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  Analysis of transactions and preparation of the income statement and balance sheet Zealock Bookstore

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  Analysis of transactions and preparation of the income statement and balance sheet Zealock Bookstore opened a bookstore near a college campus on July 1, 2008. Transactions and events of Zealock Bookstore during 2008 follow. The firm uses the calendar year as its reporting period.
  (1) July 1, 2008: Receives $25,000 from Quinn Zealock for 25,000 shares of the bookstore’s $1 par value common stack.
  (2) July 1, 2008: Obtains a $30,000 loan from a local bank for working capital needs. The loan bean interest at 6% per year. The loan is repayable with interest on June 30, 2009
  (3) July 1, 2008: Signs a rental agreement for three years at an annual rental of $20,000. Pays the first year’s rent in advance.
  (4) July 1, 2008: Acquires bookshelves for $4.000 cash. The bookshelves have an estimated useful life of five years and zero salvage value.
  (5) July 1, 2008: Acquires computers for $10,000 cash. The computers ha an estimated useful life of three ?~ears and $1.000 salvage value.
  (6) July 1, 2008: Makes security deposits with various book distributors totaling $8,000. The deposits are refundable on June 30. 2009. If the bookstore pays on time all amounts due for books purchased from the distributors between July 1, 2008, and June 30, 2009.
  (7) During 2008: Purchases books on account from various distributors costing $160,000.
  (8) During 2008: Sells books costing $140,000 for $172,800. Of the total sales, $24,600 is for cash, and $148,200 is on account.
  (9) During 2008: Returns unsold books and books ordered in error costing $14,600. The firm had not yet paid for these books.
  (10) During 2008: Collects $142,400 from sales on account.
  (11) During 2008: Pays employees compensation of $16,700.
  (12) During 2008: Pays book distributors $139,800 of the amounts due for purchases on account.
  (13) December 28, 2008: Receives advances from customers of $850 for special-order books that the bookstore will order and expects to receive during 2009.
  (14) December 31, 2008: Records an appropriate amount of interest expense on the loan in (2) for 2008.
  (15) December 31, 2008: Records an appropriate amount of rent expense for 2008.
  (16) December 31, 2008: Records an appropriate amount of depreciation expense on the bookshelves in (4).
  (17) December 31, 2008: Records an appropriate amount of depreciation expense on the computers in (5).
  (18) December 31, 2008: Records an appropriate amount of income tax expense for 2008. The income tax rate is 40%. The taxes are payable on March 15, 2009.
  a. Using T-accounts enter the 18 transactions and events above.
  b. Prepare an income statement for the six months ending December 31, 2008.
  c. Prepare a balance sheet on December 31, 2008.
  Note: Problem 37 extends this problem to income transact ions for 2009.
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  What is the synergy worth? What is the maximum price Novell can pay for WordPerfect?

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  In April 1994, Novell, Inc. announced its plan to acquire WordPerfect Corporation for

  $1.4billion.

  Atthetimeoftheacquisition,therelevantinformationaboutthetwo companies was as follows:

  	Novell	WordPerfect
  Revenues	$1,200.00	$600.00
  Costof Goods Sold (w/o Depreciation)	57.00%	75.00%
  Depreciation	$42.00	$25.00
  Tax Rate	35.00%	$25.00%
  CapitalSpending	$75.00	$40.00
  WorkingCapital(as%ofRevenue)	40.00%	30.00%
  Beta	1.45	1.25
  ExpectedGrowth Rate in Revenues/EBIT	25.00%	15.00%
  ExpectedPeriod of High Growth	10years	10years
  GrowthrateAfterHigh-GrowthPeriod	6.00%	6.00%
  BetaAfterHigh-Growthperiod	1.10	1.10

  Capital spending will be offset by depreciation after the high-growth period. Neither firm has any debt outstanding. The treasury bond rate is 7%.

  a. Estimate the value of Novell, operating independently.

  b. Estimate the value of WordPerfect, operating independently. c. Estimate the value of the combined firm, with no synergy.

  d. As a result of the merger, the combined firm is expected to grow 24% a year for the high-growth period. Estimate the value of the combined firm with the higher growth.

  e. Whatis thesynergyworth? Whatisthe maximumpriceNovell canpayfor WordPerfect?
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  Chill Mount Creamery manufactures a variety of Ice creams…

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  Chill Mount Creamery manufactures a variety of Ice creams. The company is considering introducing a new product (Yugo cream). The company’s manager has been provided with the following information by their business analyst.

  The project has an anticipated economic life of 5 years. The Company plans to spend $1,300,000 on advertising campaign to boost sales.The Company’s interest expense each year will be $500,000. The Company is required to purchase a new machine to produce the new product. The machine’s initial cost is $5,500,000. The machine will be depreciated on a straight – line basis over 5 years. The Company anticipates that the machine will last for 10 years; the salvage value after 5 years is $500,000.

  Six months ago the Company also paid $300,000 to a firm to do research regarding new product. If the Company goes ahead with the new product, it will have an effect on the Company’s net operating capital. The forecasted net working capital will be $200,000 (at time zero). The new product is expected to generate sales revenue of $1,500,000, 2,500,000, 3,500,000, 4500,000 and 5,500,000 in year 1, 2, 3, 4 and 5 respectively. Each year the operating cost (not including depreciation) expected to equal 30 percent of sales revenue. In addition the Company expects with introduction of new product, sale of other ice cream increase by $500,000 after taxes each year.

  The Company’s overall WACC is 7.5 percent. However, the proposed project is riskier than the average project; the new project’s WACC is estimated to be 10 percent. The Company’s tax rate is 30 percent.

  What is the net present value, internal rate of return, payback period, discounted payback period, and profitability index of the proposed project. Based on your analysis should the project be accepted? Discuss.
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  HA1022 Principles of Financial Markets – Assignment

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  HA1022 Principles of Financial Markets – Assignment Marking Guide

  Choose two (2) companies in the same industry and work on the criterion mentioned below:

  1. Business Overview
  2. Risk
  3. Short Term Financial Policies of the business
  4. Current Capital Structure
  5. Current Dividend Policy

  Recommendations

  References

  • Students need to clearly show the theoretical understanding of the above stated issues, defining them and using references where required.

  • Further, students need to relate the theory to the companies selected by analysing the data and the stating as to how the companies are managing their Risk, Short Term Financial Policy, Current Capital Structure and their Current Dividend Policy.

  Note: Students would be assessed as follows:

  1	Business Overview	5 Marks
  2	(Criterion: A, B, C, D, E) – Theory	5 Marks
  3	(Criterion: A, B, C, D, E) – Theory related to companies and analysis	5 Marks
  4	Recommendations	2.5 Marks
  5	Harvard Reference	2.5 Marks
  	TOTAL	20 Marks
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  Do we have everything we need on sales and costs?…

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  “Do we have everything we need on sales and costs?” you ask. ”It must be time to compute the net present value (NPV) and internal rate of return (IRR) of the Apex expansion project.”

  “We have the data from James and Luke regarding projected sales and costs, respectively, for the food packaging project,” says Mary. “It is feasible to project that we will receive a tax break from this implementation. I have information from our audit firm, which indicates that future depreciation methods for taxes will be straight-line; however, the corporate rates will be reduced to 35% as we assumed in our weighted average cost of capital (WACC) calculation.”

  “That sounds good,” you say.

  “Right,” says Mary. “You can use the WACC of 1% listed in the excel file posted for the computation of the NPV and comparison for IRR.”

  “I’ve got the information I need from Luke and James,” you say. “Does this look right to you? Here’s what they gave me,” you say, as you hand a sheet of paper to Mary.

  “Let’s look at this now while we’re together,” she says.

  The information you hand to Mary shows the following:

  • Initial investment outlay of $30 million, consisting of $25 million for equipment and $5 million for net working capital (NWC) (plastic substrate and ink inventory); NWC recoverable in terminal year
  • Project and equipment life: 5 years
  • Sales: $25 million per year for five years
  • Assume gross margin of 60% (exclusive of depreciation)
  • Depreciation: Straight-line for tax purposes
  • Selling, general, and administrative expenses: 10% of sales
  • Tax rate: 35%

  You continue your conversation.

  “It looks good,” says Mary. “Use this information from Luke and James to compute the cash flows for the project.”

  “No problem,” you say.

  “Then, compute NPV and IRR of the project using the Excel spreadsheet I sent earlier today,” says Mary. “Use the IRR financial function for the computation of IRR.”

  “Okay,” you say. “I’ll submit my Excel file showing the computation of cash flows, NPV, and IRR by the end of week so you can look at it over the weekend.”

  “Thanks,” says Mary.

  To recap: Complete the above worksheet for this assignment.

  FOR NPV AND COMPARISON FOR IRR.

  RQUIRED A COMPLETE EXCEL FILE SHOWING THE COMPUTATION OF CASH FLOWS, NPV, AND IRR FROM THE ABOVE SCENARIO.

  Additional Files:

  651975_1_Excel-Data.xls
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  Suppose that you manage a fund with an expected rate of return of 12.5% and a standard deviation of 18%.

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  Suppose that you manage a fund with an expected rate of return of 12.5% and a standard deviation of 18%. The T-bill rate currently is 4%. Your client chooses to invest 70% of a portfolio in your fund and 30% in a T-bill money market fund.

  a) What is the expected return and standard deviation of your client’s portfolio?

  b) Suppose your risky portfolio includes the following investments in the given proportions:

  Stock A 40%

  Stock B 25%

  Stock C 35%

  What are the investment proportions of your client’s overall portfolio, including the position in T-bills?

  c) What is the reward-to-volatility ratio (S) of your risky portfolio and your client’s overall portfolio?
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  What nonfinancial factors might Magnuson consider in her decision?

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  Each autumn, as a hobby, Anne Magnuson weaves cotton place mats to sell through a local craft shop. The mats sell for $20 per set of four. The shop charges a 10% commission and remits the net proceeds to Magnuson at the end of December. Magnuson has woven and sold 25 sets each for the last two years. She has enough cotton in inventory to make another 25 sets. She paid $7 per set for the cotton. Magnuson uses a four-harness loom that she purchased for cash exactly two years ago. It is depreciated at the rate of $10 per month. The accounts payable relate to the cotton inventory and are payable by September 30. Magnuson is considering buying an eight-harness loom so that she can weave more intricate patterns in linen. The new loom costs $1,000; it would be depreciated at $20 per month. Her bank has agreed to lend her $1,000 at 18% interest, with $200 payment of principal, plus accrued interest payable each December 31. Magnuson believes she can weave 15 linen place mat sets in time for the Christmas rush if she does not weave any cotton mats. She predicts that each linen set will sell for $50. Linen costs $18 per set. Magnuson’s supplier will sell her linen on credit, payable December 31. Magnuson plans to keep her old loom whether or not she buys the new loom. The balancesheet for her weaving business at August 31, 2014, is as follows:

  ANNE MAGNUSON, WEAVER
  Balance Sheet
  August 31, 2014
  Current assets:		Current liabilities:
  Cash	$ 25	Accounts payable	$ 74
  Inventory of cotton	175
  	200
  Fixed Assets:
  Loom	500	Stockholders’ equity	386
  Less: Accumulated depreciation	240
  	260
  Total assets	$ 460	Total liabilities and owner’s equity	$460

  Requirements

  1. Prepare a cash budget for the four months ending December 31, 2014, for two alternatives: weaving the place mats in cotton using the existing loom, and weaving the place mats in linen using the new loom. For each alternative, prepare a budgeted income statement for the four months ending December 31,2014, and a budgeted balance sheet at December 31, 2014.
  2. On the basis of financial considerations only, what should Magnuson do? Give your reason.
  3. What nonfinancial factors might Magnuson consider in her decision?
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  You have been hired as the strategic analyst in the Sbios Group of company…

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  You have been hired as the strategic analyst in the Sbios Group of company and have been asked to examine the potential takeover of Mbios Plc, a competing firm in the same gadget industry sector.
  Financial information of Mbios Plc is given below:
  Mbios Plc
  Income Statement Last Yr Current Yr
  in £ mill in £ mill
  Sales 470 482
  Cost of Sales (236.0) (274.0)
  Gross margin 234 208.0
  Sales, general and admin expneses (56.0) (72.0)
  Research and Dev (22.0) (26.0)
  156.0 110.0
  Depreciation (30.0) (32.0)
  Profit before interest and tax 126.0 78.0
  Interest (14.0) (12.0)
  Profit before tax 112.0 66.0
  Tax (34.0) (20.0)
  Net Profit 78.0 46.0
  Balance Sheet Last Yr 31st Dec Current Yr 31st Dec
  in £ mill in £ mill
  Fixed asset 250 264
  Current asset 170 184
  Total 420 448
  Current liabilities 120 132
  Amounts falling due after one year 70 70
  Shareholder’s funds 230 246
  420 448
  Number of outstanding shares (In Million) 152
  Share Price (£) 24.2 21
  You have now identified following information that you need to consider when valuing Mbios Plc
  Some production process are similar. You have identified an overlap process between Sbios and Mbios that would allow to immediately closedown part of Mbios manufacturing process. You estimate that it will cut the book assets at Mbios by a third but at the same time the rationalisation would not affect sales. The realisable value of the asset disposals, which would occur in the first year of the acquisition, would be £42 million after tax.
  You expect to raise Mbios’s gross margin from its current level to 45% in year 1 of the acquisition and then to 50% in year 2 and subsequent years as part of the benefit from rationalisation and greater efficiencies from the merger.
  You expect Mbios’s sales to grow at 6% in the future as a result of synergistic benefits derived from the takeover and a recovery in the market for Mbios’s products as well as the introduction of new products.
  You anticipate that investment in new fixed assets would be 5% of sales in any given period. Depreciation is 10 % of the book value of fixed assets.
  You anticipate being able to eliminate the research and development spend at Mbios post acquitision as development of new products is integrated with Sbios. There would be no increase in Sbios’s R&D budget from this change.
  Sales, general and other administrative expenses are projected to be 10% of sales in all subsequent years
  You anticipate that current assets would be 37% of sales in any year and current liabilities 25% of sales in any given year
  The corporate tax rate is 30%
  The WACC used for internal projects at Sbios Plc is 10% after tax
  Once the steady state following the acquisition has been achieved, for valuation purposes, all future cash flows beyond the detailed cash flow modelling period will be determined using a multiple of 5 times cash flow. Note that the steady state at Mbios occurs in year 3 following the acquisition.
  Question

  • Using discounted cash flow valuation method, find out the value that Papple should pay for the proposed acquisition and comment on the results?
  • All working notes should be written clearly along with justification for any assumption made.
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  Custom Snowboards, Inc. Case

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  Custom Snowboards, Inc.
  Expansion into Europe
  The management of Custom Snowboards, Inc. is considering an expansion into Europe. The percentage of the total sales from Europe has grown and the growth is expected to continue. The company could pursue this expansion from a variety of different options.

  Business Risk Assessment:
  The CEO is concerned about the risks of expansion into Europe. In particular, he wonders about what affects an European expansion will have on the internal operations of the entity and how the company will react to external issues that any company expanding into Europe will encounter.

  Expansion Options:
  Custom Snowboards has two options for European expansion. In the first option, they can expand by building a new manufacturing facility. In the second option, then can merge with or acquire the operations of European SnowFun. The relevant information for the two options is given below:

  1. Custom Snowboards has investigated expanding into Europe by building a new manufacturing facility. The manufacturing facility to include building and equipment will cost $800,000. An additional $200,000 of working capital will be needed for starting up operations.
  There are some additional considerations for the company to consider for the procurement of building and equipment. The company has researched alternatives of paying for the building and equipment on a time basis at a 6% financing rate. The following two alternatives are under consideration:
  a. Entering into a sale-leaseback.
  b. A straight purchase over time.
  An analysis of both options are presented in the Excel workbook.

  2. European SnowFun is currently operating in Europe and has heard about your expansion plans. European SnowFun has proposed to combine businesses with Custom Snowboards. European SnowFun’s product is less durable, but the company’s sales are relatively strong based on offering a personalized paintjob on snowboards that are special ordered. The following two alternatives are under consideration:
  a. A merger where the shareholders of European SnowFun would receive one share of Custom Snowboards’ stock for each three shares they hold at the time of the merger (stock swap). European SnowFun currently has 300,000 shares outstanding.
  b. An Acquisition. European SnowFun has offered to be acquired. Custom Snowboards is considering this option at $2.40/share (stock purchase).
  The Excel workbook includes data calculations for all of the options in the expansion decision. The company uses a 10% cost of capital (hurdle rate) for capital budgeting and expansion decision.
  The CEO is expecting your recommendation regarding which expansion option the company should pursue when you make the presentation.

  Financing the European Expansion:
  If Custom Snowboards chooses the first expansion option highlighted above, then it has decided to fund it through increasing its capital structure. It has concluded that it can raise the capital through the issuance of long-term debt, sale of common stock, or a combination of both debt and common stock. The CEO would like a recommendation for the option that would maximize the value for shareholders of the company.

  Product Cost Comparison: Traditional vs. ABC
  Custom Snowboards traditionally uses two separate single overhead rates to apply overhead to its two product lines: regular snowboards and personalized snowboards. It is investigating using ABC analysis to better allocate overhead to its two product lines. The unit product cost for the two product lines using traditional and ABC method of applying overhead is given in the excel workbook.