MME 3113: Engineering Management

ASSIGNMENT #2 Computation of financial ratios and application of Cash flow formulae

Total Marks: 100 Problem #1 [6+2+2=10] Consider the balance sheet entries in Table 1.1 for Iron Eagle Corporation. (a) Compute the firms (i) Current assets (ii) Current liabilities (iii) Working capital, (iv)Shareholders equity (b) If the firm had a net income of $550,000 after taxes, what is the earnings per share. (c) When the firm issued its common stock, what was the market price of the share? Table 1.1. Balance Sheet Statement as of December 31,2009 Assets Cash Marketable securities Accounts receivable Inventories Prepaid taxes and insurance Manufacturing plant at cost Less accumulated depreciation Net fixed assets Goodwill Liabilities and Shareholders Equity Notes payable Accounts payable Income taxes payable Long-term mortgage bonds Preferred stock, 6%, $110 par value (1,000 shares) Common stock, $16 par value (10,000 shares) Capital surplus Retained earnings $160,000 210,000 160, 000 60,000 40,000 $620,000 100, 000 520,000 30,000

60,000 110,000 90,000 410,000 110, 000 160,000 160,000 80,000

Problem #2 [2+2+1+2=7]. A chemical processing firm is planning on adding a duplicate polyethylene plant at another location. The financial information for the first project year is shown in Table 1.2.

(a) (b) (c) (d)

Compute the working-capital requirement during the project What is the taxable income during the project period? What is the net income during the project period? Compute the net cash flow from the project during the first year. Table 1.2: Financial Information for First Project Year

Sales Manufacturing costs Direct materials Direct labor Overhead Depreciation Operating expenses Equipment purchase Borrowing to finance equipment Increase in inventories Decease in accounts receivable Increase in wages payable Decrease in notes payable Income taxes Interest payment on financing

$1,500,000 $150,000 200,000 100,000 200,000 150,000 400,000 200,000 100,000 20,000 30,000 40,000 272,000 20,000

Problem #3 [2+3+2+1+1=9] The data in Table 1.3 are available for two companies, A and B, all stated in millions. (a) Calculate each companys return on equity (ROE) and return on total assets (ROA). (b) Why is company Bs ROE so much higher than company As? Does this mean that company B is a better company? Why or why not? (c) If companies A and B were combined (merged), what would be the impact on the results on ROE? Under what conditions would such a combination make sense? (d) What is the net income during the project period? (e) Compute the net cash flow from the project during the first year.

Table 1.3 Data available for the two companies Description Earnings before interest and taxes Interest expenses Earnings before tax Taxes at 40 % Earnings after tax (net income) Debt Equity Company A $300 20 280 112 168 $200 800 Company B $560 160 400 160 240 $1,600 400

Problem #4[1x12 =12] Table 1.4 summarizes the financial conditions for Apple Computer Corporation. The closing stock price for Apple was $128.24 on September 26, 2008. The average number of outstanding shares was 892.11 million. On the basis of the financial data presented, compute the various financial ratios and make an informed analysis of Apples financial health. (a) Debt ratio (b) Times-interest-earned ratio (c) Current ratio (d) Quick (acid-test) ratio (e) Inventory turnover ratio (f) Days-sales-outstanding (g) Total-assets-turnover ratio (h) Profit margin on sales (i) Return on total assets (with a rax rate of 40%) (j) Return on common equity (k) Price/earnings ratio (l) Book value per share.

Table 1.4 Financial Statements for Apple Computer

All numbers in thousands Period Ending BALANCE SHEET Assets Current Assets Cash and Cash Equivalents Short-Term Investment Net Receivables Inventory Other Current Assets Total Current Assets 11,875,000 12,615,000 6,151,000 509,000 3,540,000 34,690,000 9,352,000 6,034,000 4,811,000 346,000 1,413,000 21,956,000 6,392,000 3,718,000 3,452,000 270,000 677,000 14,509,000 27-Sep-08 29-Sep-07 30-Sep-06

Long Term Investment Property Plant and Equipment Goodwill Intangible Assets Accumulated Amortization Other Assets Deferred Long-term Asset Charge Total Assets Liabilities Current Liabilities Accounts Payable Short/Current Long-Term Debt

2,455,000 207,000 352,000 641,000 1,227,000 39,572,000 1,832,000 38, 000 382,000 1,051,000 88,000 25,347,000

1,281,000 38, 000 160,000 1,217,000 17,205,000

8,558,000 -

6,230,000 -

6,471,000 -

Other Current Liabilities Total Current Liabilities Long Term Debt Other Liabilities

5,534,000 14,092,000 746,000

3,069,000 9,299,000 67,000 1,449,000 10,815,000

6,471,000 14,000 736,000 7,221,000

Deferred Long-term Liability Charge 3,704,000 Minority Interest Negative Goodwill Total Liabilities Stockholders Equity Preferred Stock Common stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Net Tangible Assets 8,000 21,030,000 $20,471,000 7,177,000 13,845,000 18,542,000

5,368,000 9,101,000 63,000 14,532,000 $14,112,000 22,000 9,984,000 $9,786,000 4,355,000 5,607,000

Continued All numbers in thousands Period Ending INCOME STATEMENT Total Revenue Cost of Revenue Gross Profit Operating Expenses Research Development 1,109,000 782,000 2,963,000 3,718,000 2,433,000 32,479,000 21,334,000 24,006,000 15,852,000 19,315,000 13,717,000 27-Sep-08 29-Sep-07 30-Sep-06

Selling General and Administrative 3,761,000 Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest and Tax Interest Expense Income Before Tax Income Tax Expense Minority Interest 620,000 6,895,000 6,895,000 2,061,000 -

599,000 5,008,000 5,008,000 1,512,000 3,496,000 3,496,000 3,496,000

365,000 2,818,000 2,818,000 829,000 1,989,000 1,989,000 1,989,000

Net Income From Continuing Ops 4,834,000 Net Income 4,834,000 -

Preferred Stock And Other Adjustments Net Income To Common Shares

4,834,000

Problem #5 [1x12 =12] Table 1.5 summarizes the financial conditions for Kellog Co. (K), a manufacturer and marketer of ready-to-eat cereal and convenience foods, for fiscal year 2009. Compute the various financial ratios and interpret the firms financial health during fiscal year 2009. The closing stock price was $44.65 on January 2, 2009 and the average number of outstanding shares was 382.5 million. (a) Debt ratio (b) Times-interest-earned ratio (c) Current ratio (d) Quick (acid-test) ratio (e) Inventory turnover ratio (f) Days-sales-outstanding (g) Total-assets-turnover ratio (h) Profit

margin on sales (i) Return on total assets (with a rax rate of 40%) (j) Return on common equity (k) Price/earnings ratio (l) Book value per share. Table 1.5 Financial Statements for Kellogg Company All numbers in thousands Period Ending BALANCE SHEET Assets Current Assets Cash and Cash Equivalents Short-Term Investment Net Receivables Inventory Other Current Assets Total Current Assets Long Term Investment Property Plant and Equipment Goodwill Intangible Assets Accumulated Amortization Other Assets Deferred Long-term Asset Charge Total Assets Liabilities Current Liabilities Accounts Payable Short/Current Long-Term Debt Other Current Liabilities Total Current Liabilities Long Term Debt Other Liabilities 2,522,000 18,000 1,012,000 3,552,000 4,072,000 1,574,000 2,570,000 466,000 1,008,000 4,044,000 3,270,000 1,557,000 2,979,200 723,300 317,700 4,020,200 3,053,000 952,500 255,000 43,000 1,100,000 897,000 226,000 2,521,000 43,000 2,933,000 3,637,000 1,461,000 351,000 10,946,000 11,397,000 524,000 1,026,000 924,000 243,000 2,717,000 2,990,000 3,515,000 1,450,000 725,000 410,600 1,060,700 823,900 131,800 2,427,000 2,815,600 3,448,300 1,419,700 603,400 10,714,000 3-Jan-09 29-Dec-07 30-Dec-06

Deferred Long-term Liability Charge Total Liabilities Stockholders Equity Preferred Stock Common Stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Net Tangible Assets INCOME STATEMENT Total Revenue Cost of Revenue Gross Profit Operating Expenses Research Development

300,000 9,498,000

8,871,000

619,300 8,645,000

105,000 4,836,000 (1,790,000) 438,000 (2,141,000) 1,448,000 ( $3,650,000) 105 ,000 4,217,000 (1,357,000) 388,000 (827,000) 2,526,000 ( $2,439,000)

104,600 3,630,400 (912,100) 292,300 (1,046,200) 2,069,000 ($2,799,000)

12,822,000 7,455,000 5,367,000

11,776,000 6,597,000 5,179,000

10,906,700 6,081,500 4,825,200

3,311,000 1,868,000

3,059,400 1,765,800

Selling General and Administrative 3,414,000 Operating Income or Loss Income from Continuing Operations Total Other Income/Expenses Net Earnings Before Interest and Tax Interest Expense Income Before Tax Income Tax Expense (12,000) 1,941,000 308,000 1,633,000 485,000 1,953,000

(2,000) 1,866,000 319,000 1,547,000 444,000 1,103,000 1,103,000

13,200 1,779,000 307,400 1,471,600 466,500 1,004,100 1,004,100 1,004,100

Net Income From Continuing Ops 1,148,000 Net Income 1,148,000 -

Preferred Stock And Other Adjustments Net Income To Common Shares 1,148,000

1,103,000

Problem #6 [8] What amount would you need to pay each January 1 into a savings account if at the end of 15 years (15 payments) you desire RM 30,000? Annual interest is 7%. (Note: The last payment will coincide with the time of RM 30,000 balance.)

Problem #7 [8] A future amount, F, is equivalent to $1,500 now when six years separate the amounts and the annual interest rate is 12%. What is the value of F?

Problem #8 [8] A present obligation of $20,000 is to be repaid in equal uniform annual amounts, each of which includes repayment of the debt (principal) and interest on the debt, over a period of five years. If the interest rate is 10% per year, what is the amount of the annual repayment?

Problem #9 [8+6=14] Suppose that the $20,000 in problem 3 is to be repaid at a rate of $4,000 plus the interest that is owed based on the beginning-of-year unpaid principal. (a) Compute the total amount of interest repaid in this situation and compare with that of problem 3. (b) Why are the two amounts different?

Problem #10 [4+8=12] It is estimated that a copper mine will produce 10,000 tons of ore during the coming year. Production is expected to increase by 5% per year thereafter in each of the following six years. Profit per ton will be $14 for years one through seven. (a) Draw a cash flow diagram for this copper mine operation from companys point of view. (b) If the company can earn 10% per year on its capital, what is the future equivalent of the copper mines cash flows at the end of year seven?
Note: Date of Submission: 18/03/2013 (for Section 1) Delay will cost @ 10% marks per day No need of submission after 5 days from the due date.

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