公司理财Corporate-Finance-第九版-CASE答案.doc

C-45 CASE SOLUTIONS

Case Solutions

Fundamentals of Corporate Finance

Ross, Westerfield, and Jordan
9th edition

CHAPTER 2 C-5

CHAPTER 1
THE McGEE CAKE COMPANY

1. The advantages to a LLC are: 1) Reduction of personal liability. A sole proprietor has unlimited liability, which can include the potential loss of all personal assets. 2) Taxes. Forming an LLC may mean that more expenses can be considered business expenses and be deducted from the company’s income. 3) Improved credibility. The business may have increased credibility in the business world compared to a sole proprietorship. 4) Ability to attract investment. Corporations, even LLCs, can raise capital through the sale of equity. 5) Continuous life. Sole proprietorships have a limited life, while corporations have a potentially perpetual life. 6) Transfer of ownership. It is easier to transfer ownership in a corporation through the sale of stock.

The biggest disadvantage is the potential cost, although the cost of forming a LLC can be relatively small. There are also other potential costs, including more expansive record-keeping.

2. Forming a corporation has the same advantages as forming a LLC, but the costs are likely to be higher.

3. As a small company, changing to a LLC is probably the most advantageous decision at the current time. If the company grows, and Doc and Lyn are willing to sell more equity ownership, the company can reorganize as a corporation at a later date. Additionally, forming a LLC is likely to be less expensive than forming a corporation.

CHAPTER 2
CASH FLOWS AND FINANCIAL STATEMENTS AT SUNSET BOARDS

Below are the financial statements that you are asked to prepare.

1. The income statement for each year will look like this:

Income statement

2008

2009

Sales
$247,259

$301,392

Cost of goods sold
126,038

159,143

Selling & administrative
24,787

32,352

Depreciation
35,581

40,217

EBIT
$60,853

$69,680

Interest
7,735

8,866

EBT
$53,118

$60,814

Taxes
10,624

12,163

Net income
$42,494

$48,651

Dividends
$21,247

$24,326

Addition to retained earnings
21,247

24,326

2. The balance sheet for each year will be:

Balance sheet as of Dec. 31, 2008

Cash
$18,187

Accounts payable
$32,143

Accounts receivable
12,887

Notes payable
14,651

Inventory
27,119

Current liabilities
$46,794

Current assets
$58,193

Long-term debt
$79,235

Net fixed assets
$156,975

Owners' equity
89,139

Total assets
$215,168

Total liab. & equity

$215,168

In the first year, equity is not given. Therefore, we must calculate equity as a plug variable. Since total liabilities & equity is equal to total assets, equity can be calculated as:

Equity = $215,168 – 46,794 – 79,235
Equity = $89,139

Balance sheet as of Dec. 31, 2009

Cash
$27,478

Accounts payable
$36,404

Accounts receivable
16,717

Notes payable
15,997

Inventory
37,216

Current liabilities
$52,401

Current assets
$81,411

Long-term debt
$91,195

Net fixed assets
$191,250

Owners' equity
129,065

Total assets
$272,661

Total liab. & equity
$272,661

The owner’s equity for 2009 is the beginning of year owner’s equity, plus the addition to retained earnings, plus the new equity, so:

Equity = $89,139 + 24,326 + 15,600
Equity = $129,065

3. Using the OCF equation:

OCF = EBIT + Depreciation – Taxes

The OCF for each year is:

OCF2008 = $60,853 + 35,581 – 10,624
OCF2008 = $85,180

OCF2009 = $69,680 + 40,217 – 12,163
OCF2009 = $97,734

4. To calculate the cash flow from assets, we need to find the capital spending and change in net working capital. The capital spending for the year was:

Capital spending

Ending net fixed assets
$191,250

– Beginning net fixed assets
156,975

+ Depreciation
40,217

Net capital spending
$74,492

And the change in net working capital was:

Change in net working capital

Ending NWC
$29,010

– Beginning NWC
11,399

Change in NWC
$17,611

So, the cash flow from assets was:

Cash flow from assets

Operating cash flow
$97,734

– Net capital spending
74,492

– Change in NWC
17,611

Cash flow from assets
$ 5,631

5. The cash flow to creditors was:

Cash flow to creditors

Interest paid
$8,866

– Net new borrowing
11,960

Cash flow to creditors
–$3,094

6. The cash flow to stockholders was:

Cash flow to stockholders

Dividends paid
$24,326

– Net new equity raised
15,600

Cash flow to stockholders
$8,726

Answers to questions

1. The firm had positive earnings in an accounting sense (NI > 0) and had positive cash flow from operations. The firm invested $17,611 in new net working capital and $74,492 in new fixed assets. The firm gave $5,631 to its stakeholders. It raised $3,094 from bondholders, and paid $8,726 to stockholders.

2. The expansion plans may be a little risky. The company does have a positive cash flow, but a large portion of the operating cash flow is already going to capital spending. The company has had to raise capital from creditors and stockholders for its current operations. So, the expansion plans may be too aggressive at this time. On the other hand, companies do need capital to grow. Before investing or loaning the company money, you would want to know where the current capital spending is going, and why the company is spending so much in this area already.

CHAPTER 3 C-11

CHAPTER 3
RATIOS ANALYSIS AT S&S AIR

1. The calculations for the ratios listed are:

Current ratio = $2,186,520 / $2,919,000
Current ratio = 0.75 times

Quick ratio = ($2,186,250 – 1,037,120) / $2,919,000
Quick ratio = 0.39 times

Cash ratio = $441,000 / $2,919,000
Cash ratio = 0.15 times

Total asset turnover = $30,499,420 / $18,308,920
Total asset turnover = 1.67 times

Inventory turnover = $22,224,580 / $1,037,120
Inventory turnover = 21.43 times

Receivables turnover = $30,499,420 / $708,400
Receivables turnover = 43.05 times

Total debt ratio = ($18,308,920 – 10,069,920) / $18,308,920
Total debt ratio = 0.45 times

Debt-equity ratio = ($2,919,000 + 5,320,000) / $10,069,920
Debt-equity ratio = 0.82 times

Equity multiplier = $18,308,920 / $10,069,920
Equity multiplier = 1.82 times

Times interest earned = $3,040,660 / $478,240
Times interest earned = 6.36 times

Cash coverage = ($3,040,660 + 1,366,680) / $478,420
Cash coverage = 9.22 times

Profit margin = $1,537,452 / $30,499,420
Profit margin = 5.04%

Return on assets = $1,537,452 / $18,308,920
Return on assets = 8.40%

Return on equity = $1,537,452 / $10,069,920
Return on equity = 15.27%

2. Boeing is probably not a good aspirant company. Even though both companies manufacture airplanes, S&S Air manufactures small airplanes, while Boeing manufactures large, commercial aircraft. These are two different markets. Additionally, Boeing is heavily involved in the defense industry, as well as Boeing Capital, which finances airplanes.

Bombardier is a Canadian company that builds business jets, short-range airliners and fire-fighting amphibious aircraft and also provides defense-related services. It is the third largest commercial aircraft manufacturer in the world. Embraer is a Brazilian manufacturer than manufactures commercial, military, and corporate airplanes. Additionally, the Brazilian government is a part owner of the company Bombardier and Embraer are probably not good aspirant companies because of the diverse range of products and manufacture of larger aircraft.

Cirrus is the world's second largest manufacturer of single-engine, piston-powered aircraft. Its SR22 is the world's best selling plane in its class. The company is noted for its innovative small aircraft and is a good aspirant company.

Cessna is a well known manufacturer of small airplanes. The company produces business jets, freight- and passenger-hauling utility Caravans, personal and small-business single engine pistons. It may be a good aspirant company, however, its products could be considered too broad and diversified since S&S Air produces only small personal airplanes.

3. S&S is below the median industry ratios for the current and cash ratios. This implies the company has less liquidity than the industry in general. However, both ratios are above the lower quartile, so there are companies in the industry with lower liquidity ratios than S&S Air. The company may have more predictable cash flows, or more access to short-term borrowing. If you created an Inventory to Current liabilities ratio, S&S Air would have a ratio that is lower than the industry median. The current ratio is below the industry median, while the quick ratio is above the industry median. This implies that S&S Air has less inventory to current liabilities than the industry median. S&S Air has less inventory than the industry median, but more accounts receivable than the industry since the cash ratio is lower than the industry median.

The turnover ratios are all higher than the industry median; in fact, all three turnover ratios are above the upper quartile. This may mean that S&S Air is more efficient than the industry.

The financial leverage ratios are all below the industry median, but above the lower quartile. S&S Air generally has less debt than comparable companies, but still within the normal range.

The profit margin, ROA, and ROE are all slightly below the industry median, however, not dramatically lower. The company may want to examine its costs structure to determine if costs can be reduced, or price can be increased.

Overall, S&S Air’s performance seems good, although the liquidity ratios indicate that a closer look may be needed in this area.

Below is a list of possible reasons it may be good or bad that each ratio is higher or lower than the industry. Note that the list is not exhaustive, but merely one possible explanation for each ratio.

Ratio
Good
Bad

Current ratio
Better at managing current accounts.
May be having liquidity problems.

Quick ratio
Better at managing current accounts.
May be having liquidity problems.

Cash ratio
Better at managing current accounts.
May be having liquidity problems.

Total asset turnover
Better at utilizing assets.
Assets may be older and depreciated, requiring extensive investment soon.

Inventory turnover
Better at inventory management, possibly due to better procedures.
Could be experiencing inventory shortages.

Receivables turnover
Better at collecting receivables.
May have credit terms that are too strict. Decreasing receivables turnover may increase sales.

Total debt ratio
Less debt than industry median means the company is less likely to experience credit problems.
Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE.

Debt-equity ratio
Less debt than industry median means the company is less likely to experience credit problems
Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE.

Equity multiplier
Less debt than industry median means the company is less likely to experience credit problems.
Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE.

TIE
Higher quality materials could be increasing costs.
The company may have more difficulty meeting interest payments in a downturn.

Cash coverage
Less debt than industry median means the company is less likely to experience credit problems.
Increasing the amount of debt can increase shareholder returns. Especially notice that it will increase ROE.

Profit margin
The PM is slightly below the industry median. It could be a result of higher quality materials or better manufacturing.
Company may be having trouble controlling costs.

ROA
Company may have newer assets than the industry.
Company may have newer assets than the industry.

ROE
Lower profit margin may be a result of higher quality.
Profit margin and EM are lower than industry, which results in the lower ROE.

CHAPTER 4 C-19

CHAPTER 4
PLANNING FOR GROWTH AT S&S AIR

1. To calculate the internal growth rate, we first need to find the ROA and the retention ratio, so:

ROA = NI / TA
ROA = $1,537,452 / $18,309,920
ROA = .0840 or 8.40%

b = Addition to RE / NI
b = $977,452 / $1,537,452
b = 0.64

Now we can use the internal growth rate equation to get:

Internal growth rate = (ROA × b) / [1 – (ROA × b)]
Internal growth rate = [0.0840(.64)] / [1 – 0.0840(.64)]
Internal growth rate = .0564 or 5.64%

To find the sustainable growth rate, we need the ROE, which is:

ROE = NI / TE
ROE = $1,537,452 / $10,069,920
ROE = .1527 or 15.27%

Using the retention ratio we previously calculated, the sustainable growth rate is:

Sustainable growth rate = (ROE × b) / [1 – (ROE × b)]
Sustainable growth rate = [0.1527(.64)] / [1 – 0.1527(.64)]
Sustainable growth rate = .1075 or 10.75%

The internal growth rate is the growth rate the company can achieve with no outside financing of any sort. The sustainable growth rate is the growth rate the company can achieve by raising outside debt based on its retained earnings and current capital structure.

2. Pro forma financial statements for next year at a 12 percent growth rate are:

Income statement

Sales
$ 34,159,350

COGS
24,891,530

Other expenses
4,331,600

Depreciation
1,366,680

EBIT
$ 3,569,541

Interest
478,240

Taxable income
$ 3,091,301

Taxes (40%)
1,236,520

Net income
$ 1,854,780

Dividends
$ 675,583

Add to RE
1,179,197

Balance sheet

Assets

Liabilities & Equity

Current Assets

Current Liabilities

Cash
$ 493,920

Accounts Payable
$ 995,680

Accounts rec.
793,408

Notes Payable
2,030,000

Inventory
1,161,574

Total CL
$ 3,025,680

Total CA
$ 2,448,902

Long-term debt
$ 5,320,000

Shareholder Equity

Common stock
$ 350,000

Fixed assets

Retained earnings
10,899,117

Net PP&E
$ 18,057,088 

Total Equity
$ 11,249,117

Total Assets
$ 20,505