FIN 6212 Winter 2014 Final Exam Name:________________________________________ The Exam is a total of 130 points.

You must complete at least 100 points of problems and you may exceed that for EXTRA CREDIT. MAKE SURE TO SHOW ALL YOUR WORK!!!!

Problem 1: 5 points Blockbuster Inc. Balance Sheet for year-ended Dec 31 ($000's) ASSETS Cash Accounts Receivables Inventory Other Current Assets Total Current Assets Fixed Assets Long Term Investments PP&E Goodwill Total Fixed Assets Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Accounts Payable Short-term Debt 1,090,400 32,800 1,087,400 181,400 214,100 1,079,400 6,455,900 7,749,400 8,548,900 159,500 909,000 5,967,500 7,036,000 7,752,400 Year 1 194,200 185,800 242,200 177,300 799,500 Year 2 200,200 150,000 202,900 163,300 716,400

Total Current Liabilities Long-term Debt Total Liabilities Shareholders' Equity Common Stock Retained Earnings Total Stockholder Equity Total Liabilities and Shareholders' Equity

1,123,200 1,417,300 2,540,500

1,268,800 734,900 2,003,700

6,095,200 -86,800 6,008,400

6,075,800 -327,100 5,748,700

8,548,900

7,752,400

Blockbuster Inc. Income Statement for year-ended Dec 31 ($000's) Year 1 Sales COGS SG&A Depreciation 4,969,100 2,036,000 2,390,600 279,000 Year 2 5,157,600 2,420,700 2,532,400 246,600 176,100 -218,200 78,200 -296,400 -56,100 -240,300

Amortization of Intangibles 180,100 Operating Income (Loss) Interest Expense Income Before Tax Income Tax Expense Net Income 83,400 116,500 -33,100 45,400 -78,500

Referring to the Blockbuster financial statements, what is the change in ROE from Year 1 to Year 2? (ROE = )

Problem 2: 5 points Blockbuster Inc. Income Statement for year-ended Dec 31 ($000's) Year 1 Sales COGS SG&A Depreciation 4,969,100 2,036,000 2,390,600 279,000 Year 2 5,157,600 2,420,700 2,532,400 246,600 176,100 -218,200 78,200 -296,400 -56,100 -240,300

Amortization of Intangibles 180,100 Operating Income (Loss) Interest Expense Income Before Tax Income Tax Expense Net Income 83,400 116,500 -33,100 45,400 -78,500

Referring to the Blockbuster financial statements, what is the change in ROA from Year 1 to Year 2?

Problem 3: 5 points Blockbuster Inc. Income Statement for year-ended Dec 31 ($000's) Year 1 Sales COGS SG&A Depreciation 4,969,100 2,036,000 2,390,600 279,000 Year 2 5,157,600 2,420,700 2,532,400 246,600 176,100 -218,200 78,200 -296,400 -56,100 -240,300

Amortization of Intangibles 180,100 Operating Income (Loss) Interest Expense Income Before Tax Income Tax Expense Net Income 83,400 116,500 -33,100 45,400 -78,500

Referring to the Blockbuster financial statements, which of the following ratios decreased from Year 1 to Year 2: I. II. III. Equity Multiplier Net Profit Margin Total Asset Turnover 5 points

Problem 4:

Blockbuster Inc. Income Statement for year-ended Dec 31 ($000's) Year 1 Sales COGS SG&A 4,969,100 2,036,000 2,390,600 Year 2 5,157,600 2,420,700 2,532,400
4

Depreciation

279,000

246,600 176,100 -218,200 78,200 -296,400 -56,100 -240,300

Amortization of Intangibles 180,100 Operating Income (Loss) Interest Expense Income Before Tax Income Tax Expense Net Income 83,400 116,500 -33,100 45,400 -78,500

Referring to the Blockbuster financial statements, what is the change in Gross Margin from Year 1 to Year 2? (GM = )

Problem 5:

5 points

Blockbuster Inc. Income Statement for year-ended Dec 31 ($000's) Year 1 Sales COGS SG&A Depreciation 4,969,100 2,036,000 2,390,600 279,000 Year 2 5,157,600 2,420,700 2,532,400 246,600 176,100 -218,200 78,200 -296,400 -56,100 -240,300

Amortization of Intangibles 180,100 Operating Income (Loss) Interest Expense Income Before Tax Income Tax Expense Net Income 83,400 116,500 -33,100 45,400 -78,500

Referring to the Blockbuster financial statements, what is the most important underlying reason for the change in ROE?

Problem 6: 5 points Income Statement Molson Coors Inc. Years 1 & 2 ($000s) Year 1 Revenues 2,429,462 COGS 1,537,623 Depreciation 121,091 SG&A 619,143 EBIT 151,605 Interest Expense -14,403 Other income 32,005 Pre-Tax Income 198,013 Income Tax 75,049 Net Income 122,964 Shares outstanding 36,902 Earnings per share $3.33 Dividends per common share $0.80

Year 2 3,776,322 2,414,530 230,299 833,208 298,285 49,732 8,047 256,600 94,947 161,653 36,140 $4.47 $0.82

Referring to the Molson Coors financial statements, what is the most important determinant of the change in ROE?

Problem 7: 10points You have the opportunity to purchase an insurance policy for your newborn son. You must make the payments shown in the table. After his fifth birthday no more payments are required. If your son reaches the age of 60, then the insurance company will pay him $90,000. Alternatively, you could invest the money in a savings account. Your banker promises to pay you interest at the rate of 8% for the first 5 years (from now until your son's fifth birthday), but only promises 4% every year after that. Should you buy the policy or invest in the savings account? First birthday Second birthday Third birthday Fourth birthday Fifth birthday $600 $650 $700 $750 $800

Problem 8: 10

points

Suzanne has identified a project with the following cash flows. What is the present value of the cash flows at time 0 if the interest rate is 9%? Year 1 2 3 4 Cash Flow $2,000 $650 $375 $1,200

Problem 9 10points: Jacquie plans to deposit $3,500 into her savings account for each of the next 5 years, and then $2,000 per year for 5 years after that (all at year end). She anticipates interest rates to be 6% for the next 3 years and then 9% thereafter. How much will she have in the account after the 10 years? Problem 10 10points: You can invest $3,000 at the end of each of the next 20 years into a retirement account paying 10% annual interest. Alternatively, you can enter into a retirement plan with your employer where, for every yearly (end-of-year) payment of $3,000 you make, the firm will contribute $1,500. Your employer's plan will also last for the next 20 years. The firm guarantees a return of 7% on its retirement plan. Which option is better?

Problem 11 15 points: Utility Muffin Research Kitchen Inc. is financed with debt, preferred stock and common equity. Selected information for each of the securities is provided in the table below. Calculate the capital structure weights which would be used to calculate the weighted average cost of capital. Long-term Debt: $5M Face Value, Coupon Rate = 3.5%, Annual Coupons, Time to Maturity = 10 Years, YTM = 5%. Preferred Shares: 0.5M Shares outstanding, Par Value = $10 per share, Dividend Rate (Annual) = 4%, Equivalent preferred shares yield 7%.

Problem 12: 15 points Consider two firms that are identical in every way except that one has $1,200 of debt and 350 shares of stock outstanding, while the other is all-equity and has 400 shares of stock outstanding. Assume that the debt is a perpetuity with annual coupons at the rate of 7%. What is each firm's earnings per share if EBIT is $5,000? Assume a tax rate of 40%. All-Equity Firm $5,000 ?

EBIT EPS

Leveraged Firm $5,000 ?

Problem 13 15 points: The Seattle Corporation has been presented with an investment opportunity which will yield end of year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. What is the NPV for this investment? Problem 14 15points: Orange Inc., the Cupertino-based computer manufacturer, has developed a new all-in-one device: phone, music-player, camera, GPS, and computer. The device is called the iPip. The following data have been collected regarding the iPip project. The company has identified a prime piece of real estate and must purchase it immediately for $100,000. In addition, R&D expenditures of $175,000 must be made immediately. During the first year the manufacturing plant will be constructed. The plant will be ready for operation at the end of Year 1. The construction costs are $500,000 and will be paid upon completion. At the end of the Year 1, an inventory of raw materials will be purchased costing $50,000. Production and sales will occur during years 2 and 3. (Assume that all revenues and operating expenses are received (paid) at the end of each year.) Annual revenues are expected to be $850,000. Fixed operating expenses are $100,000 per year and variable operating expenses are 25% of sales. The construction facilities are classified as 10-year property for tax-depreciation purposes. When the plant is closed it will be sold for $200,000. (Note: Assume the investment in plant is depreciated during years 2 and 3.) The land will be sold for $225,000 at the end of year 3. The tax rate on all types of income is 34%. The cost of capital is 12%. What are the operating cash flows at the end of Year 2? MACRS Depreciation Rates Year 10-Year 1 10.00% 2 18.00% 3 14.40%

15-Year 5.00% 9.50% 8.55%