Use the financial statements for Koski, Inc.

1. Use the financial statements for Koski, Inc. to answer the question below.

Financial Statements for Koski, Inc.

Balance Sheet (Millions of $)

Assets 2014 2013

Cash and securities 2,500

Accounts receivable 11,500

Inventories 16,000

Total current assets 30,000

Net plant and equipment 30,000

Total assets 60,000 50,000

Liabilities and Equity

Accounts payable 9,500

Notes payable 7,000

Accruals 5,500

Total current liabilities 22,000

Long-term bonds 25,000

Total liabilities 47,000

Common stock 2,000

Retained earnings 11,000

Total common equity 13,000 10,000

Total liabilities and equity 60,000 50,000

Income Statement (Millions of $) 2014 2013

Net sales 97,500 90,000

Operating costs except depreciation 91,813

Depreciation 1,531

Earnings before interest and taxes (EBIT)$4,156

Less interest 1,375

Earnings before taxes (EBT) $2,781

Taxes 973

Net income 1,808 1,500

Assume that Koski's net sales will grow by 20 percent in 2015. Expected Net Income is 2.5 percent of sales. Dividends will be $625 million. The Asset-to-Sales ratio will remain at the 2014 level. All liabilities and equity accounts will remain constant except for retained earnings (which will change due to net income and dividends) and accounts payable will grow with sales at the same ratio as for 2014. What is the projected External Funds Needed (EFN) for 2015?

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10 points

QUESTION 3

1. Answer the following questions pertaining to time value of money.

Part A - Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?

Part B - Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity?

Part C - At a rate of 6.5%, what is the value of the following cash flow stream at the end of year 3?

Years: 0 1 2 3 4

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CFs: $0 $75 $225 $0 $300

Part D - Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0% with interest paid quarterly. Merchants Bank offers to lend you the $50,000, but it will charge 6.0%, with interest paid at the end of the year. What's the difference in the effective annual rates charged by the two banks?

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20 points

QUESTION 4

1. A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, and pays interest semiannually. The bond becomes callable five years from now at a call price of $1,140. What is the bond's yield to maturity? What is its yield to call?

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10 points

QUESTION 5

1. Answer the following questions using the dividend discount model to value stock.

Part A (5 points) - The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. Francis' cost of equity is 10.33%. What is the company's current stock price?

Part B (10 points) - The Ramirez Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 25% for 2 years, after which dividends are expected to grow at a rate of 6% forever. Its required return is 12%. What is the best estimate of the current stock price?

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15 points

QUESTION 6

1. Use the table below, summarized from CFO Magazine's 2006 working capital survey to answer this question. Compare Genzyme's CCC to that of Chiron. What do the CCC for the two companies tell us about their working capital management? Why is Genzyme's 2005 CCC different from Chiron's? Suppose that Genzyme's annual sales are $2,734,842,000 and its cost of capital is 15%. If Genzyme's CCC rises to the level of Chirons's, how much additional money will Genzyme need to tie up in net working capital and what is the annual cost of this additional capital in dollars?

Ratio Genzyme Chiron

Days Sales Outstanding 81.5 90.5

Days Inventory Outstanding 39.7 44.0

Days Payable Outstanding 12.9 22.4

Cash Conversion Cycle 108.3 112.1

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15 points

QUESTION 7

1. Information for Moonkist Orange Juice Project

• Moonkist is a manufacturer orange juice concentrate products. The company is considering entering a new product market, the manufacture and sale of fresh-squeezed orange juice. The proposed project will last for four years, after which, the equipment will be sold at salvage and the project terminated.

• Production would occur in an unused portion of the existing plant. Last year, the company spent $500,000 to repair this section of the plant. If the unused space is not used for this project, it can be rented out to a local produce company for $100,000 per year before taxes. Machinery would cost $500,000. Shipping , installation, and setup charges would be $100,000. Working capital would increase by $50,000 at the time of the initial investment. The working capital will be recovered at the end of the project.

• The machinery will be depreciated under MACRS using a 4 year life, with 33%, 45%, 15%, and 7% of the cost being depreciated in years 1-4 respectively. The full cost of the machinery and setup will be depreciated. The machinery is expected to have a salvage value of $75,000 after 4 years of use.

• Sales are expected to be 200,000 cartons for each of the next four years at a price of $4.00 per can the first year, and growing by inflation of 5% per year thereafter. Operating costs are expected to be $2.00 per can for the first year, and growing by inflation of 4% per year thereafter. These costs will vary proportionately with the number of cans produced.

• The fresh-squeezed orange juice will cannibalize some sales concentrate products. It is expected that concentrate sales will be $50,000 less each year, and operating costs will be $20,000 less.

• Moonkist's cost of capital is 10 percent and its marginal tax rate is 35 percent. Any losses on this project will be offset against taxable income from Moonkist's other product lines.

Using the information provided for Moonkist, compute the relevant cash flows to evaluate this project (initial investment, annual operating cash flows, and terminal value). Compute the Net Present Value and Internal Rate of Return for the project. Should it be accepted?