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Quiz. Please give one-word answers only (“yes”, “no”, “better”, etc): a. Brokeman Brothers, a large investment bank, is facing near-term cash outflows despite having successfully raised capital in the past via stock offerings and having retained significant earnings for over fifty years. i. Can it tap the retained earnings on its balance sheet to pay for its obligations? ii. How about additional paid-in capital? b. The market value of DEF Company’s liabilities (e.g. bonds) falls by $10 million. i. Is the company better or worse off? ii. Will its equity book value go up or down? iii. If you owned the DEF Company, would you prefer the market value of its assets to rise $10 million or the market value of its liabilities to fall $10 million? 2. For each of the following transactions, indicate in the table below how net income and net cash flow are affected (increase, decrease, no effect) and by how much (disregard the effect of taxes): a. Prepay next month’s rent of $500. b. Buy a factory for $10,000 in cash c. Write down the value of damaged inventory by $100. d. Depreciate PPE by $450. e. Pay employees a $1,000 cash bonus. f. Make dividend payments of $250. g. Sell, on account, for $75, a unit of inventory that costs $55. The unit is already in inventory. h. Make a purchase of inventory on accounts payable for $650. i. Sell an asset marked at $200 on the balance sheet for $175. j. Issue 500 shares of common stock for $10 per share.

1. Quiz. Please give one-word answers only (“yes”, “no”, “better”, etc):

a. Brokeman Brothers, a large investment bank, is facing near-term cash outflows despite having successfully raised capital in the past via stock offerings and having retained significant earnings for over fifty years. i. Can it tap the retained earnings on its balance sheet to pay for its obligations?

ii. How about additional paid-in capital?

b. The market value of DEF Company’s liabilities (e.g. bonds) falls by $10 million.

i. Is the company better or worse off?

ii. Will its equity book value go up or down?

iii. If you owned the DEF Company, would you prefer the market value of its assets to rise $10 million or the market value of its liabilities to fall $10 million?

 

2. For each of the following transactions, indicate in the table below how net income and net cash flow are affected (increase, decrease, no effect) and by how much (disregard the effect of taxes):

a. Prepay next month’s rent of $500.

b. Buy a factory for $10,000 in cash

c. Write down the value of damaged inventory by $100.

d. Depreciate PPE by $450.

e. Pay employees a $1,000 cash bonus.

f. Make dividend payments of $250.

g. Sell, on account, for $75, a unit of inventory that costs $55. The unit is already in inventory.

h. Make a purchase of inventory on accounts payable for $650.

i. Sell an asset marked at $200 on the balance sheet for $175.

j. Issue 500 shares of common stock for $10 per share.

 

net income flow net cash flow

a

b

c

d

e

f

g

h

i

j

Industrial Economics Fall 2011

IEOR E4003

 

3. Consider the following 2010 balance sheet data for Funny Mae:

Assets

Cash 41000

Accounts Receivable 50000

Inventory: 175000

Factory, at cost 500000

Less accumulated depreciation 335000

Net fixed assets1 400000

Land 145000

Total assets 811000

Liabilities and stockholder’s equity

Notes payable 142000

Accounts payable 80000

Very long-term mortgage bonds 275000

Preferred stock2 30000

Common stock3 150000

Capital surplus 75000

Retained earnings 59000

Total liabilities and stockholder’s equity 811000 1

Pools of subprime mortgages that cannot be easily converted into cash are included here. 2 Preferred stocks are not convertible, pay 3% on notional (100 dollars), there are 300 preferred shares outstanding. 3 Common stocks have a notional of 10 dollars, there are 15000 common outstanding.

 

a.) Based on the information given, calculate the firm’s working capital

b.) In 2010, the company earned an after-tax net income of $20,000 and paid dividends to common stockholders of $15,900. What were the earnings and dividends per share?

c.) Funny Mae has only issued common stock during its Initial Public Offering (IPO). What was the market price per share at the time of issuance?

 

4. The following accounting information was taken from the book of Sadighian, Inc. for the fiscal year 2010:

 

Selected 2010 Accounting Data

 

Beginning inventory $35,000 Ending inventory $23,000

Other Operating Expenses $22,000 New purchases of goods $83,000

Income Taxes $10,000 Net Income $27,400

Gain on sale of PP&E $6,000 Cash Dividend $12,000

Depreciation $10,000 New Short Term Debt $20,000

New Long Term Debt $50,000 Interest Expense $10,000

 

On the basis of this information, compute the total sales for fiscal year 2010.

Industrial Economics Fall 2011

IEOR E4003

5. Santoli Corporation is considering a plant expansion project that will add a new line of eyewear

products, “Italian Vision”, to its extensive selection of accessories. The financial data for the first

project year are estimated as follows:

Project Estimates

Sales 800,000

Costs of Goods Sold

Labor 150,000

Material 180,000

Total Costs of Goods Sold 330,000

Depreciation 20,500

Operating Expenses 135,000

Interest Expense 8,500

Income Taxes 125,460

 

Additional Information

• The firm must purchase $180,000 of new equipment at the beginning of the year,

financed by $80,000 in cash and $100,000 in borrowings at 8.5% interest payable at the

end of each year. The $8,500 interest expense shown in the income statement represents

the interest payment at the end of the first year.

• The project requires 9,200 in working capital.

 

Based on the given information, compute the Cash Flow from Operations and Investing AND

Free Cash Flow from this project during the first year.

 

6. The financial statement data for Pharmex Pharmaceutical Company for 2010 is as

follows:

PHARMEX PHARMACEUTICAL COMPANY

12/31/09 12/31/10

Comparative Data

Debits

Cash $ 80,000 $ 60,000

Accounts Receivable $ 175,000 $ 235,000

Inventories $ 296,000 $ 325,000

Machinery $ 545,000 $ 555,000

Total $ 1,096,000 $ 1,175,000

 

Credits

Accumulated Depreciation $ 122,500 $ 172,500

Accounts Payable $ 93,500 $ 82,500

Bonds Payable $ 154,000 $ 175,000

Common Stock $ 340,000 $ 400,000

Retained Earnings $ 386,000 $ 345,000

Total $ 1,096,000 $ 1,175,000

 

Income Statement Data

Sales $ 1,052,000

Gain on Sale of PP&E $ 15,000

Cost of Goods Sold $ 878,000

Depreciation Expense $ 75,000

Interest Expenses $ 60,000

Rent Expense $ 70,000 Industrial Economics Fall 2011

IEOR E4003

Addition Information:

Acquisition cost of new machinery is $135,000. Old machinery having an original cost of

$125,000 was sold at a gain of $15,000. Dividends of $25,000 were declared and paid.

 

a. Prepare an income statement including a reconciliation of retained earnings for the year

ended 12/31/10.

b. Prepare a statement of cash flows for the year ended 12/31/10 by filling in the blank

 

Statement of Cash Flows

 

__________ (16,000)

Cash Flow from Operations

+_________ _______

Changes in WC

– Increase in _________ (60,000)

– Increase in __________ _______

+ Increase in AP _______

Cash Flow from investing

– Capital Expenditures (35,000)

Cash Flow from Financing

+ Increase in Bonds Payable _______

+ Increase in Common Stock _______

– _____________ (25,000)

Total Changes in Cash (20,000)

 

**Note: Capital expenditure was calculated to be 35,000 with following reasons.

The accumulated depreciation on 12/31/10 is equal to accumulated depreciation on 12/31/09 less the

portion that belongs to machinery sold, plus depreciation expense. In other words,

 

122,500 – X + 75,000 = 172,500

 

Therefore, the machinery sold has depreciated by X = 25,000, and the net value of machinery sold is

100,000. Cash received from sale of this machinery is 115,000. However, since the company records

15,000 gain on sale of PPE on its income statement (and hence pays tax on it), it only uses 100,000

of cash from sales to contribute to the new machinery. Therefore, the total capital expenditure is

135,000 – 100,000 = 35,000.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Economics Fall 2011

IEOR E4003

The following question may be done in groups of no more than 4 students

 

7. Select a company of your choice from the S&P 500 Index and locate its 2008 10-K,

annual report, and proxy statement. Answer the following questions.

a. Give an overview of the company’s business. Which products/services does the

company provide? Which geographies/demographics does the company market to?

Who are its main customers, suppliers, and competitors?

b. What pattern do you observe in the company’s net income, cash flow from

operations, and working capital over the past three years? Which company-specific

developments and macroeconomic factors influenced these patterns? Support your

answer quantitatively and graphically. Attach a copy of the cash flow statement in

your answer.

c. How does the company finance its business? Do the amount and maturity of

outstanding debt pose potential cash problems for the company in the foreseeable

future?

d. Plot the pattern in the stock price of your company from January 2007 until today

(monthly). Plot the index value of the benchmark S&P 500 in the same graph (you

should use different y-axis). Based on the company’s industry and size, explain how

its price movement differed from changes in the benchmark since the equity market

fallout in September 2008.

e. What were the major issues discussed at the company’s annual meeting? Give a brief

biography of the company’s CEO and CFO. Explain in your own words how have

they contributed to the company during their employment?

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