Reference no: EM13347556

Question 1-Conceptual questions

Part A: What should be the primary objective of  management?

Part B: Briefly explain the term "free-cash flow"               
                                           
Part C: Briefly explain the term "weighted average cost of capital"                               

Part D: Briefly explain the term "fundamental value or intrinsic value"

Question 2- Financial Statements

FINANCIAL STATEMENTS FOR BigRed INC.  (MILLIONS OF DOLLARS)
Balance Sheet	2008	2007				Income Statement			2008
Assets						Sales			10,000
Cash	330	300				Operating costs			8,700
Accounts receivable	550	500				EBITDA			1,300
Inventory	925	1,000				Depreciation			200
Total current assets	1,805	1,800				EBIT			1,100
Net plant and equipment	2,300	2,000				Interest expense			300
						EBT			800
Total assets	4,105	3,800				Taxes			250
						Net Income			550
Liabilities and equity
Notes payable	390	380				Industry averages for selected financial ratios
Accounts payable	280	250				Current ratio			4.2
Accruals	85	70				Quick (Acid test) ratio			2.1
Total current liabilities	755	700				Inventory turnover ratio			9
Long-term debt	950	1,100				Days sales outstanding			36
Total liabilities	1,705	1,800				Fixed asset turnover ratio			3
						Total asset turnover ratio			1.8
Common stock	1,000	1,000				Debt ratio			30%
Retained earnings	1,400	1,000				Times-interest earned ratio			6
Total common equity	2,400	2,000				Profit margin on sales			5%
						ROA			9%
Total liabilities and equity	4,105	3,800				ROE			15%

Part A: Compute NOPAT for 2008

Part B: Compute Free Cash Flow for 2008

Part C: Compute net cash provided by operating activities in 2008 appearing on the statement of cash flows (Please note that statement of cash flows is not provided, meaning that you will have to make the computations. For a hint please check Table 2-4 on page 58).

Part D: Compute the amount of dividends paid out in 2008.

Part E: Compute the current ratio for 2008

Part F: Compute the acid ratio for 2008

Part G: Compute the inventory turnover ratio for 2008

Part H: Compute days sales outstanding for 2008

Part I: Compute fixed asset turnover ratio for 2008

Part J: Compute the total asset turnover ratio for 2008

Part K: Compute the debt ratio for 2008

Part L: Compute times-interest-earned for 2008

Part N: Compute return on total assets (ROA) for 2008

Part O: Compute return on common equity (ROE) for 2008

Part P: Using your computations above comment on the firm's liquidity policy.

Part Q: Using your computations above comment on the firm's asset management policy.

Part R: Using your computations above comment on the firm's debt management policy.

Part S: Using DuPont analysis please explain why ROE is larger than ROA

Question 3

The following schedule shows how much money you withdraw or deposit every month to your bank account. If the number shown is negative then the number represents a withdrawal amount and similarly if the number is positive then the number represents a deposit amount. t=1 represents 1 month, t=2 represents 2 months from today. Currently you have a zero balance in your bank account and the first deposit of $10,000 will be made 1 month from today.

Point in time	Withdrawal/Deposit
t=0	0
t=1	10000
t=2	144
t=3	622
t=4	715
t=5	82
t=6	708
t=7	164
t=8	419
t=9	-273
t=10	-656
t=11	208
t=12	-862
t=13	1994
t=14	1267
t=15	-75
t=16	431
t=17	1329
t=18	183
t=19	1877
t=20	1837
t=21	-545
t=22	1412
t=23	-407
t=24	49
t=25	-366
t=26	1798
t=27	-163
t=28	-706
t=29	1073
t=30	44
t=31	1482
t=32	1148
t=33	772
t=34	214
t=35	-344

a) Assuming that your money earns an interest rate of 0.1% per month during the next 36 months, what will be your final balance at the end of t=36?

b) Assuming that your money earns an interest rate of 0.1% per month during the next 12 months (starting from t=0 to t=12) and an interest rate of 0.2% per month during the following months (starting from t=12 to t=24) and an interest rate of 0.3% per month during the following 12 months (starting from t=24 to t=36), what will be your balance at the end of t=36?

Question 4

Suppose that Joe Brown borrows $300,000 via 15-year mortgage that requires him to make payments every month. The first payment will be made one month from today (t=1) and the last payment will be made 180 months from today (t=180). Assume that the monthly interest rate on the loan (r) is 0.5% and there are no prepayment penalties.

a) What will be Joe's monthly mortgage payment?

b) Joe makes the monthly payments (calculated in part a) during the next 60 months and wants to payback all of the loan at the end of the 60th month (t=60). How much will Joe have to pay to extinguish the debt.

c) At t=60, instead of paying back all of the debt out of his own pocket, Joe borrows from another lender a 10-year mortgage loan at a lower monthly rate of 0.4%. What will be Joe's new monthly payments? (Assume no refining costs)

d) Assume the scenario in part c except for that Joe will have to pay a one-time upfront fee of $12000 for refinancing. Should Joe refinance? Why or why not? Please be specific and assume that Joe can reinvest his money in an investment that earns 0.6% rate of return per month.

Question 5

For years ending 12/31	2010	2011
INCOME STATEMENT
Net sales	$      16,230	$      20,355
Cost of sales	$        9,430	$      11,898
Gross Profit	$        6,800	$        8,457
Selling, general, and administrative expenses	$        5,195	$        6,352
Depreciation	$           160	$           180
Net interest expense	$           119	$           106
Pre-tax income	$        1,326	$        1,819
Income taxes	$           546	$           822
Net income	$           780	$           997
Dividends	$           155	$           200
Contribution to retained earnings
BALANCE SHEET
Assets	2010	2011
Cash balances	$           508	$           609
Accounts receivable	$        2,545	$        3,095
Inventories	$        1,630	$        1,838
Total current assets	$        4,683	$        5,542
Gross plant & equipment	$        3,232	$        3,795
Accumulated depreciation	$        1,335	$        1,515
Net plant & equipment	$        1,897	$        2,280
Total assets	$        6,580	$        7,822
Liabilities & Equity
Current maturities of long-term debt	$           125	$           125
Accounts payable	$        1,042	$        1,325
Accrued expenses	$        1,145	$        1,432
Total current liabilities	$        2,312	$        2,882
Long-term debt	$        1,000	$           875
Common stock	$        1,135	$        1,135
Retained earnings	$        2,133	$        2,930
Total shareholders' equity	$        3,268	$        4,065
Total liabilities and equity	$        6,580	$        7,822

Please construct the statement of cash flows for year 2011 using the above information.