Xacc 280 Week 3
Chapter 3
Problem 3
Operating Activities:
Net Income
$5,560
Depreciation
$4,268
Change in Working Capital
$1,397
Cash from Operating Activities
$11,225
Investing Activities:
Increased in Fixed Assets
($6,068)
Cash from Investing Activities
($6,068)
Financing Activities:
Decrease in Debt
($7,655)
Dividends Paid
($2,900)
New Stock Sold
$4,800
Cash from Financing Activities
($5,755)
Net Cash Flow
($598)
Beginning Cash Flow
$3,245
Net Cash Flow
($598)
Ending Cash
$2,647
Problem 12
a.
Linden
%
Industry
%
Sales
6,000
100
64,000
100
Cost of Goods Sold
3,200
53.3
33,650
52.6
Gross Margin
2,800
47.7
30,350
47.4
Expenses:
Sales and Marketing
430
7.2
3,850
6
Engineering
225
3.8
2,650
4.1
Finance and Administration
650
10.8
4,560 …show more content…
7.1
Total Expenses
1,305
21.8
11,060
17.2
EBIT
1,495
24.9
19,290
30.1
Interest Expense
230
3.8
4,500
7
EBT
1,265
21.1
14,790
23.1
Tax
500
8.3
5,620
8.8
Net Income
765
12.8
9,170
14.3
b.
As you can see in the Linden percentage columns they are significantly less profitable than the Industry. With the EBIT we can see that Linden is less profitable than the industry standard. Linden has a very good interest rate, because its borrowing less, in the end that could hurt them in terms of leveraging the return on equity. Look for excessive executive salaries and bonuses, lavish travel and entertainment expenses, money spent on acquiring other companies, and any other expenditures that aren’t strictly necessary to run the business.
Problem 22
Income Statement
Revenue
$6,000,000
Cost of Goods Sold
$3,600,000
Gross Margin
$2,400,000
Expense
$160,000
EBIT
$1,280,000
Interest
$160,000
EBT
Tax
EAT
Balance Sheet
Current Assets
$400,000
Current Liabilities
$400,000
Fixed Assets
$4,000,000
Long term debt
$2,000,000
Total Assets
$4,600,000
Paid in Capital
$1,450,000
Retained Earnings
$750,000
Total equity
Total liabilities
Ratios
Book value per share
$7.59
Market value per share
$2.42
Problem 26
a.
Common Size
2011
2012
2013
$
%
$
%
$
%
Sales
$1,578
100
$2,106
100 $ 3,265
100
COGS
$631
40
$906
43 $ 1,502
46
Gross Margin
$947
60
$1,200
57 $ 1,763
54
Expenses
Marketing
$316
20
$495
23.5 $ 882
27
R&D
$158
10
$211
10 $ 327
10
Admin
$126
8
$179
8.5 $ 294
9
Total Expenses
$600
38
$885
42 $ 1,503
46
EBIT
$347
22
$315
15 $ 260
8
Interest
$63
4
$95
4.5 $ 143
4.4
EBT
$284
18
$220
10.4 $ 117
3.6
Tax
$97
6.1
$75
3.6 $ 40
1.2
EAT
$187
11.9
$145
6.9 $ 77
2.4
Spending at Protek may have been too high when they were in the growth stage. They fell into a spending trap. Cost is increasing as a percent of revenue, this can be caused by a few things.
b.
Cash Flow Statement
2012
2013
Operating Activities
Net Income
$145
$77
Depreciation
$250
$275
Change in WC
($207)
($325)
Cash from Operating Activities
$188
$27
Investing Activities
Increase in Fixed Assets
($808)
($345)
Cash from Investing Activities
($808)
($345)
Financing Activities
Increase in Debt
$630
$340
Cash from Financing Activities
$630
$340
Net Cash Flow
$10
$22
Beginning Cash
$30
$40
Net Cash Flow
$10
$22
Ending Cash
$40
$62
The cash generated by operations is declining fast. That cash will be gone If things don’t change. Protek’s money is coming from borrowing that is increases in debt. This is increasing the firms risk. Free cash flows are negative because of the rapid growth.
c.
Ratio Analysis
2011
2012
2013
Current Ratio
4.2
5.4
5.8
Quick Ratio
2.9
3.9
4
ACP
40 Days
60 Days
65 Days
Inventory Turnover
7
6
5
Fixed Asset Turnover
1.7
1.4
2.1
Total Asset Turnover
1.33
1
1.3
Debt Ratio
56%
66%
70%
Debt Equity
1.1:1
1.8:1
2.1:1
TIE
5.5
3.3
1.8
ROS
11.90%
6.90%
2.40%
ROA
15%
7.10%
3%
ROE
34.10%
20.90%
10%
Equity Multiplier
2.3
2.90%
3.3
The ACP is increasing which is not a good thing, it means that the firm is selling to a lower class of customer on credit. Inventory turnover is declining which is another bad sign, inventory can become valueless over time. The liquidity situation looks good because of the quick ratio. Fixed asset turnover looks to be improving also. Debt ratio and debt to equity ratios are not looking so good. They could turn this around but it would be a tough task.
d. The DU Pont Equation= ROA=ROS*Total Asset Turnover Industry 10.8% 9.0% 1.2 Protek 3.1% 2.4% 1.3
This tells us that at ROA the issue is in the revenue cost and expense areas associated with the income statement/
Extended Du Pont Equation=ROE=ROA*Equity Multiplier Industry 22.7% 10.8% 2.1 Protek 10% 3% 3.3
This tells us that the leverage is still helping Protek. There is some risk involved because if the ROA falls much lower, the effect of the leverage will be negative.
e.
2011
2012
2013
Number of Shares
100 Mil
100 Mil
100 Mil
Earning in $M
$187
$145
$77
Stock Price
$39.27
$26.10
$11.55
EPS
$1.87
$1.45
$0.77
P/E
21
18
15
Market to BV
7.2
3.8
1.5
The stock price of Protek is dropping. The firms performance establishes earnings per share, but the market’s price earnings on a stock. This tells us what the market will pay in general. A drop in sales could hurt badly because of interest burden.
f. I would not recommend Protek as an investment. The market may be overreacting, so it could be a good risk/reward situation.
Problem 3
Operating Activities:
Net Income
$5,560
Depreciation
$4,268
Change in Working Capital
$1,397
Cash from Operating Activities
$11,225
Investing Activities:
Increased in Fixed Assets
($6,068)
Cash from Investing Activities
($6,068)
Financing Activities:
Decrease in Debt
($7,655)
Dividends Paid
($2,900)
New Stock Sold
$4,800
Cash from Financing Activities
($5,755)
Net Cash Flow
($598)
Beginning Cash Flow
$3,245
Net Cash Flow
($598)
Ending Cash
$2,647
Problem 12
a.
Linden
%
Industry
%
Sales
6,000
100
64,000
100
Cost of Goods Sold
3,200
53.3
33,650
52.6
Gross Margin
2,800
47.7
30,350
47.4
Expenses:
Sales and Marketing
430
7.2
3,850
6
Engineering
225
3.8
2,650
4.1
Finance and Administration
650
10.8
4,560 …show more content…
7.1
Total Expenses
1,305
21.8
11,060
17.2
EBIT
1,495
24.9
19,290
30.1
Interest Expense
230
3.8
4,500
7
EBT
1,265
21.1
14,790
23.1
Tax
500
8.3
5,620
8.8
Net Income
765
12.8
9,170
14.3
b.
As you can see in the Linden percentage columns they are significantly less profitable than the Industry. With the EBIT we can see that Linden is less profitable than the industry standard. Linden has a very good interest rate, because its borrowing less, in the end that could hurt them in terms of leveraging the return on equity. Look for excessive executive salaries and bonuses, lavish travel and entertainment expenses, money spent on acquiring other companies, and any other expenditures that aren’t strictly necessary to run the business.
Problem 22
Income Statement
Revenue
$6,000,000
Cost of Goods Sold
$3,600,000
Gross Margin
$2,400,000
Expense
$160,000
EBIT
$1,280,000
Interest
$160,000
EBT
Tax
EAT
Balance Sheet
Current Assets
$400,000
Current Liabilities
$400,000
Fixed Assets
$4,000,000
Long term debt
$2,000,000
Total Assets
$4,600,000
Paid in Capital
$1,450,000
Retained Earnings
$750,000
Total equity
Total liabilities
Ratios
Book value per share
$7.59
Market value per share
$2.42
Problem 26
a.
Common Size
2011
2012
2013
$
%
$
%
$
%
Sales
$1,578
100
$2,106
100 $ 3,265
100
COGS
$631
40
$906
43 $ 1,502
46
Gross Margin
$947
60
$1,200
57 $ 1,763
54
Expenses
Marketing
$316
20
$495
23.5 $ 882
27
R&D
$158
10
$211
10 $ 327
10
Admin
$126
8
$179
8.5 $ 294
9
Total Expenses
$600
38
$885
42 $ 1,503
46
EBIT
$347
22
$315
15 $ 260
8
Interest
$63
4
$95
4.5 $ 143
4.4
EBT
$284
18
$220
10.4 $ 117
3.6
Tax
$97
6.1
$75
3.6 $ 40
1.2
EAT
$187
11.9
$145
6.9 $ 77
2.4
Spending at Protek may have been too high when they were in the growth stage. They fell into a spending trap. Cost is increasing as a percent of revenue, this can be caused by a few things.
b.
Cash Flow Statement
2012
2013
Operating Activities
Net Income
$145
$77
Depreciation
$250
$275
Change in WC
($207)
($325)
Cash from Operating Activities
$188
$27
Investing Activities
Increase in Fixed Assets
($808)
($345)
Cash from Investing Activities
($808)
($345)
Financing Activities
Increase in Debt
$630
$340
Cash from Financing Activities
$630
$340
Net Cash Flow
$10
$22
Beginning Cash
$30
$40
Net Cash Flow
$10
$22
Ending Cash
$40
$62
The cash generated by operations is declining fast. That cash will be gone If things don’t change. Protek’s money is coming from borrowing that is increases in debt. This is increasing the firms risk. Free cash flows are negative because of the rapid growth.
c.
Ratio Analysis
2011
2012
2013
Current Ratio
4.2
5.4
5.8
Quick Ratio
2.9
3.9
4
ACP
40 Days
60 Days
65 Days
Inventory Turnover
7
6
5
Fixed Asset Turnover
1.7
1.4
2.1
Total Asset Turnover
1.33
1
1.3
Debt Ratio
56%
66%
70%
Debt Equity
1.1:1
1.8:1
2.1:1
TIE
5.5
3.3
1.8
ROS
11.90%
6.90%
2.40%
ROA
15%
7.10%
3%
ROE
34.10%
20.90%
10%
Equity Multiplier
2.3
2.90%
3.3
The ACP is increasing which is not a good thing, it means that the firm is selling to a lower class of customer on credit. Inventory turnover is declining which is another bad sign, inventory can become valueless over time. The liquidity situation looks good because of the quick ratio. Fixed asset turnover looks to be improving also. Debt ratio and debt to equity ratios are not looking so good. They could turn this around but it would be a tough task.
d. The DU Pont Equation= ROA=ROS*Total Asset Turnover Industry 10.8% 9.0% 1.2 Protek 3.1% 2.4% 1.3
This tells us that at ROA the issue is in the revenue cost and expense areas associated with the income statement/
Extended Du Pont Equation=ROE=ROA*Equity Multiplier Industry 22.7% 10.8% 2.1 Protek 10% 3% 3.3
This tells us that the leverage is still helping Protek. There is some risk involved because if the ROA falls much lower, the effect of the leverage will be negative.
e.
2011
2012
2013
Number of Shares
100 Mil
100 Mil
100 Mil
Earning in $M
$187
$145
$77
Stock Price
$39.27
$26.10
$11.55
EPS
$1.87
$1.45
$0.77
P/E
21
18
15
Market to BV
7.2
3.8
1.5
The stock price of Protek is dropping. The firms performance establishes earnings per share, but the market’s price earnings on a stock. This tells us what the market will pay in general. A drop in sales could hurt badly because of interest burden.
f. I would not recommend Protek as an investment. The market may be overreacting, so it could be a good risk/reward situation.