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    Pfizer and Mylan

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    1. The income statement and balance sheet for Galaxy Interiors (for 2011) are shown below:

    A. What is the firm's operating cash flow for 2011 (as defined in Chapter 2)?
    B. What is the "Net cash from operating activities" on the Statement of Cash Flows (see Chapter 3)?
    C. What was the amount of dividends paid in 2011?
    D. What is the amount of the net capital spending for 2011?

    2. ABC Pharmaceuticals has current assets of $6,500, net fixed assets of $37,500, current liabilities of $4,900, and long term debt of $16,800. In addition, the firm just received approval from the FDA to start selling product XYZ, which it has developed (from R&D spending) over the past several years. This product (which is owned by ABC) has a market value of $750,000 (this is the present value of the expected future cash flows).

    A. What is the amount of Shareholder's Equity on this firm's accounting balance sheet?
    B. Do you think the firm's asset market value is greater than, less than, or equal to its asset book value? How do you know? (You do not need to give a precise numerical answer to this question.)

    3. Given the following information for Cutting-Edge Cure Company, calculate depreciation expense: sales = $34,000; administrative costs (excluding depreciation) = 12,000; R&D costs (excluding depreciation) = 4,000; addition to retained earnings = $4,300; dividends paid = $1,200; interest expense = $2,300; tax rate = 35%.

    4. What is the sustainable growth rate (assuming the following ratios are constant)?

    1/1.20 = .833
    1/[1/1.20) - 1]
    1.200 - 1 = D/E .200

    (.08) (1.46)(1 +.200)
    ROE = .14016

    1 - .32 = .68

    [.14016 (.68)] / (1-.14016 (.68)
    = 0.953/.9047
    SGR = .1053

    5. Natural Country Cures has sales of $35 million, total debt of $36 million, and a debt-to-equity ratio of 1.2. The firm's net profit margin is 6 percent.

    A. What is the firm's net income (in dollars)?
    B. What is the firm's ROA?
    - Net Income/Assets =(NI/Sales) x (Sales/Assets) =
    C. What is the firm's ROE?
    - Net Income/Equity = (Net Income/Assests) x (Assests/Equity) = ROA x (Assets/Equity)

    Question 6 is on the next page

    6. Define the gross profit margin (GPM) as follows:

    Note that cost of goods sold (COGS) includes only the raw material (or inventory) acquisition costs, the direct production costs, and the packaging costs of items sold.

    In addition, define the R&D/Sales ratio as:

    Obtain the 2011 annual reports for Pfizer and Mylan Inc. from the internet. You must use numbers obtained from the firms' 2011 income statements in parts A, C, and D (show your work!).

    A. Calculate the gross profit margin for each firm for 2011.
    B. Why do these firms have dramatically different gross profit margins? What fundamental difference in their business models causes this difference? (Use your own words).
    C. Calculate the R&D/Sales ratio for each firm in 2011.
    D. Why do these firms have dramatically different R&D/Sales ratios? (This answer is similar to part B, but specifically address R&D expense in Part D).

    Question 7 is on the next page

    7. The most recent financial statements for Watchtower Inc. are shown here (assume no income taxes, and ignore interest expense):

    Income Statement

    Sales $5,100
    Costs 3,480
    Net Income 1,620

    Balance Sheet

    Assets 14,500 Debt 10,200
    Equity 4,300
    Total 14,500 Total 14,500

    Assets and costs are proportional to sales; debt and equity are not. No dividends are paid. Next year's sales are projected to be $5,967.

    A. What is the external financing needed?
    B. What maximum sales amount (in dollars) could the firm support next with no external financing?
    C. What is the sales growth rate implied by the sales amount you identify in part B? What is this growth rate called? (Hint: This term is in the book!)

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    Solution Preview

    1. Operating cash flow = EBIT+Depreciation-Taxes
    OCF = 3396+1611-740 = $4267 million
    b. Net cash from operating activities:
    Net Income $1374
    Depreciation: 1611
    (Incr)/Decr in a/r: 84
    (Incr)/Decr in inventory: 901
    Incr/(Decr) in a/p: (162)
    Net cash flow from operating activities = $3808 million
    c. Need EPS information
    d. Net capital spending = ending fixed assets - beginning fixed assets + depreciation
    = 17107-17489+1611 = $1229m

    2. Assets = liabilities + owners' equity
    6500+37500 = 4900+16800+OE
    OE = 44000-21700 = $22,300
    b. Yes, assets' market value is more than book value.
    Book value is the net asset value of the firm value obtained by subtracting all liabilities on the firm's balance sheet from the total value of the firm's assets. This value is $22,300 while market value of assets is ...

    Solution Summary

    The expert examines the firm's operation cash flows and the net cash from operation activities.