ABC CORPORATION

Balance Sheet

Year Ended December 31 (in $ millions)

ABC Corporation

Income Statement

Year Ended December 31 ($ in millions)

ABC Corporation has 5.8 million shares outstanding and shares are trading for $20

Calculate the following for 2006:

Quick Ratio

Current Ratio

Market to Book Ratio

Debt to Equity Ratio

Enterprise Value

EPS

Operating Margin

Net Profit Margin

Return on Equity

P/E Ratio

Inventory Turnover

Days of Sales Outstanding

ROA

ROE

Did the tax rate increase from 2005 to 2006? If so, by how much?

How do the stock prices of publicly traded companies behave when corporate and/or financial restructuring (e.g., divestiture, rationalization) is involved? Please explain why by citing two real world examples, and if appropriate, clarify the circumstances that affect the stock price movement.

1.Depreciation is an example of discounting

true

false

2.As of today, MU’s WACC = 11.6% and SBUX’s WACC = 5.9%. Both MU (Micron) and SBUX (Starbucks) are publicly traded companies. This means:the market views MU as riskier than SBUX

true

false

The data set below contains 100 records of heights and weights for some current and recent Major League Baseball (MLB) players.

Note: BMI 18.5 - 24.9 normal group, 25 - 29.9 overweight group and > 30 obese group. 

Compute the body mass index (BMI) (703 times weight in pounds, divided by the square of the height in inches) of each major league baseball player

height Weight(pounds) Age
70 195 25
74 180 23
74 215 35
72 210 31
72 210 35
73 188 36
69 176 29
69 209 31
71 200 35
76 231 30
71 180 27
73 188 24
73 180 27
74 185 23
74 160 26
69 180 28
70 185 34
72 197 30
73 189 28
75 185 22
78 219 23
79 230 26
76 205 36
74 230 31
76 195 32
72 180 31
71 192 29
75 225 29
77 203 32
74 195 36
73 182 26
74 188 27
78 200 24
73 180 27
75 200 25
73 200 28
75 245 30
75 240 31
74 215 31
69 185 32
71 175 28
74 199 28
73 200 29
73 215 24
76 200 22
74 205 25
74 206 27
70 186 33
72 188 31
77 220 33
74 210 33
70 195 31
76 244 37
75 195 26
73 200 23
75 200 25
76 212 24
76 224 35
78 210 27
74 205 31
74 220 28
76 195 30
77 200 25
81 260 24
78 228 30
75 270 26
77 200 23
75 210 26
76 190 25
74 220 32
72 180 24
72 205 25
75 210 24
73 220 24
73 211 32
73 200 30
70 180 24
70 190 32
70 170 23
76 230 27
68 155 26
71 185 26
72 185 28
75 200 25
75 225 33
75 225 35
75 220 31
68 160 29
74 205 29
78 235 28
71 250 34
73 210 31
76 190 38
74 160 24
74 200 26
79 205 24
75 222 24
73 195 28
76 205 33
74 220 36

You have joined the corporate finance department of Premium Meats, a food processing firm that is privately held (i.e. its shares do not trade on a stock exchange). Your manager has asked you to calculate the firm’s WACC, using the Capital Asset Pricing Model to estimate the cost of equity.

The debt/equity ratio of Premium Meats is 50%. The interest rate on Premium Meats debt is 6%. The corporate tax rate is 27%. You have estimated the risk-free rate to be 1.5% and the expected return on the market to be 6%.

You need an estimate of equity beta for Premium Meats. You believe that Specialty Meats, which is publicly traded, is a comparable firm and has the same business mix as your company. The equity beta of Specialty Meats is 0.9. Specialty Meats has a debt/equity ratio of 38%. (Hint: find asset beta of Specialty Meats – then adjust for the leverage of Premium Meats)

Calculate the WACC for Premium Meats  

Steps:

• Estimate the capital structure of Premium Meats
• Find the equity beta of Premium Meats to use in the CAPM equation

Prepare a financial plan for the company you select for your business plan, this should be a company that you start versus an existing publicly traded company. This financial plan will be included in your final business plan in your capstone course. Be creative and think about a franchise or business that you have always wanted to create.

Describe the business that you would like to start, including the type of business (what industry, product offering, etc).

Create the business case, which is your justification of why the business is needed in the market.

• Determine why funding is needed for the company.
• Determine the sources of funding. Considerself-funding, borrowing, equity, venture capital, etc.
• Evaluate the requirements of each funding source you determined appropriate.
• Analyze the associated risks of each funding source.
• Decide which sources are the best fit for your company based on the requirements of each. Justify your decision.
• Estimate the cost of capital for both short-term and long-term funding sources. Research current estimated APRs for your selected sources of funding. Consider creating a table or chart to display this information.

Create a profit-and-loss statement for a 3-year period. Project revenue, stating realistic assumptions, such as growth per year, in your projections. You will have to develop these numbers and provide details.

Estimate direct costs, including capital, marketing, labor, and supply costs, which should be included in your P&L statements for all 3 years.

Case study#1: From Housing Bubble to Housing Bust

The United States experienced rising home ownership rates for most of the last two decades. Between 1990 and 2006, the U.S. housing market grew. Homeownership rates grew from 64% to a high of over 69% between 2004 and 2005. For many people, this was a period in which they could either buy first homes or buy a larger and more expensive home. During this time mortgage values tripled. Housing became more accessible to Americans and was considered to be a safe financial investment. The housing bubble began to show signs of bursting in 2005, as delinquency and late payments began to grow and an oversupply of new homes on the market became apparent. Dropping home values contributed to a decrease in the overall wealth of the household sector and caused homeowners to pull back on spending. Several mortgage lenders were forced to file for bankruptcy because homeowners were not making their payments, and by 2008 the problem had spread throughout the financial markets. Lenders clamped down on credit and the housing bubble burst. Financial markets were now in crisis and unable or unwilling to even extend credit to credit-worthy customers.

The housing bubble and the crisis in the financial markets were major contributors to the Great Recession that led to unemployment rates over 10% and falling GDP. While the United States is still recovering from the impact of the Great Recession, it has made substantial progress in restoring financial market stability through the implementation of aggressive fiscal and monetary policy.

The economic history of the United States is cyclical in nature with recessions and expansions. Some of these fluctuations are severe, such as the economic downturn experienced during Great Depression of the 1930’s which lasted several years. Why does the economy grow at different rates in different years? What are the causes of the cyclical behavior of the economy? This chapter will introduce an important model, the aggregate demand–aggregate supply model, to begin our understanding of why economies expand and contract over time.

Question: Analyze the above Case Study from the Aggregate Demand and Aggregate Supply Theory.

As an auditor for the CPA firm of Hinkson and Calvert, you encounter the following situations in auditing different clients.

Prepare the journal entries for each of the situations above. (Record journal entries in the order presented in the problem. Credit account titles are automatically indented when amount is entered. Do not indent manually.)

1. In the 1970s, the United States federal government created a Department of Energy. This is a time when the OPEC (Organization of Petroleum Exporting Countries) cartel first became prominent. Identify how this action might have impacted the three major macroeconomic goals of our economy.

2. Suppose you live in a community of 100 people where everyone is able and seeks to work. If 80 people are over 16 years old and 72 of them are employed, what is the unemployment rate in this community?

3. What are the three major types of unemployment? What are their causes?

4.  What is the business cycle? Explain the four phases of the business cycle.

5. Suppose a consumer buys 10 units of good X and 20 units of good Y every year. The following table lists the prices of goods X and Y in the years 2005-2007. Assume that these two goods constitute the typical market basket. Calculate the price indices for these years with 2005 as the base year. Comment on the inflation picture for these years.