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Finance Problems

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1. Suppose sales were $38,873, $45,626, and $57,689 for the years 2000, 2001, and 2002, respectively. Compute the annual growth rate in sales for 2001 and 2002. Compute the arithmetic average growth rate based on the annual growth rate calculations. Using the arithmetic average growth rate, compute the forecast for sales for 2003.

2. Suppose forecasted sales are $46,117 and the gross profit margin is expected to be 30.00 percent. If the forecasted ratio of inventories to cost of sales is 25.00 percent, compute the forecasted inventories balance for the pro forma financial statements.

Problems 3 and 4

Given the following financial statements:

Income Statement (millions) 2000 2001 2002 2003 est.
Net revenues:
Retail $1,823.6 $2,229.6 $2,792.9 $3,456.5
Specialty $354.0 $419.4 $496.0 $587.1
Total net revenues $2,177.6 $2,649.0 $3,288.9 $4,043.6
Cost of sales $961.9 $1,112.8 $1,350.0 $1,657.9
Store operating expenses $704.9 $875.5 $1,121.1 $1,389.5
Other operating expenses $78.4 $93.3 $127.1 $152.6
Depreciation expense $130.2 $163.5 $205.6 $256.8
General and administrative expenses $110.2 $151.4 $202.2 $230.5
Income from equity investees $20.3 $28.6 $35.8 $44.5
Operating income $212.3 $281.1 $318.7 $400.8
Interest income $8.1 $8.2 $7.1 $5.1
Interest expense $4.5 $2.7 $1.8 $1.4
Other income, net ($55.4) $2.4 $17.4
Pre-tax income $160.5 $289.0 $341.4 $404.5
Income taxes $65.9 $107.8 $126.3 $149.7
Net income $94.6 $181.2 $215.1 $254.8

Dividends $0.0 $0.0 $0.0 $0.0

Balance Sheet (millions) 2001 2002 2003 est.
Assets
Cash and equivalents $113.2 $174.6 $222.4
Short-term investments $107.3 $227.6 $158.3
Accounts receivable $90.4 $97.6 $117.4
Inventories $221.3 $263.2 $327.4
Other current assets $61.7 $84.5 $105.1
Total current assets $593.9 $847.5 $930.6

Gross property, plant, and equipment $1,741.0 $2,080.2 $2,505.2
Accumulated depreciation $605.2 $814.4 $1,071.2
Net property, plant, and equipment $1,135.8 $1,265.8 $1,434.0
Other non-current assets $116.8 $179.4 $222.4
Total Assets $1,846.5 $2,292.7 $2,587.0

Liabilities & Owners' Equity
Accounts payable $127.9 $136.0 $165.8
Notes payable $62.0 $74.9 $0.0
Current maturities of long-term debt $0.7 $0.7 $0.7
Other current liabilities $254.7 $325.9 $404.4
Total current liabilities $445.3 $537.5 $570.9
Long-term debt $5.8 $5.1 $4.4
Other non-current liabilities $19.5 $23.5 $30.3
Total liabilities $470.6 $566.1 $605.6
Common stock $791.6 $930.4 $930.4
Retained earnings $584.3 $796.2 $1,051.0
Total equity $1,375.9 $1,726.6 $1,981.4
Total liabilities and owners' equity $1,846.5 $2,292.7 $2,587.0

3. Evaluate the forecasted change in liquidity from 2002 to 2003. Why is there a divergence between the two liquidity ratios?

4. Compute the sustainable growth rate for the above company based on 2002's financial statements. Do you think that the company will have a growth problem in 2003? Why or why not?

Two companies, A and B, have the following balance sheet accounts:

A B
Current assets $ 200 $ 900
Fixed assets 350 2250
Current liabilities 100 600
Long-term debt 100 1100
Equity 350 1450

5. Compute values for all of the ratios that measure working capital for firms A and B.

6. Compare Firm A to B with regards to its need for working capital and how it finances its working capital (short-term vs. long-term financing).

The Rhino Company is considering two investments. The firm's cost of capital is 14 percent, and the risk-free rate is 8 percent. The two investments have the following cash flows:
Investment A Investment B
Year Projected Cash Flow Certainty Equivalent Cash Flow Projected Cash Flow Certainty Equivalent Cash Flow
0 -1,000 -1,000 -1,000 -1,000
1 600 400 700 600
2 600 400 600 500
3 600 400 500 400
4 600 400 400 300
7. Compute the NPV of the two investments using the firm's cost of capital. Identify the preferred investment.

8. Compute the NPV of the two investments using the certainty-equivalent approach. Identify the preferred investment

9. How is the information regarding store count and growth in total revenues presented in Figure 5-14 possibly misleading?
Figure 5-14: Starbucks Corporation: Store Count and Growth Rate in Total Revenues, 1993- 2002

10. Identify each of the following decisions as strategic or normal:
1. The decision to advertise in the Daily Sun newspaper or the Daily Journal newspaper
2. The decision to institute a new line of sportswear for a men's clothing manufacturer
3. The decision to raise the targeted return on equity from 12 percent to 14 percent
4. The decision to finance the firm with approximately 40 percent debt and 60 percent equity
5. The decision to raise capital by selling bonds through Investment Banking Firm A or through Investment Banking Firm B

1. How do fixed versus variable costs impact sensitivity analysis on pro forma financial statements?

2. Discuss one scenario that could explain why sales may increase at one rate, say, 5 percent, but net income increases at a different rate, say, 10 percent.

3. Describe how depreciation leads to a cash inflow for a firm.

4. Explain the process for implementing the risk-adjusted discount rate method.

5. Describe some basic guidelines for using visuals within an oral presentation.

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Solution Preview

1. Suppose sales were $38,873, $45,626, and $57,689 for the years 2000, 2001, and 2002, respectively. Compute the annual growth rate in sales for 2001 and 2002. Compute the arithmetic average growth rate based on the annual growth rate calculations. Using the arithmetic average growth rate, compute the forecast for sales for 2003.

Annual growth rate in sales for 2001 is

$45,626 - $38,873 x 100 = 17.37%
$38,873

Annual growth rate in sales for 2002 is

$57,689 - $45,626 x 100 = 26.44%
$45,626

17.37% + 26.44% = 43.81/2 = 21.905%

The forecast for sales for 2003 is

$57,689 x 1.21905 = $70,326

2. Suppose forecasted sales are $46,117 and the gross profit margin is expected to be 30.00 percent. If the forecasted ratio of inventories to cost of sales is 25.00 percent, compute the forecasted inventories balance for the pro forma financial statements.

Sales 46,117.00
Cost of sales (70% x Sales) 32,281.90
Gross Profit (30% x Sales) 13,835.10

Inventories to cost of sales ratio = Inventories/Cost of sales
25% = Inventories/32,281.90
Inventories = $8,070.48

Problems 3 and 4

Given the following financial statements:

Income Statement (millions) 2000 2001 2002 2003 est.
Net revenues:
Retail $1,823.6 $2,229.6 $2,792.9 $3,456.5
Specialty $354.0 $419.4 $496.0 $587.1
Total net revenues $2,177.6 $2,649.0 $3,288.9 $4,043.6
Cost of sales $961.9 $1,112.8 $1,350.0 $1,657.9
Store operating expenses $704.9 $875.5 $1,121.1 $1,389.5
Other operating expenses $78.4 $93.3 $127.1 $152.6
Depreciation expense $130.2 $163.5 $205.6 $256.8
General and administrative expenses $110.2 $151.4 $202.2 $230.5
Income from equity investees $20.3 $28.6 $35.8 $44.5
Operating income $212.3 $281.1 $318.7 $400.8
Interest income $8.1 $8.2 $7.1 $5.1
Interest expense $4.5 $2.7 $1.8 $1.4
Other income, net ($55.4) $2.4 $17.4
Pre-tax income $160.5 $289.0 $341.4 $404.5
Income taxes $65.9 $107.8 $126.3 $149.7
Net income $94.6 $181.2 $215.1 $254.8

Dividends $0.0 $0.0 $0.0 $0.0

Balance Sheet (millions) 2001 2002 2003 est.
Assets
Cash and equivalents $113.2 $174.6 $222.4
Short-term investments $107.3 $227.6 $158.3
Accounts receivable $90.4 $97.6 $117.4
Inventories $221.3 $263.2 $327.4
Other current assets $61.7 $84.5 $105.1
Total current assets $593.9 $847.5 $930.6

Gross property, plant, and equipment $1,741.0 $2,080.2 $2,505.2
Accumulated depreciation $605.2 $814.4 $1,071.2
Net property, plant, and equipment $1,135.8 $1,265.8 $1,434.0
Other non-current assets $116.8 $179.4 $222.4
Total Assets $1,846.5 $2,292.7 ...

Solution Summary

This solution is comprised of a detailed explanation and calculation to answer various finance problems.

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