Professional Documents
Culture Documents
1 (14 points)
At the end of year 2008 the balance sheet of Access Co. is the following:
ASSETS
Cash and Cash Equivalents
Account Receivables
Inventories
Short-term investments
Pre-paid Expenses
Total current assets
Note Receivables
Intangible assets
Fixture and Equipment
Land
Buildings
Total long-term assets
Total assets
$
723,000
137,000
311,000
121,000
30,745
1,322,745
7,960
16,823
89,820
220,000
315,000
649,603
1,972,348
243,500
15,700
70,500
112,700
442,400
218,200
29,172
256,783
504,155
Contributed Capital
Retained Earnings
Accumulated other comprehensive income (loss)
Total stockholder's equity
476,993
561,560
(12,760)
1,025,793
1,972,348
3. On January 1, 2009 the company issued bonds for 200,000$, coupon rate 8%. The market
rate was 9%. The bonds were dated January,1 2009, pay interest each December 31, and
mature 10 years from January 1, 2009.
4. In the first half of July, the company sold 10 identical items of merchandise to 10
customers. Each of them bought one item. The 50,000$ total sale price of the 10 items was
charged on the customers Visa Credit cards. Visa charges Access.Co a 3% credit card fee.
On July 27th one customer returned the item purchased because it was defective and was
reimbursed.
5. The company earned additional sales revenues for 450,000$, of which 123,000$ was on
credit.
6. The company estimated bad debt expense for the year to be 50,000$
7. The company issued 800 shares of common stock (par value 8$ per share) for a piece of
land to be used for a facility site. The stock was selling at 25$ per share at the date of
issuance.
8. On January 1 the company paid 5,040 for a 3-year insurance policy. On Dec 31 the company
must adjust the pre-paid expenses account to reflect that one year of the policy has expired
9. On Dec. 20th, 2009 the company receives 8,000$ rent in advance for January and February
2010 from Self-Stand Co. This amount will be earned in 2010 for financial accounting
purposes but is taxed in 2009. The company is subject to a 32% income tax rate.
Create the T-accounts and prepare the classified balance sheet and the income statement for year
end 2009.
SOLUTION
T-accounts: balance sheet
Beg.
(3)
(4)
(5)
(9)
Cash
723,000
46,000 (1)
187,165
16,000 (3)
43,500
327,000
8,000
5,040
(8)
1,221,625
Accounts Receivable
Beg. 137,000
Inventory
Beg. 311,000
(2) 350,000
(5) 123,000
610,000
250,000 (2)
61,000
Land
Beg. 220,000
Lease Liability
553,912.8 (1)
(1)
553,912.8
(7) 20,000
(1) 12,765.23
643,732.8
240,000
541,147.57
Bonds Payable
Beg. 256,783
Discount on bonds
payable (XL)
(3) 12,835
8,000 (9)
(3) 200,000
8,000
456,783
11,551
Pre-Paid Expense
Paid-in capital
34,105
Common Stock
6,400 (7)
6,400
Deferred Tax Asset
152,686.31 (9)
(9) 2,560
152,686.31
22,156.51 (1)
22,156.51
13,600 (7)
13,600
Accumulated Depreciaiton
Beg. 30,745
(8) 5,040
1,680 (8)
50,000
1,284 (3)
2,560
Insurance Expense
(8)1,680
50,000
Interest Expense
(1) 33,234.77
(3) 17,284
50,518.77
1,680
Revenues
350,000 (2)
43,500 (4)
450,000 (5)
843,500
Depreciation Expense
(1) 22,156.51
250,000
22,156.51
Credit
553,912.8
553,912.8
22,156.51
22,156.51
33,234.77
12,765.23
46,000
Cash (-A)
PV of the fixture:
1
1
22
0.06 0.06(1 0.06)
PV 46,000
=553,912.8$
The adjustments at year end (t1):
Depreciation expense=cost-residual value*1/useful life
Depreciation expense=553,912.8/25=22,156.51$
Interest expense=553,912.8*0.06=33,234.77$
Lease liability=46,000-33,234.77=12,765.23$ (the portion of the equipment that is now
owned)
Transaction 3:
Present Value of the principal:
PV
200,000
(1 0.09)10
=84,482$
1
1
10
0
.
09
0
.
09
(
1
0
.
09
)
PV 16,000
102,683$
Income statement
Revenues:
Net sales revenues
843,500
(250,000)
(22,156.51)
(1,680)
Operating income
569,663.49
(50,518.77)
(50,000)
Pre-tax income
Income tax expense
469,144.72
(150,126.31)
Net Income
319,018.41
Balance Sheet
ASSETS
Cash and Cash Equivalents
Account Receivables (net of Allowance for doubtful accounts)
Inventories
Short-term investments
Deferred Tax Asset
Pre-paid Expenses
Total current assets
1,221,625
560,000
61,000
121,000
2,560
34,105
2,000,290
Note Receivables
Intangible assets
Fixture and Equipmet (net of accumulated depreciation)
Land
Buildings
Total long-term assets
7,960
16,823
621,576
240,000
315,000
1,201,359
Total assets
3,201,649
243,500
15,700
70,500
152,686
120,700
603,086
218,200
570,320
445,232
1,233,752
Contributed Capital
Retained Earnings*
Accumulated other comprehensive income (loss)
Total stockholder's equity
496,993
880,578
-12,760
1,364,811
3,201,649
*Retained Earnings=561,560$+319,018.41=880,578.41$
EXERCISE n.2 (2 points)
Give the definition of the following ratios:
1) GROSS MARGIN
2) PAYOUT RATIO
3) CURRENT RATIO
SOLUTION
GROSS MARGIN=GROSS PROFIT/NET SALES or NET SALES-COGS/NET SALES
PAYOUT RATIO= CASH DIVIDENDS/NET INCOME
CURRENT RATIO=CURRENT ASSETS/CURRENT LIABILITIES
EXERCISE n.3 (14 points)
Company DELTA operates in the household appliances sector and it is not quoted on the stock market. The following
analysis refers to January 2012. The following data on the last 2 financial statements of company DELTA are available
(mln Euros).
Revenues
EBITDA
Amortization costs
Interest Expense
Earnings before taxes
Equity (book value)
Number of shares
Net operating working capital
Corporate tax rate
Year 2010
350
87.5
6
12
59.5
45
14 mln
28
40%
Year 2011
365
91.25
7.7
12
61.55
60
14 mln
29.2
40%
At the moment of the analysis the debt of company DELTA is made of 300,000 bonds, with a face value of 1,000 Euros,
coupon rate 6%, annual interest payments, maturity 5 years and yield to maturity 7%.
The following information concerns company GAMMA, a competitor of DELTA, quoted on the stock market.
EBIT=350 mln Euros
Net Earnings=75 mln Euros
Corporate Tax rate=40%
Beta=1.3
Market value of equity=690 mln Euros (the total number of shares is of 34 million)
Market value of debt= 130 mln Euros, entirely made of bonds with a rating equal to BBB.
The following information on capital markets are also available:
Market risk premium
4.5%
Bond yields
Treasury
Corporate bonds
bonds
6 months 3.1%
AAA
4.5%
10 years 4.2%
AA
5.5%
A
5.7%
BBB
5.9%
BB
7%
B
8%
C
12%
The management of DELTA, assuming a zero growth rate of cash flows for the year 2011 (assumption of perpetuity),
wants to calculate the following parameters at market value:
1. the weighed average cost of capital for the company
2. the possible target price of the shares of the company if it was quoted on the stock
market
3. the parameters P/E and EPS of the company (on closing data for 2011)
4. What is it possible to infer on the future perspectives of company DELTA with respect to
its competitor on the basis of the information obtained from point 3?
SOLUTION
1. Calculate ru on the basis of the information of company Gamma.
re r f i (rM r f )
re 4.2% 1.3(4.5%) 10.05%
re ru (1 Tc )(ru rd )(
D
)
E
130
)
690
ru 9.62%
We assume that ru is the same for Delta company that operates in the same sector but is not quoted.
2. Calculate the UCF of Delta Company (data from 2011 financial statements)
Taxes=(91.25-7.7)0.4=33.42
UCF=91.25-33.42-1.2=56.63
From 2010 to 2011 there is an increase in working capital of 1.2 that needs to be subtracted to
calculate the UCF.
3. Calculate the value of Delta Company with the APV method (assumption that cash flows are
constant in perpetuity)
5
60
1,000
959
t
(1.07) 5
t 1 (1.07 )
D=959*0.3=287.7 mln Euros
P
D
E
rd (1 Tc )
re
DE
DE
rWACC
287.7
416.04
7%(1 0.4)
re
703.74
703.74
D
re ru (1 Tc )( ru rd )( )
E
re 9.62% (1 40%)(9.62% 7%)(
287.7
)
416.04
10.70%
rWACC
287.7
416.04
7%(1 0.4)
10.7% 8.04%
703.74
703.74