and 3 000 in the years 2008 to 2011 respectively e Finance growth by improving cash receipts Instead of issuing new equity and or new long term debt Johnson can try to finance growth by cutting the percentage of credit sales so that accounts receivable is only at 5 of its total sales for each year and reduce inventory to 5 of the next year s sale by reducing dealer inventories f Ms Lender points out that if Johnson is successful in financing the desired growth shareholders may want a higher level of dividends Therefore she suggests an analysis of the impact of a higher level of dividends on its financial plan using the financial growth plan specified in d increase the total dividend payout to 450 for 2009 and beyond Procedure 1 For each of the six scenarios suggested by Ms Lender retrieve the copy of the worksheet saved in step 5 of the previous section Base plan 2 Enter appropriate information for each scenario Modify cell A6 to indicate SCENARIO A SCENARIO B and so on and cell A69 to indicate RATIO ANALYSIS SCENARIO A and so on 3 Use the worksheet to provide the appropriate analysis and conclusions 4 Submit the Ratio Analysis for each scenario by pasting cells A69 to G76 into your Word document Question 2 20 marks Multiple choice 2 marks each a In assessing a firm s liquidity which of the following ratios would be most helpful 1 Earnings power ratio 2 Asset turnover ratio 3 Current ratio 4 Times interest earned ratio Corporate Finance FundamentalsAssignment 10 7 b Which of the following ratios would be most useful for evaluating a firm s degree of leverage 1 Earnings power ratio 2 Debt to equity ratio 3 Current ratio 4 Asset turnover ratio c Which of the following ratios is helpful when a financial analyst has concerns about the quality of a firm s current assets as evaluated in the current ratio 1 Quick ratio 2 Average collection period 3 Debt to equity ratio 4 1 and 2 d What is the importance of financial planning 1 To promote forward thinking 2 To allow early anticipation of financial needs 3 To provide a recipe for accurate forecasting 4 1 and 2 e What is the single most critical element in pro forma financial statements 1 Interest rates 2 Sales 3 Cash flow 4 Operating costs f Which of the following financial statements is commonly used by creditors to highlight the firm s liquidity position 1 Sources and uses of funds statement 2 Cash flow statement 3 Pro forma income statement 4 Pro forma balance sheet g What is sensitivity analysis 1 An environmental assessment 2 A planning tool 3 A taxable company benefit 4 A pro forma financial statement Corporate Finance FundamentalsAssignment 10 8 h A financial executive must decide to issue 1 billion of either new bonds or new shares If the bonds are issued the new debt equity D E ratio will be 0 50 and the return on equity ROE will be 15 If the shares are issued the revised numbers for D E and ROE are 25 and 7 respectively What should the executive do 1 Issue all bonds 2 Issue all shares 3 Issue a combination of bonds and shares 4 Reconsider it with preference shares in the mix i Which of the following is not required by the financial planning model 1 Forecasts of sales and interest rates 2 Choices involving capital structure 3 Present value analysis 4 Shareholder input j What does financial leverage pertain to 1 The profitability of the firm 2 The relative size of the debt 3 The times interest earned 4 2 and 3 Question 3 20 marks Note This question draws on the ethics readings studied throughout the course Martin Lee Treasurer for Acme Bolt Co had an extraordinary day yesterday Martin is responsible for among other things arranging all financings for Acme and also for making new capital investment recommendations to the CEO s office A flurry of activity yesterday involved key decisions in both of those areas A breakfast meeting followed by an afternoon meeting left him uncomfortable The breakfast meeting was with Ron Grant a long time personal friend of Martin s and the loan officer at First Security one of Acme s two primary bankers Acme needs a 5 year loan From previous discussions with an underwriter Martin knew Acme could sell a 5 year public debt issue with a fixed interest cost of 1 over the prime rate Martin had to get back to the underwriter later this week Although Martin had been prepared to go with the public debt issue Ron Grant had made a surprising offer First Security would open a 5 year line of credit for Acme and charge a floating interest rate set at the prime rate each year Martin admitted to Ron that since he Martin expected interest rates to rise over the next five years the public debt issue looked a lot better from Acme s point of view At that point Ron broke down and gave Martin a 15 minute tale of bad loans by himself and unhappy senior management at the bank Ron s job at the bank appeared to be on the line Ron said he could not make a better offer and he hoped Corporate Finance FundamentalsAssignment 10 9 that Martin could see the bigger picture rather than just do what is best for Acme shareholders Just as they were leaving Ron told Martin to seriously consider his offer He added If you stay with First Security as your friend I can give you a little extra edge For example I ll bet you have a meeting this afternoon and I know that the proposal you will get can be a much better deal than what will be put on the table I can help you make really big bucks for Acme s shareholders Martin was startled He did have a meeting and a proposal was to be forthcoming At three o clock Justine Smith President of Galactic Realty Corp showed up for her meeting with Martin Lee in Acme s Board Room Galactic is developing a new industrial park on the city s edge and would provide Acme with a new manufacturing facility in the park if Acme would become an equity partner in the industrial park development Martin told Justine that Acme was not in the real estate business and would prefer to keep it that way However he admitted that the manufacturing facility would greatly improve productivity lower costs and save on transportation costs to city delivery points While examining the financial details Justine noted that Galactic had a large loan from First Security and part of the land was collateral for the loan However Justine assured Martin that the development is a sure thing and Acme would not only get rent free facilities but also earn a nice rate of return on its 25 equity position in the industrial park Martin thanked Justine for the offer and promised to meet with her in Galactic s office next week Before leaving for the day Martin phoned Ron Grant at First Security and described the Gala