Quiz 1 Reviewer

Weatherford Industries Inc. has the following ratios: A0 / S 0  1.6;  0.4; profit
* *
L /S
0 0
margin =0.10; and retention ratio = 55%.
Sales last year were $100M. Assuming that these ratios remain constant:

a. Use the AFN equation to determine the maximum growth rate (sustainable growth rate) it can
achieve without having to employ non-spontaneous external funds.
b.Suppose financial consultants report (1) that the inventory turnover ratio: Sales/Inventory = 3X
versus an industry average of 4X and (2) inventories can be reduced and thus raise its turnover
to 4 without affecting sales, profit margin or other asset turnover ratios. Determine the amount
of additional funds the company will require next year if sales grow by 20%.
c. Suppose 40% of the company’s present asset holdings is fixed asset while the remainder are all
current assets which increase proportionately with sales. If the company is not yet operating at
full capacity and an additional 15% of sales increase next year can be ably absorbed by the
slack capacity, determine the additional amount of external financing needed.

Questions Answer Pts

a. Maximum growth rate? 2
b.1 What is the projected level of inventory if company 2
succeeds to improve its turnover next year?
b.2 What is the new asset to sales proportion with the 4
improvement in the inventory turnover ratio?
b.3 What is the total current amount of external 3
financing employed by the company?
b.4 What additional external funds would the company 5
require next year to fund its 20% sales growth
c.1 What is the projected total asset amount next year 2
with the 15% sales increase.
c.2 What additional amount of external funds would be 2
required?

The following data apply to Sinotronics (in millions):

Cash and equivalents 120

Fixed Assets 267.5
Sales 1,100
Net Income 52
Current Liabilities 106.8
Current Ratio 3.1X
DSO 41.25 days
ROE 12.5%
Use a 365-day year
Sinotronics has no preferred stocks- only common equity, current liabilities and long-term debt.

A. Determine the following (1pt. each):

Acct/Ratio Answer Acct/Ratio Answer

Accounts Rec. Common Equity
Current Assets Quick Ratio
Total Assets Long-term Debt
ROA

B. If Sinotronics’ could reduce its DSO from 41.25 days to 30.4 days while holding other
things constant, this would generate cash. The company plans to use this cash to buy back
common stocks (at book value) thus reducing common equity.

Questions Answer Pts.

b.1 How much cash would 2
it generate?
How would the buy back affect the following (just indicate increase or decrease):
b.2 ROE 1
b.3 ROA 1
b.4 Financial Leverage 1

C. Suppose Filtronics, the erstwhile competitor of Sinotronics’, has a current ratio of 2.9 and
a quick ratio of 2.5.

Question Answer Pts

What weakness does this reveal about 3
the asset holdings of Sinotronics?

Given below are the balance sheets as of Dec 31, 1979 and Dec 31, 1980 as well as the income
statement.

Electronics Limited
Comparative Balance Sheets (in ‘000)
Dec 31, 1979 Dec 31, 1980
Cash 74,000 37,000
Accounts Receivable 54,000 47,000
Inventories 312,000 277,000
Prepaid Expenses 6,000 4,000
Land 60,000 60,000
Patents, Net 55,000 65,000
Buildings and Equipment 420,000 480,000
Less: Acc. Depreciation (105,000) (120,000)
Total Assets 876,000 850,000

Accounts Payable 58,000 94,000

Notes Payable 28,000 8,000
Income Tax Accrued 86,000 12,000
Social Security Tax 3,000 5,000
Accrued
Long Term Debt 220,000 60,000
Capital 250,000 460,000
Retained Earnings 231,000 211,000
Total Liabilities & Equities 876,000 850,000

Electronics Limited
Income Statement (in ‘000)
Net Sales 1,970,000
Less: CGS (1,480,000)
Gross Profit 490,000
Less: Operating Expenses (500,000)
Net Loss from Operations (10,000)
Add: Other Revenues 7,000
Less: Other Losses (Net Loss on Machine Sale) (1,000)
Net Loss (4,000)

Retained Earnings, Beginning 231,000

Less: Dividend Paid (16,000)
Retained Earnings, Ending 211,000
During the year, a specialized machine that originally cost 15M was sold. The accumulated
depreciation of this machine at the time of the sale was 8M. The machine was sold for 6M and
full payment was received in cash. Yearly amortization of intangible asset stands at 6M.

A. (19pts) Do a funds flow statement on cash basis:

OPERATING ACTIVITIES
Sources of Cash Amount Uses of Cash Amount
NET CASH GENERATED BY OPERATING ACTIVITIES =
INVESTING ACTIVITIES
Sources of Cash Amount Uses of Cash Amount

NET CASH GENERATED BY INVESTING ACTIVITIES =

FINANCING ACTIVITIES
Sources of Cash Amount Uses of Cash Amount

NET CASH GENERATED BY FINANCING ACTIVITIES =

NET CHANGE IN CASH =

B. Answer the following (assume no tax charges for operational loss and ‘Net Loss from
Operations’ will serve as EBIT).
Questions Answer Pts.
b.1 Compute the total operating capital or 2
investor supplied funds for the company on
1980.
b.2 Compute the company’s FCF for 1980. 3
b.3 If after-tax cost of capital is 12%, what is 2
the company’s EVA for 1980?
b.4 Comment on the company’s state of 3
working capital, return to shareholders,
financing activities vis-à-vis the investment it
is undertaking. What should the company
watch out for?