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Problem Review Set-1


Given the following financial statements, historical ratios, and industry averages, calculate Sterling
Company's financial ratios for the most recent year. (Assume a 365-day year.)
Footnote-c: The annual principal payment on the long term debt is $100,000

Footnote-d: On December 31 2012, the firm’s common stock closed at 39.50 per share

X (1-0.4)=100,000

Analyze its overall financial situation from both a cross-sectional and a time-series viewpoint. Break your
analysis into evaluations of the firm's liquidity, activity, debt, profitability, and market ratios.

Home Health, Inc., has come to Jane Ross for a yearly financial checkup. As a first step, Jane has
prepared a complete set of ratios for fiscal years 2011 and 2012. She will use them to look for significant
changes in the company's situation from one year to the next.

a. To focus on the degree of change, calculate the year-to-year proportional change by subtracting the
year 2011 ratio from the year 2012 ratio, then dividing the difference by the year 2011 ratio. Multiply the
result by 100. Preserve the positive or negative sign. The result is the percentage change in the ratio from
2011 to 2012. Calculate the proportional change for the ratios shown here.

b. For any ratio that shows a year-to-year difference of 10% or more, state whether the difference is in the
company's favor or not.

c. For the most significant changes (25% or more), look at the other ratios and cite at least one other
change that may have contributed to the change in the ratio that you are discussing.

Consider the balance sheets and selected data from the income statement of Keith Corporation that appear

a. Calculate the firm's net operating profit after taxes (NOPAT) for the year ended December 31, 2012,
using Equation 4.1.
b. Calculate the firm's operating cash flow (OCF) for the year ended December 31, 2012, using Equation

c. Calculate the firm's free cash flow (FCF) for the year ended December 31, 2012, using Equation 4.5.

d. Interpret, compare, and contrast your cash flow estimates in parts b and c.


The actual sales and purchases for Xenocore, Inc., for September and October 2012, along with its
forecast sales and purchases for the period November 2012 through April 2013, follow. The firm makes
20% of all sales for cash and collects on 40% of its sales in each of the 2 months following the sale. Other
cash inflows are expected to be $12,000 in September and April, $15,000 in January and March, and
$27,000 in February. The firm pays cash for 10% of its purchases. It pays for 50% of its purchases in the
following month and for 40% of its purchases 2 months later.

Wages and salaries amount to 20% of the preceding month's sales. Rent of $20,000 per month must be
paid. Interest payments of $10,000 are due in January and April. A principal payment of $30,000 is also
due in April. The firm expects to pay cash dividends of $20,000 in January and April. Taxes of $80,000
are due in April. The firm also intends to make a $25,000 cash purchase of fixed assets in December.

a. Assuming that the firm has a cash balance of $22,000 at the beginning of November, determine the
end-of-month cash balances for each month, November through April.

b. Assuming that the firm wishes to maintain a $15,000 minimum cash balance, determine the required
total financing or excess cash balance for each month, November through April.

c. If the firm were requesting a line of credit to cover needed financing for the period November to April,
how large would this line have to be? Explain your answer.

Red Queen Restaurants wishes to prepare financial plans. Use the financial statements and the other
information provided below to prepare the financial plans. The following financial data are also available:

(1) The firm has estimated that its sales for 2013 will be $900,000.

(2) The firm expects to pay $35,000 in cash dividends in 2013.

(3) The firm wishes to maintain a minimum cash balance of $30,000.

(4) Accounts receivable represent approximately 18% of annual sales.

(5) The firm's ending inventory will change directly with changes in sales in 2013.

(6) A new machine costing $42,000 will be purchased in 2013. Total depreciation for 2013 will be

(7) Accounts payable will change directly in response to changes in sales in 2013.

(8) Taxes payable will equal one-fourth of the tax liability on the pro forma income statement.

(9) Marketable securities, other current liabilities, long-term debt, and common stock will remain

a. Prepare a pro forma income statement for the year ended December 31, 2013, using the percent-of-
sales method.

b. Prepare a pro forma balance sheet dated December 31, 2013, using the judgmental approach.

c. Analyze these statements, and discuss the resulting external financing required.

California Integrated Systems Inc. recently reported $27.75bn of sales, $17.25bn of operating costs other
than depreciation, and $2.1bn of depreciation. The company had no amortization charges, it had $9.6bn
of outstanding bonds that carry a 5% interest rate, and its federal-plus-state income tax rate was 35%. In
order to sustain its operations and thus generate sales and cash flows in the future, the firm was required
to make $3.75bn of capital expenditures on new fixed assets and to invest $900 million in net working
capital requirement (operating working capital) . By how much did the firm's net income exceed its free
cash flow?

[Hint: Use FCF=EBIT(1-T)+Depreciation-NWCR-NFAI]


NWCR=Operating Working Capital = WCR=NCAI

NFAI=Net Fixed Asset Investment