Reference no: EM131233518

A computer manufacturer has financial statements as follows:

Balance Sheets
Assets	2015		2016		2017Estimated
Cash	$ 9,000		$ 7,282		$ 14,000
Short-Term Investments.	48,600		20,000		71,632
Accounts Receivable	351,200		632,160		878,000
Inventories	715,200		1,287,360		1,716,480
Total Current Assets	$ 1,124,000		$ 1,946,802		$ 2,680,112
Gross Fixed Assets	491,000		1,202,950		1,220,000
Less: Accumulated Depreciation	146,200		263,160		383,160
Net Fixed Assets	$ 344,800		$ 939,790		$ 836,840
Total Assets	$ 1,468,800		$ 2,886,592		$ 3,516,952
Liabilities And Equity	2015		2016		2017 Estimated
Accounts Payable	$ 145,600		$ 324,000		$ 359,800
Notes Payable	200,000		720,000		300,000
Accruals	136,000		284,960		380,000
Total Current Liabilities	$ 481,600		$ 1,328,960		$ 1,039,800
Long-Term Debt	323,432		1,000,000		500,000
Common Stock (100,000 Shares)	460,000		460,000		1,680,936
Retained Earnings	203,768		97,632		296,216
Total Equity	$ 663,768		$ 557,632		$ 1,977,152
Total Liabilities And Equity	$ 1,468,800		$ 2,886,592		$ 3,516,952

Income Statements
	2015		2016		2017E
Sales	$ 3,432,000		$ 5,834,400		$ 7,035,600
COGS except depr.	2,864,000		4,980,000		5,800,000
Depreciation	18,900		116,960		120,000
Other Expenses	340,000		720,000		612,960
Total Operating Costs	$ 3,222,900		$ 5,816,960		$ 6,532,960
EBIT	$ 209,100		$ 17,440		$ 502,640
Interest Expense	62,500		176,000		80,000
EBT	$ 146,600		$ (158,560)		$ 422,640
Taxes (40%)	58,640		(63,424)		169,056
Net Income	$ 87,960		$ (95,136)		$ 253,584
Other Data	2015		2016		2017E
Stock Price	$ 8.50		$ 6.00		$ 12.17
Shares Outstanding	100,000		100,000		250,000
EPS	$ 0.880		$ (0.951)		$ 1.014
DPS	$ 0.220		$ 0.110		$ 0.220
Tax Rate	40%		40%		40%
Book Value Per Share	$ 6.638		$ 5.576		$ 7.909
Lease Payments	$ 40,000		$ 40,000		$ 40,000

Statement of Cash Flows

2016

Operating activities
Net income		$ (95,136)
Adjustments:
noncash adjustments:
depreciation		116,960
changes in working capital:
change in accounts receivable		(280,960)
change in inventories		(572,160)
change in accounts payable		178,400
change in accruals		148,960
Net cash provided by operating activities		$ (503,936)
Investing activities
Cash used to acquire fixed assets		$ (711,950)
Cash due to change in short term investments		$ 28,600
Net cash provided by operating activities		$ (683,350)
Financing activities
change in notes payable		$ 520,000
change in long-term debt		$ 676,568
change in common stock		$ -
payment of cash dividends		$ (11,000)
Net cash provided by financing activities		$ 1,185,568
Summary
Net change in cash		$ (1,718)
Cash at beginning of year		9,000
Cash at end of year		$ 7,282

1. What is free cash flow? Why is it important?

a) What is the company's net operating profit after taxes in 2016 (NOPAT)?

b) What are operating current assets? How much operating current assets does the company have in 2016?

c) What are operating current liabilities? How much operating current liabilities does the company have in 2016?

d) How much net operating working capital does the company have in 2016?

e) How much total net operating capital does the company have in 2016?

f) What is the company's return on invested capital (ROIC) in 2016?

g) What is the company's EVA in 2016? It has a 10% cost of capital (WACC).

h) What is the company's MVA in 2016?

2. Why are ratios useful? What three groups use ratio analysis and for what reasons?

a) Refer to the above company's financial statements. Calculate the 2017 current and quick ratios based on the projected balance sheet and income statement data.

b) Calculate the 2017 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total assets turnover.

c) Calculate the 2017 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE).

d) Use the extended DuPont equation to provide a summary and overview of the company's financial condition as projected for 2017. What are the firm's major strengths and weaknesses?

3. Suppose someone offered to sell you a note calling for the payment of $1,000 15 months from today. They offer to sell it to you for $850. You have $850 in a bank time deposit which pays a 7% effective annual interest rate (compounding), and you plan to leave the money in the bank unless you buy the note. The note is not risky--you are sure it will be paid on schedule. Should you buy the note?

4. Jordan Jones (JJ) and Casey Carter (CC) are portfolio managers at your firm. Each manages a well-diversified portfolio. Your boss has asked for your opinion regarding their performance in the past year. JJ's portfolio has a beta of 0.7 and had a return of 8.5%; CC's portfolio has a beta of 1.4 and had a return of 9.5%. Which manager had better performance? Why? (Assumer the risk-free rate is 4% and the market risk premium is 5%).