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FINAL EXAM ONLINE MBAD 6235 FINANCE 2020 MBAD 6235-ON FINANCE 2020 FINAL EXAM THIS IS AN EXAM. THEREFORE, REMAIN SILENT ABOUT ALL ASPECTS OF THE EXAM UNTIL THE EXAM PERIOD ENDS ON WEDNESDAY, APRIL 29, 2020 AT 11:59 PM EST TALK TO NO ONE, INSIDE OR OUTSIDE THE COURSE. DO NOT FORGET TO TO SIGN THE HONOR STATEMENT AT THE TOP OF THE QUESTIONS TAB. Direc8ons Two exam files are posted…this .xlsx file and the .docx MMI case file. Work smart by reading the .docx MMI case and the tabs in the .xlsx file, especially the QUESTIONS tab. Find the relevant course material to guide you, one ques8on at a 8me. Use any files from the course to answer the ques8ons. Avoid web searches. Write a complete focused answer to the ques8on asked. Avoid informa8on dumping. Q1-6 are about the MMI case. Q7-8 are not related to the MMI case. Keep your words and numbers typed inside the answer box. Don't cut and paste. 1 2 INCOME STATEMENT BALANCE SHEET WORKING CAPITAL Revenue ASSETS LIABILITIES AND EQUITY spontaneous change with revenue Cost of sales Current assets Current liabilities ?what levels of ca, cl, s-t loans? Gross profit Cash Trade payables CAPITAL BUDGETING Other operating income Investments Other accruals ?what projects to accept? Other operating expenses Trade receivables Tax liabilities FINANCING Total cost and expenses Inventories Short-term loans, leases ?what is the debt capacity? Operating profit (EBIT) Non-current assets Non-current liabilities Finance costs Property, plant & equipmentLoans, debt, leases due after 1 year Profit before tax Investment property Retirement benefit obligation COST OF DEBT Income tax Goodwill Deferred tax liabilities Net profit after tax Total non-current liabilities Dividends K-WACC Reinvested in the business Equity & capital reserves Share capital OPERATING LEVERAGE Capital reserves COST OF EQUITY Reserves FINANCIAL LEVERAGE Accumulated profits(Retained earnings) VALUATION CASH FLOW Total assets Total liabilities & equity COST OF CAPITAL INCOME STATEMENT BALANCE SHEET WORKING CAPITAL Revenue ASSETS LIABILITIES AND EQUITY spontaneous change with revenue Cost of sales Current assets Current liabilities ?what levels of ca, cl, s-t loans? Gross profit Cash Trade payables CAPITAL BUDGETING Other operating income Investments Other accruals ?what projects to accept? Other operating expenses Trade receivables Tax liabilities FINANCING Total cost and expenses Inventories Short-term loans, leases ?what is the debt capacity? Operating profit (EBIT) Non-current assets Non-current liabilities Interest, finance costs Property, plant & equipmentLoans, debt, leases due after 1 year Profit before tax Investment property Retirement benefit obligation COST OF DEBT Income tax Goodwill Deferred tax liabilities Net profit after tax Total non-current liabilities Dividends K-WACC Reinvested in the business Stockholder's equity (Net worth) Preferred stock OPERATING LEVERAGE Common stock COST OF EQUITY Additional paid-in-capital FINANCIAL LEVERAGE Retained earnings VALUATION CASH FLOW Total assets Total liabilities & equity COST OF CAPITAL 1 CREATION TRANSFER DESTRUCTION OF SHAREHOLDER VALUE THUMBNAIL SKETCH: FINANCING DEBT EQUITY BRIEF ANALYSIS DEBT DUPONT RATIOS HISTORICAL RATIOSI/S & B/S FORECAST EFN TIE NORMAL DEBT RATIOWORKING CAPITALI/S, B/S, & RATIOS EQUITY STOCK PRICE EBIT CHART MKT CAP EXTENDED ANALYSIS FULL RATIOS LIQUIDITY incomerisk control mktblty flexblty timing LEVERAGE ASSET USE PROFITABILITY VALUATION GROWTH CAPITAL BUDGETINGOP & CAP NATCF, NPV, IRR, PAYBACK ANALYSIS STEPS: 1-HISTORICAL RATIOS 2-K-WACC 3-CAPITAL BUDGETING 4-FORECAST & EFN K-WACC 5-EQUITY VALUATION 6-FINANCING VALUATION ENTERPRISE VALUE USING FREE CASH FLOW MARKET MULTIPLES: P/E, MV/BV, REV, EBIT 1 2 3 4 5 6 Write your answers to each ques8on in the answer box below each ques8on. All exam ques8ons are on this tab. Use the return key to skip to the next row when your text or numbers get close to the right-side of the answer box. If you need more space, insert more rows inside the box. Edit and revise your answers as necessary to make a strong impression. Focus on answering the ques8on asked. Aim for clarity. Make assump8ons where needed. Supply missing informa8on where/if needed. Ques8ons are equal-weighted. I CERTIFY THAT 100% OF THE WORK ON THIS FINAL EXAM IS ENTIRELY MY OWN. I WORKED ALONE. I DID NOT CONSULT ANYONE, EITHER IN THE CLASS OR OUTSIDE THE CLASS. I DID NOT PLAGIARIZE ANYONE ELSE'S WORK. SIGNED: Amber Beason Q1 Using income statements, balance sheets, and financial raWos tabs, review MMI's historical performance and idenWfy posiWve and negaWve aspects. REMEMBER: Historical (actual) years only. Q2 Interpret the financial forecasts (projecWons) using the income statements, balance sheets, and financial raWos tabs. REMEMBER: Forecast (projecWon) years only. How should Sam and Alice use this informaWon? Explain why IS G16 & H16 are 1,000. Explain why BS G19 & H19 are 0. 1 Q3 Complete the model on the Debt vs. Equity tab and explain how its results should be used by Sam and Alice. Q4 Is the new producWon equipment proposal jusWfied? What is the correct k-wacc? Use the cost of capital and New Machine tabs for your analysis. Calculate decision variables. 2 Q5 Solid Ventures may be able to sell its investment in MMI common stock. Using the Equity ValuaWon tab, suggest a fair 'intrinsic' value for MMI equity. Incorporate any relevant informaWon from Q1-5 and the case. Be convincing. Q6 How is MMI’s equity valuaWon linked to its beta? Explain analyWcally. 3 Q7 You are asked by your boss, who knows that you just completed a finance course at GWU, to prepare an online lesson for colleagues who never studied economics or business. Q8 Connect Parts One and Two of this course. (See Schedule on Page 4 of Syllabus for a topic list.) Illustrate with specific examples about how - what you learned about financial markets, risk, and rate of return - connects to the analyWc models you learned about: historical raWos, 4 k-wacc, capital budgeWng, forecast & EFN, equity valuaWon, and financing. 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 Magic Makers, Inc. Historical & Projected Income Statements Years Ended Dec 31 (000) 2017 2018 2019 2020 2021 2022 (Actual) (Actual) (Actual)(Projected)(Projected)(Projected) Sales 71,924 80,115 92,613 106,042 110,284 114,695 Opera8ng expenses: Produc8on costs and expenses33,703 38,393 46,492 53,445 55,142 57,348 Admin. and selling expenses 16,733 17,787 21,301 24,633 25,365 26,380 Deprecia8on 8,076 9,028 10,392 11,360 15,260 19,160 Total opera8ng expenses 58,512 65,208 78,185 89,438 95,767 102,888 Opera8ng profit 13,412 14,907 14,428 16,604 14,517 11,807 Interest expense 3,487 3,929 6,227 7,614 1,000 1,000 Profit before tax 9,925 10,978 8,201 8,990 13,517 10,807 Income tax 3,970 4,391 2,050 2,247 3,379 2,702 Net profit 5,955 6,587 6,151 6,742 10,138 8,105 Dividends 2,000 2,000 2,000 2,000 2,000 2,000 Reinvested profit 3,955 4,587 4,151 4,742 8,138 6,105 1 2 3 4 Magic Makers, Inc. Historical & Projected Balance Sheets Years Ended Dec 31 (000) 2017 2018 2019 2020 2021 2022 (Actual) (Actual) (Actual)(Projected)(Projected)(Projected) Assets: Cash 4,816 5,670 5,090 5,795 6,000 6,000 Accounts receivable 22,148 25,364 28,078 35,486 37,000 38,000 Inventories 23,301 27,662 53,828 63,778 66,000 70,000 Total current assets 50,265 58,696 86,996 105,059 109,000 114,000 Gross property plant & equipt. 64,611 80,153 97,899 115,153 142,453 169,753 Accumulated deprecia8on (4,559) (13,587) (23,979) (35,339) (50,599) (69,759) Net property plant & equipt. 60,052 66,566 73,920 79,814 91,854 99,994 Total assets 110,317 125,262 160,916 184,873 200,854 213,994 LiabiliWes and stockholders' equity: Short-term borrowings (bank) 29,002 35,462 69,005 82,275 0 0 Accounts payable 12,315 12,806 11,890 13,370 14,000 15,000 Other accrued liabili8es 24,608 26,330 25,081 21,318 24,000 25,000 Total current liabili8es 65,925 74,598 105,976 116,963 38,000 40,000 Long-term debt 10,000 10,000 10,000 18,200 18,200 18,200 Shareholders' equity 34,391 38,978 43,128 47,871 52,548 52,604 Total liabiliWes & stockholders' equity110,316 123,576 159,104 183,034 108,748 110,804 EFN 92,106 103,190 1-Short term debt has an interest rate of prime +1.5%. The current prime rate was 5.34%. The treasury bond yield is 2.3%. 2- Long term debt has two components. $10,000,000 loan placed privately, subordinate to bank borrowing. $8,200,000 public issue bond, 5-year maturity, 5.75% coupon. 1 2 3 4 Magic Makers, Inc. Financial Ra8os Years Ending Dec 31 2017 2018 2019 2020 2021 2022 (Actual) (Actual) (Actual) (Projected)(Projected)(Projected) Profitability Opera8ng margin 18.6% 18.6% 15.6% 15.7% 13.2% 10.3% Tax rate 40.0% 40.0% 25.0% 25.0% 25.0% 25.0% Return on sales 8.3% 8.2% 6.6% 6.4% 9.2% 7.1% Return on equity