FIN 534 Homework Set #1 1156 (5-19-2015) Page 1 of 3
Directions: Answer the following questions on a separate document. Explain how you reached the answer
or show your work if a mathematical calculation is needed, or both. Submit your assignment using the
assignment link in the course shell. This homework assignment is worth 100 points.
Use the following information for Questions 1 through 4:
Assume that you recently graduated and have just reported to work as an investment advisor at the one
of the firms on Wall Street. You have been presented and asked to review the following Income
Statement and Balance Sheets of one of the firm's clients. Your boss has developed the following set of
questions you must answer.
Income Statements and Balance Sheet
Balance Sheet 2012 2013 2014
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
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 2012 2013 2014
Sales $3,432,000 $5,834,400 $7,035,600
Cost of goods sold except depr. 2,864,000 4,980,000 5,800,000
Depreciation and amortization 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 2012 2013 2014
Stock price $8.50 $6.00 $12.17
Shares outstanding 100,000 100,000 250,000
EPS $0.88 ($0.95) $1.104
DPS $0.22 0.11 0.22
Tax rate 40% 40% 40%
Book value per share $6.64 $5.58 $7.909
Lease payments $40,000 $40,000 $40,000
Ratio Analysis 2012 2013 Industry
Average
Current 2.3 1.5 2.7
Quick 0.8 0.5 1.0
Inventory turnover 4 4 6.1
Days sales outstanding 37.3 39.6 32.0
Fixed assets turnover 10 6.2 7.0
Total assets turnover 2.3 2 2.5
Debt ratio 35.60% 59.60% 32.0%
Liabilities-to-assets ratio 54.80% 80.70% 50.0%
TIE 3.3 0.1 6.2
EBITDA coverage 2.6 0.8 8.0
Profit margin 2.60% -1.6% 3.6%
Basic earning power 14.20% 0.60% 17.8%
ROA 6.00% -3.3% 9.0%
ROE 13.30% -17.1% 17.9%
Price/Earnings (P/E) 9.7 -6.3 16.2
Price/Cash flow 8 27.5 7.6
Market/Book 1.3 1.1 2.9
1. What is the free cash flow for 2014?
2. Suppose Congress changed the tax laws so that Berndt's depreciation expenses doubled. No
changes in operations occurred. What would happen to reported profit and to net cash flow?
3. Calculate the 2014 current and quick ratios based on the projected balance sheet and income
statement data. What can you say about the company's liquidity position in 2013?
4. Use the extended DuPont equation to provide a summary and overview of company's financial
condition as projected for 2014. What are the firm's major strengths and weaknesses?