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?