Exam 9: Prospective Analysis

The statement of cash flows for Georgey Company for 2004 and 2005 is as follows: Net income \ 189 \ 170 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 201 173 Deferred income taxes 14 (20) Restructuring charges 80 90 Accounts receivable 30 20 Inventory (30) 50 Current liabilities 10 30 Cash flow from operations 494 513 Sale of equipment 200 300 Purchase of equipment (130) (120) Cash flow from investing 70 180 Dividends (120) (130) Long-term debt (440) (440) Cash flow from financing (560) (570) -Which of the following statements is correct?

Problem Six: Need for External Financing Yeats Corporation is trying to determine its short-term cash needs. Given the following information, how much money will Yeats need to borrow next year? ● Sales in Year 9 are expected to be $500M ● Operating Margin is expected to be 8% ● Interest expense is expected to be $6M (ignore additional interest expense generated by additional borrowings in Year 9) ● Tax rate is 40% ● Dividend payout ratio is 30% ● Increase in working capital is 5% of sales ● Increase in fixed assets is 10% of sales ● No new equity will be issued

When analyzing the liquidity of a company the current ratio is a better indicator of liquidity than short-term cash forecasts.

If sales increased by 10% per annum for the next 20 years, sales for year 2025 would be closest to:

In determining long-term future cash flows it is normal to project income statement and balance sheet first and construct cash flows from these.

Which of the following statements is most correct?

Gertup has increased its borrowing since last year, in part to finance the increased credit terms offered to customers. Which of the following actions would not decrease its borrowing?

Projected accounts receivable can be calculated by dividing projected sales by accounts receivable turnover rate.

Pro forma financial statements are another name for common size financial statements.

The major use of cash for declining companies is repurchase of equity.

Which of the following statements is incorrect?

If a company is to successfully remain in business over the long haul, which of the following statements is most correct?

As cash is the most liquid of all assets and liquidity is crucial to a company, all companies should hold as much cash as possible.

When a company is experiencing rapid growth, which of the following statements is the most correct?

If a company has excess cash it wishes to return to shareholders it can do this by either distributing extra dividends or repurchasing stock.

Due to competitive pressures, Gertup has had to increase credit terms to customers to maintain sales. This resulted in Gertup's accounts receivable doubling from 12/31/04 to 12/31/05. The average accounts receivable turnover was 30 days. Without the increased credit terms accounts receivable turnover would have remained at 12/31/04 levels. The impact of the change in credit policy was:

a. Refer to Wal*Mart financial statements, above. Prepare a forecasted income statement for Year 8 assuming: ● Total revenues are expected to increase by 12% from Year 7 to Year 8 ● Operating income as a percentage of total revenues will remain unchanged from Year 7 to Year 8 ● Total Interest costs will increase by 10% ● Effective tax rate is 37% b. What additional information will Wal*Mart need in order to assess whether it needs additional outside funding?

Over time, what observation(s) best characterizes how ROE for a given firm should behave? I. ROE will increase, because the firm becomes more efficient II. ROE will decrease, because competition will erode profitability III. The answer depends on how conservative the firm's accounting policies are, which affects its reported earnings.

a. Developing pro forma financial statements and cash flow forecasts depends heavily upon sales forecasts. Imagine you are a financial analyst working for a major stockbroker and you are trying to develop a one-year sales forecast for a major national department store. List five pieces of information you want to obtain to aid you in your forecast, explaining why this will aid you in your forecast. b. Now you have made your best prediction of next year's sales you want to estimate next year's cost of goods sold. Pick two pieces of information you definitely want to obtain in order to help you with this task being sure to explain why they will be helpful.

If a company's cost of capital increases unexpectedly, which of the following actions will help it maintain or increase its stock price: I. Decrease its asset turnover II. Increase its inventory III. Increase its Gross margin IV. Issue a stock dividend