Q Homework #1 FINA 408 Due: At the beginning of the class on Oct 8 (Section 1) or Oct 9 (Sections 2 and 3) Name: __________________________ Homework #1 Guidelines • Please answer the following questions on separate sheets of paper, written by hand and by yourself. • Show all your work and be complete in your analysis. • While you may chat with others regarding homework questions, please ensure the work you turn in is your own work, otherwise you may be violating academic integrity clause (see syllabus for details). • Let me know if I can help – the goal of these problems is to expose you to relevant material, so please make a good effort and assimilate the material. Use the following statements to answer questions 1-4 below: INCOME STATEMENTS For The Periods ended 12/31 (000,000) 20X1 20X2 20X3 Sales $1,578 $2,106 $3,265 COGS 631 906 1,502 Gross Margin $ 947 $1,200 $1,763 Expenses Marketing $316 $495 $882 R & D 158 211 327 Admin. 126 179 294 Total Expenses $ 600 $ 885 $1,503 EBIT $347 $315 $260 Interest 63 95 143 EBT $284 $220 $117 Tax 97 75 40 EAT $187 $145 $ 77 BALANCE SHEETS 12/31 ($000,000) 20X1 20X2 20X3 ASSETS Cash $ 30 $ 40 $ 62 Accounts Receivable 175 351 590 Inventory 90 151 300 Current Assets $ 295 $ 542 $ 952 Fixed Assets Gross $1,565 $2,373 $2,718 Accum. Depreciation (610) (860) (1,135) Net $ 955 $1,513 $1,583 Total Assets $1,250 $2,055 $2,535 LIABILITIES Accounts Payable $56 $81 $134 Accruals 15 20 30 Current Liabilities $71 $101 $164 Capital Long-Term Debt $630 $1,260 $1,600 Equity 549 694 771 Total Liability & Equity $1,250 $2,055 $2,535 The following additional information is provided with the financial statements. Depreciation for 20X1, 20X2, and 20X3 was $200, $250, and $275 million respectively. No stock was sold or repurchased, and like many fast growing companies, and the company paid no dividends. Assume the tax rate is a flat 34% and the firm pays 10% interest on its debt. 1. Construct Common Size Income Statements for 20X1, 20X2, and 20X3. Analyze the trend in each line. What appears to be happening? (Hints: Think in terms of both dollars and percentages. As the company grows, the absolute dollars of cost and expense spending go up. What does it mean if the percentage of revenue represented by the expenditure increases as well? How much of an increase in spending do you think a department could manage efficiently? Could pricing of the company’s products have any effect?) 2. Construct Statements of Cash Flows for 20X2 and 20X3. Where is the company's money going to and coming from? Make a comment about their free cash flows during the period. Is it likely to have positive or negative free cash flows in the future? 3. One hundred million shares of stock have been outstanding for the entire period. The price of company’s stock in 20X1, 20X2, and 20X3 was $39.27, $26.10, and $11.55 respectively. Calculate the firm's Earnings Per Share (EPS), and its Price Earnings Ratio (P/E). What's happening to the P/E? To what things are investors likely to be reacting? 4. Would you recommend this company stock as an investment? Why might it be a very bad investment in the near future? Why might it be a very good one?