# FIN 370 Week 2 Lab

Problem 1 (Preparing common-size financial statements)

The balance sheet and income statement for Carver Enterprises, Inc. are found here:

Problem 2 (Analyzing common-size financial statements)

Use the common size financial statements found here to respond to your boss' request that you write up your assessment of the firm's financial condition. Specifically, write up a brief narrative that responds to the following questions: How much cash does Carver have on hand relative to its total assets?

a. What proportion of Carver's assets has the firm financed using short-term debt? Long-tem1 debt?

b. What percent of Carver's revenues does the firm have left over after paying all of its expenses (including taxes)?

c. Describe the relative importance of Carver's major expense categories including cost of goods sold, operating expenses, and interest expenses.

Problem 3 (Using common-size financial statements)

The S&H Construction Company expects to have total sales next year totaling \$14,500,000. ln addition, the firm pays taxes at 35 percent and will owe \$286,000 in interest expense. Based on last year's operations the firm's management predicts that its cost of goods sold will be 60 percent of sales and operating expenses will total 26 percent. What is your estimate of the firm's net income (after taxes) for the coming year?

Problem 4 (Liquidity analysis)

Airspot Motors, Inc. has \$2,523,000 in current assets and \$870,000 in current liabilities. The company's managers want to increase the firm's inventory, which will be financed using short-term debt. How much can the firm increase its inventory without its current ratio falling below 2.1 (assuming all other current assets and current liabilities remain constant)

Problem 5 (Future value)

To what amount will \$5,200 invested for 10 years at 9 percent compounded annually accumulate?

Problem 6 (Future value)

Leslie Mosallam, who recently sold her Porsche, placed S 10,600 in a savings account paying annual compound interest of 5 percent.

a. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 3, 7, and 17 year(s).

b. Suppose Leslie moves her money into an account that pays 7 percent or one that pays 9 percent. Rework part (a) using 7 percent and 9 percent.

c. What conclusions can you draw about the relationship between interest rates, time, and future sums from the calculations you just did?

Problem 7 (Related to the Business of Life: Saving for Your First House) (Future value)

You are hoping to buy a house in the future and recently received an inheritance of \$20,000. You intend to use your inheritance as a down payment on your house.

a. If you put your inheritance in an account that earns 9 percent interest compounded annually, how many years will it be before your inheritance grows to \$30,000?

b. If you let your money grow for 9.75 years at 9 percent, how much will you have?

c. How long w ll it take your money to grow to \$30,000 if you move it into an account that pays 3 percent compounded annually?

How long will it take your money to grow to \$30,000 if you move it into an account that pays I I percent?

d. What does all this tell you about the relationship among interest rates, time, and future sums?

Problem 8 (Future value)

Bob Terwilliger received \$13,881 tor his services as financial consultant to the mayor's office of his hometown of Springfield. Bob says that his consulting work was his civic duty and that he should not receive any compensation. So, he has invested his paycheck into an account paying 3.59 percent annual interest and left the account in his will to the city of Springfield on the condition that the city could not collect any money from the account for 160 years. How much money will the city receive in 160 years from Bob's generosity?

Problem 9 (Calculating expected revenues)

The owner of the Crusik Distribution Company is evaluating the expected annual sales tor a new line of facial care products and estimates that there is a 53 percent chance that the product line will be extremely successful, in which case it will generate sales next year of 5.5 million. However, since the new product line has a unique appeal that will require substantial advertising by its manufacturer to gain consumer acceptance, there is a 47 percent chance that revenues for next year will be a modest 1.3 million. What is the expected level of revenues for the new product line?

Problem 10 (Forecasting cash flows using the expected value)

Peterson Trucking is contemplating the acquisition of Armour Transport, a competing trucking firm, and estimates that during the next year the cash flows from the  Armour Transport acquisition will vary depending upon the state of the local economy:

a. Calculate the expected cash flow for next year using the estimates provided above.

b. Assume the probability of a recession increases to 43 percent, the normal scenario probability remains at 51 percent, and the expansion probability drops to only 6 percent. What is your estimate of the expected cash flow for next year under these circumstances?

c. Your analysis of the acquisition suggests that tor the investment to have at least a zero NPV. it must produce an annual expected cash flow of 90,41 0 per year over the next five years. Assuming that the cash flow you estimated in part a is the expected cash flow for years one through five, what would you like to know about the project cash flows to make you more comfortable with the idea that you can indeed generate the requisite 90,410 per year cash flow? (No computations required.)

Problem 11 (Financial Forecasting)

Zapatera Enterprises is evaluating its financing requirements for the coming year. The firm has only been in business for one year, but its CFO predicts that the firm's operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales. Last year Zapatera had \$12.27 million in sales with net income of \$1.24 million. The firm anticipates that next year's sales will reach \$14.56 million with net income rising to \$2.13 million. Given its present high rate of growth, the firm retains all of its earnings to help defray the cost of new investments.

The firm's balance sheet for the year just ended is as follows

Estimate Zapatera's total financing requirements ( total assets) and its net funding requirements (discretionary financing needed) for 2014. Note: Use the percentage of sales given in Zapatera Enterprises' balance sheet for 2013.

Problem 12 (Related to Checkpoint 5.6)

Lance Murdock purchased a wooden statue of a Conquistador for \$7,600 to put in his home office 7 years ago. Lance has recently married, and his home office is being converted into a sewing room. His new wife, who has far better taste than Lance, thinks the Conquistador is hideous and must go immediately. Lance decided to sell it on e-Bay and only received \$5,200 for it, and so he took a loss on the investment. What was his rate of return, that is, the value of i?

Problem 13-4 (Related to Checkpoint 13.3) (Forecasting revenues using scenario analysis) Floating Homes, Inc. is a manufacturer of luxury pontoon and house boats that sell for \$40,000 to \$100,000. To estimate its revenues for the following year, Floating Homes divides its boat sales into three categories based on selling price (high, medium, and low) and estimates the number of units it expects to sell under three different economic scenarios. These scenarios include a recession (Scenario Q, a continuation of current conditions in which the economy is level (Scenario IQ, and a strong economy (Scenario IIQ. These estimates are given here: Using these estimates, calculate the expected revenue for Floating Homes, Inc. for the following year.

Problem 14 (Break-even analysis)

Farrington Enterprises owns a number of sporting goods businesses and is currently analyzing a new T-shirt printing business. Specifically, the company is evaluating the feasibility of this business based on its estimates of unit sales, the price per unit, variable cost per unit and fixed costs. The company's initial estimates of annual sales and other critical variables are shown here:

Problem 15

The Marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of it is \$582,000 and it’s expected to have a six year life with annual depreciation expense of \$97,000 and no salvage value. Annual Sales from the new facility is expected 2,010 units with a price of \$930 per unit. Variable production costs are \$570 per unit while fixed cash expenses are \$75,000 per year

a. find the accounting and the cash break-even units of production. (round to nearest interger)

b. will the plant make a profit based on its current expected level of operations?

c. will the plant contribute cash flow to the firm at the expected level of operations?

Problem 16 (Review of financial statements)

A scrambled list of accounts from the income statement and balance sheet of Belmond, Inc. is found here:

a.. How much is the firm's net working capital?

b. Complete an income statement and a balance sheet for Behnond..

c. If you were asked to respond to parts (a) and {II) as part of a training exercise, what could you tell your boss about the company's financial condition based on your answers?

Problem 17 (Corporate income tax)

Meyer Inc. bas taxable income (earnings before taxes) of \$300,000. Calculate Meyers federal income tax liability using the tax table shown in the popup. What are the firm's and marginal tax rates?

Problem 18 (Analyzing the quality of firm earnings)

Kabutell, Inc. had net income of \$750,000, cash flow from financing activities of \$50,000, depreciation expenses of \$50,000, and cash flow from operating activities of \$575,000.

• Posted: 5 years ago
FIN 370 Week 2 Finance Lab

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