Corporate Finance
– Spring 2018 Part A – Budgeting & Financial Analysis You are required to show all work to receive full credit. Assume the following data for Spring Break Corp: Statement of Income: Balance Sheet: 2017 2017 2016 Sales $750 Current Assets $1,050 $840 Costs 300 PP&E 650 400 Op Income 450 Goodwill 150 100 Interest 40 Total Assets 1,850 1,340 Pre-tax Income 410 Taxes 160 Current Liabilities 250 200 Net income $250 Notes Payable 150 120 Revolving Credit Line 150 110 Deferred taxes 20 10 Total Liabilities 570 440 Shareholders’ Equity 1,280 900 $1,850 $1,340 1. Calculate the net profit margin and explain what it means. (2 pts) 2. Calculate the ROE (return on equity) and explain what it means. (2 pts) 3. Calculate the current Debt/Total Capital ratio and explain what it means. (2 pts) 4. Calculate the asset turnover ratio and explain what it means. (2 pts) 5. Based on the following assumptions, what is the expected growth (bps) in operating margin in 2018. (4 pts) a. Sales projected to grow 12.0% each year b. Costs expected to leverage 50 bps (basis points) as a percentage of sales c. Interest expense projected to stay fixed at $40 d. Taxes expected to be 20% as a result of the new tax plan in 2018 Part B – Financial Analysis Short Answer (4 pts each) You are required to show all your work to receive full credit. If using a financial calculator, please list your inputs and the function used. If using excel, please download “Midterm Backup” file under Assignments on Blackboard and submit exam through Blackboard. If using paper, please detail all calculations. 1. At an interest rate of 12%, which of the following sequences of cash flows should you prefer and why? Year 1 Year 2 Year 3 Project A $400 $400 $400 Project B $180 $420 $600 Project C $600 $420 $180 2. Assume Go Fish, Inc. has about 6.0 million shares outstanding and the stock price is $24.50. Also, assume the P/E ratio is about 16.4x. Calculate the approximate market capitalization for Go Fish, Inc. 3. A government bond has a face value of 100 euros, a coupon rate of 5.5 percent and matures in six years. The bond pays annual interest payments. Calculate the yield to maturity of the bond (in euros) if the price of the bond is 105 euros. 4. Tapped Out is a no-growth firm and has 1.3 million shares outstanding. It expects to earn a constant $11.5 million per year on its assets. If it has no debt, all earnings are paid out as dividends, and the cost of capital is 12.3%, calculate the current price per share of the stock. 5. ABC Co. has $7,500,000 of revenue today. It is estimated to grow 15% next year, 13% the following year and 11% in each of the next 2 years. What is the CAGR? 6. Joe Condo has taken a 30-year $425,000 mortgage, payable monthly, on his condo at an interest rate of 6.20% per year. What is the remaining balance (or value) of the mortgage after 6 years? PART C – Short Answer (2 pt each) 1. Please give one example of the following decisions a company may face: – Investment decision – Financing decision 2. What is the relationship between the yield to maturity and coupon rate on a premium bond? 3. During which stage of company’s lifecycle would you expect it to have higher payout ratios and why? 4. Why did Prof. Kaplowitz highlight the Doritos/Mountain Dew Super Bowl commercial as a good use of marketing budget? 5. Rank these securities from most to least risky. a. Senior Secured Bond b. Common Stock c. Subordinated debt d. Preferred Stock 6. What is the NPV rule? 7. Does Rutgers Athletic Department break even from a budget standpoint in 2018? Why or why not?
