Problem Review Set-1

Question-1
a. Given the following financial statements, historical ratios, and industry averages, calculate Sterling
Company's financial ratios for 2012. (Assume a 365-day year.)
Sterling Company Income Statement Year End December
2012
Sales revenue
Less: Cost of goods sold
Gross profits
Less: Operating expenses
Selling expense
General and administrative expenses
Lease expense
Depreciation expense
Total operating expense
Operating profits
Less: Interest expense
Net profits before taxes
Less: Taxes (rate = 40%)
Net profits after taxes
Less: Preferred stock dividends
Earnings available for common stockholders
Earnings per share (EPS)
Number of Outstanding Shares

10,000,000.00
7,500,000
2,500,000.00
300,000.00
650.00
50.00
200.00
1,200,000.00
1,300,000.00
200.00
1,100,000.00
440.00
660,000.00
50,000.00
610,000.00
$3.05
200,000

Sterling Company Balance Sheet Year End December 2012

Cash
Marketable securities
Accounts receivable
Inventories
Total current assets
Gross fixed assets (at cost)J
Less: Accumulated depreciation
Net fixed assets
Other assets
Total assets

$200,000.00
$50,000.00
$800,000.00
$950,000.00
$2,000,000.00
$12,000,000
3,000,000
$9,000,000.00
1,000,000
$12,000,000

Accounts payable6
Notes payable
Accruals
Total current liabilities
Long-term debt (includes
financial leases)'

$900,000.00
$200,000.00
$100,000.00
$1,200,000.00
$3,000,000.00

Preferred stock (25,000 shares,

$2 dividend)
Common stock (200,000
shares at %i par)
Paid-in capital in excess of par value
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity

$1,000,000.00
$600,000.00
$5,200,000.00
$1,000,000.00
$7,800,000.00
$12,000,000.00

Footnote a: The firm has a financial lease requiring make annual payments of 50,000.Five years of the lease has yet to run
Footnote b: Annual Credit pruchases of 6,200,000 made during the year
Footnote c: The annual principal payment on the long term debt is $100,000; pre tax equivalent is
X=100,000/0.6=166,667
Footnote d: On December 31 2012, the firms common stock closed at 39.50 per share

Actual 2010
Current ratio
Quick ratio
Inventory turnover
Average collection period
Average payment period
Total asset turnover
Debt ratio
Times interest earned ratio
Fixed-payment coverage ratio
Gross profit margin
Operating profit margin
Net profit margin
Return on total assets (ROA)
Return on common equity (ROE)
Earnings per share (EPS)
Price/earnings (P/E> ratio
Market/book (M/B) ratio

1.4
1
9.52
45.6 days
59.3 days
0.74
0.2
8.2
4.5
0.3
0.12
0.062
0.045
0.061
$1.75
12
1.2

Actual
2011
1.55
0.92
9.21
36.9 days
61.6 days
0.8
0.2
7.3
4.2
0.27
0.12
0.062
0.05
0.067
$2.20
10.5
1.05

Actual
2012
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Industry Average
2012
1.85
1.05
8.6
35.5 days
46.4 days
0.74
0.3
8
4.2
0.25
0.1
0.053
0.04
0.066
$1.50
11.2
1.1

b. Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint. Break
your analysis into evaluation of the firm's liquidity, activity, debt, profitability, and market ratios.

Question-2:
Home Health, Inc., has come to Jane Ross for a yearly financial checkup. As a first step, Jane has
prepared a complete set of ratios for fiscal years 2011 and 2012. She will use them to look for significant
changes in the company's situation from one year to the next.
Home Health Inc. Financial Ratios
Ratio
Current ratio
Quick ratio
Inventory turnover
Average collection period
Total asset turnover
Debt ratio
Times interest earned ratio
Gross profit margin
Operating profit margin
Net profit margin
Return on total assets
Return on common equity
Price/earnings ratio
Market/book ratio

2011
3.25
2.5
12.8
42.6
days
1.4
0.45
4
68
14%
8.3%
11.6%
21.1%
10.7
1.4

2012
3
2.2
10.3
31.4
days
2
0.62
3.85
65%
16%
8.1%
16.2%
42.6%
9.8
1.25

a. To focus on the degree of change, calculate the year-to-year proportional change by subtracting the
year 2011 ratio from the year 2012 ratio, then dividing the difference by the year 2011 ratio. Multiply the
result by 100. Preserve the positive or negative sign. The result is the percentage change in the ratio from
2011 to 2012. Calculate the proportional change for the ratios shown here.

b. For any ratio that shows a year-to-year difference of 10% or more, state whether the difference is in the
company's favor or not.
c. For the most significant changes (25% or more), look at the other ratios and cite at least one other
change that may have contributed to the change in the ratio that you are discussing.

Question-3
Consider the balance sheets and selected data from the income statement of Keith Corporation that appear
below.
Keith Corporation Balance Sheets
Assets
Cash
Marketable securities
Accounts receivable
Inventories
Total current assets
Gross fixed assets
Less: Accumulated depreciation
Net fixed assets
Total assets
Liabilities and Stockholders' Equity
Accounts payable
Notes payable
Accruals
Total current liabilities
Long-term debt
Total liabilities
Common stock
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity

Dec-12
2012
$1,500
$1,800
$2,000
$2,900
$8,200
$29,500
$14,700
$14,800
$23,000

Dec-11
2011
$1,000
$1,200
$1,800
$2,800
$6,800
$28,100
$13,100
$15,000
$21,800

$1,600
$2,800
$200
$4,600
$5,000
$9,600
$10,000
$3,400
$13,400
$23,000

$1,500
$2,200
$300
$4,000
$5,000
$9,600
$10,000
$2,800
$12,800
$22,400

Ketith Corporation Income Statement Data (2012)

Depreciation Expense
1,600
EBIT
2,700
Interest Expense
367
Net Profits After Taxes
1,400
Tax Rate
40%

a. Calculate the firm's net operating profit after taxes (NOPAT) for the year ended December 31, 2012.
Hint: NOPAT=EBIT x (1-T)
b. Calculate the firm's operating cash flow (OCF) for the year ended December 31, 2012.
c. Calculate the firm's free cash flow (FCF) for the year ended December 31, 2012.
d. Interpret, compare, and contrast your cash flow estimates in parts b and c.

Question-4:
The actual sales and purchases for Xenocore, Inc., for September and October 2012, along with its
forecast sales and purchases for the period November 2012 through April 2013, follow. The firm makes
20% of all sales for cash and collects on 40% of its sales in each of the 2 months following the sale. Other
cash inflows are expected to be $12,000 in September and April, $15,000 in January and March, and
$27,000 in February. The firm pays cash for 10% of its purchases. It pays for 50% of its purchases in the
following month and for 40% of its purchases 2 months later.

Year
2012
2012
2012
2012
2013
2013
2013
2013

Month
September
October
November
December
January
February
March
April

Sales
$210,000
$250,000
$170,000
$160,000
$140,000
$180,000
$200,000
$250,000

Purchases
$120,000
$150,000
$140,000
$100,000
$80,000
$110,000
$100,000
$90,000

Wages and salaries amount to 20% of the preceding month's sales. Rent of $20,000 per month must be
paid. Interest payments of $10,000 are due in January and April. A principal payment of $30,000 is also
due in April. The firm expects to pay cash dividends of $20,000 in January and April. Taxes of $80,000
are due in April. The firm also intends to make a $25,000 cash purchase of fixed assets in December.
a. Assuming that the firm has a cash balance of $22,000 at the beginning of November, determine the
end-of-month cash balances for each month, November through April.
b. Assuming that the firm wishes to maintain a $15,000 minimum cash balance, determine the required
total financing or excess cash balance for each month, November through April.
c. If the firm were requesting a line of credit to cover needed financing for the period November to April,
how large would this line have to be? Explain your answer.

Question-5:
Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other
information provided below to prepare the financial plans. The following financial data are also available:
(1) The firm has estimated that its sales for 2013 will be $900,000.
(2) The firm expects to pay $35,000 in cash dividends in 2013.
(3) The firm wishes to maintain a minimum cash balance of $30,000.
(4) Accounts receivable represent approximately 18% of annual sales.
(5) The firm's ending inventory will change directly with changes in sales in 2013.
(6) A new machine costing $42,000 will be purchased in 2013. Total depreciation for 2013 will be
$17,000.
(7) Accounts payable will change directly in response to changes in sales in 2013.
(8) Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.
(9) Marketable securities, other current liabilities, long-term debt, and common stock will remain
unchanged.
a. Prepare a pro forma income statement for the year ended December 31, 2013, using the percent-ofsales method.
b. Prepare a pro forma balance sheet dated December 31, 2013, using the judgmental approach.
c. Analyze these statements, and discuss the resulting external financing required.

Question-6
California Integrated Systems Inc. recently reported $27.75bn of sales, $17.25bn of operating costs other
than depreciation, and $2.1bn of depreciation. The company had no amortization charges, it had $9.6bn
of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In
order to sustain its operations and thus generate sales and cash flows in the future, the firm was required
to make $3.75bn of capital expenditures on new fixed assets and to invest $900 million in net working
capital requirement (operating working capital) . By how much did the firm's net income exceed its free
cash flow?
[Hint: Use FCF=EBIT(1-T)+Depreciation-NWCR-NFAI]

Vocabulary:
NWCR=Operating Working Capital = WCR=NCAI
NFAI=Net Fixed Asset Investment