FIN 4424 Exam 1
Degree of Combined Leverage
=Degree of Operating Leverage * Degree of Financial Leverage
Taxes Value
=Earning before tax - Net Income
Degree of Financial Leverage
=IFERROR (Earnings Before Interest Taxes/ (Earning before taxes - preferred dividends/ 1 - Tax rate)), NA ())
Which of the following statements about the common-size income statement is NOT true?
C. On a common-size income statement, each item is expressed as a percent of Gross Profit.
Which of the following statements about the income statement is true?
C. Revenue shows at the time of sale, not when the cash is actually received.
Estimate the maintenance costs for the car with a mileage of 20,000.
Model: 𝐶𝑂𝑆𝑇 = −796.07 + 0.05 × 𝑀𝐼𝐿𝐸𝐴𝐺𝐸 If 𝑀𝐼𝐿𝐸𝐴𝐺𝐸 = 20,000, then 𝐶𝑂𝑆𝑇 = −796.07 + 0.05 × 20,000 = $203.93. Therefore, the maintenance costs will be $203.93.
Operating Break-even Point (Dollars)
= Operating Break-even Point (Units) * Price per unit
Net Income Ratio
= ROA * (Total Assets2018+Total Assets2017/2)
Gross Profit Value
= Sales - COGS
Sales Ratio
= net income / net profit margin
Degree of Operating Leverage
= IFERROR (Sales - Variable costs/ Earning before interest taxes) NA ())
Cost of Goods Sold Ratio
= Inventory turn over ratio * (Inventory2018+Inventory2017/2)
Why does liquidity matter? What might it indicate? Can a firm have too much liquidity?
1) Liquidity indicates the firm's ability to meet its short term obligation (ability to pay lenders). 2) A firm could have too much liquidity if the managers are using cash inefficiently, which could lead to serious agency problems
In the case study, we analyzed and compared Intel Corp. and Advanced Micro Devices (AMD), Inc.What tools did we use to compare the two firms? What was the conclusion we reached in class?
1) We calculated the financial ratios based on the financial statements for the two firms. 2) We applied DuPont analysis to see what caused the low (negative) ROE and ROA ratios for AMD, Inc. 3) We used the Altman's Z-score model to analyze if the two firms were under financial distress. 4) Conclusions: i. Intel was doing much better than AMD, Inc. according to the financial ratios. AMD's strategy of lowing the prices of the products did not help it generate more profits. ii. Intel had a Z-score of 7.86 in 2008, which indicated that Intel was in a good state and no bankruptcy was predicted in the near future. iii. AMD had a Z-score of -0.87 in 2008, which indicated that AMD would go bankrupt within one year
Earnings before Taxes Value
= EBIT - Interest Expense
Operating Break-even Point (Units)
= Fixed Costs / (Price per unit - Fixed Costs/ Unit Sales)
Units to Meet EBIT Target
= Fixed costs + Target EBIT / (Price per unit - Fixed Costs/ Unit Sales)
EBIT Value
= Gross Profit * (Sellin GA+ Fixed Expenses + Depreciation Expense)
Table 4 below is a part from an Excel spreadsheet. It presents the actual sales and COGS of Company XYZ for the years from 2013 and 2017, and the estimated sales for 2018. As a financial analyst, you are asked by the management of the company to forecast the COGS for 2018. You decide to use the TREND function to estimate the COGS as a function of sales (i.e. 퐶푂퐺). Which of the following formula should youenter in Cell "C7" to forecast the COGS?
A. TREND(C2:C6, B2:B6, B7)
Write down the Excel formulas you should enter in the Cells "B10", "B11" and "B23" in the table below to calculate Accumulated Depreciation, Net Fixed Assets, and Total Liabilities and Owner's Equity, respectively
Accumulated Depreciation =IS(Depreciation Expense2018 + Accumulated Depreciation 2017) Net Fixed Assets=Plant and Equipment - Accumulated Depreciation Total Liabilites + Total Owner Equity= Total Liabilities + Total Stockholder Equity
Table 3 is a part from an Excel worksheet. In order to analyze Company XYZ's financial health, you decide to compare the ROE of the company (Ratio1) to the industry average (Ratio2). If Ratio1 < 0.8*Ratio2, then D2 = "Bad".If 0.8*Ratio2 <= Ratio1 < 1.2*Ratio2, then D2 = "OK".If Ratio1>1.2*Ratio2, then D2="Good". Which of following IF statements below should youenter in Cell "D2" so that it will show "Bad", "OK" or "Good" under different conditions as stated above?
B. =IF(B2<0.8*C2,"Bad",IF(B2<1.2*C2,"OK","Good"))
You are forecasting the balance sheet for Company XYZ using the Percent of Sales method, but you notice that the forecast balance sheet does not balance. The Total Assets are greater than Total Liabilities and Equity. What does this indicate and what can you do to resolve the issue?
B. Deficit of funds; Reduce cash
Big Rock Candy Mountain Mining is a private firm. Calculate the Z-score for the company using Altman's model. Does it appear that the firm is in imminent danger of bankruptcy?
Big Rock Candy is a PRIVATE firm. Based on the Altman's Z-score model for privately held firms, the Z-score for the firm is 1.78. Since 1.21 < 1.78 < 2.90, the company is in the gray zone.
When you forecast the balance sheet using the Percent of Sales method, which of the following two asset items are assumed to be a given percent of sales?
C. Accounts Receivable and Inventory
Write down the Excel formulas you should enter in the Cells "B8", "B17" and "C21" in the table below to calculate Change in Inventories, Change in Long-term Debt, and Net Change in Cash Balance, respectively.
Change In Inventories= BS(Inventory2017) - BS(Inventory2018) Change in Long Term Debtv= BS(LongTerm Debt2018)- BS (Long term Debt2017) Net Change in Cash balance = Total Cash flows from Operations+ Total Cash flows from Investing + Total Cash flows from Financing
Use the following information about Company XYZ for Question 10. If sales increase by 8%, what should be the increase in EBIT?
EBIT = Sales − Variable costs − Fixed costs DOL = Sales − Variable Costs EBIT %∆EBIT = DOL × %∆Sales = 2.4286 × 8% = 19.43%
As a financial analyst at Elvis Products International, you are creating the company's financial statements for 2018 in Excel. You've entered some of the numbers on each of the three financial statements presented below and are now ready to use Excel formulas to calculate the rest of the items. Write down the excel formulas you should enter in the Cells "B7" and "B11" in the table below to calculate the Gross ProfitandEBIT, respectively
Gross Profit = Sales - COGS EBIT = Gross Profit - SUM(Selling and GA, Fixed Expenses, Depreciation Expense)
What is the value of β? What's the interpretation?
Interpretation: If you drive one more mile, the annual maintenance cost will increase by $0.05.
You want to predict the annual expenditure for the maintenance of a given car (Toyota) by using the mileage of the car as the explanatory variable. The model is as follows: The output below presents the regression results. 1) How can you interpret the R Square of 85.85%?
It indicates that 85.85% of the variation in the maintenance costs can be explained by the model.
The Table 1 below presents some of the financial ratios of Company XYZ for 2018. What is the company's Return on Equity (ROE) for 2018?
Net Profit Margin × Total Asset Turnover Ratio 1 − Total Debt Ratio
What are the two general principles you need to follow when creating Excel spreadsheets?
Principle 1: 1) Let Excel do the work. Use formulas and cell references whenever possible. 2) Principle 2: Format the worksheet so that it is easy to understand: i. Arrange the numbers logically; ii. Follow accepted accounting formats; iii. User color and fonts judiciously to highlight important numbers
Write down the Excel formulas to calculate the missing items with the word "Ratio" based on the information provided in the table above.2) Write down the Excel formulas to calculate the missing items with the word "Value".
See below
Which of the following statements about the efficiency ratios is true?
The Average Collection Period ratio measures how fast customers are paying their bills. A lower ratio indicates that the clients pay their bills faster, which is good for the firm. A is incorrect. Managers do care about efficiency ratios. B is incorrect. Efficiency ratios measure how effectively a firm is using its assets to generate sales. D is incorrect. Current ratio is a liquidity ratio.
Is mileage a significant determinant of maintenance costs?
The t-stat of 𝛽 is 18.27, and |18.27| > 2, so mileage is a significant determinant of maintenance cost.