INDIVIDUAL ASSIGNMENT

QUESTION 1

The 2008 comparative balance sheet and income statement of Motor Trend, Inc.,

follow.

Motor TrendComparative Balance Sheet

December 31, Increase2008 2007 (Decrease)

Current assets: Cash and cash equivalent $ 14,400 $ 19,300 $ (4,900) Accounts receivable 52,500 48,900 3,600 Inventories 87,600 92,300 (4,700)Plant Assets: Land 49,200 18,700 30,500 Net, Equipment 110,900 87,400 23,400Total Assets 314,600 266,600 48,000Current liabilities Accounts payable $ 34,900 27,200 7,700 Accrued liabilities 19,400 19,900 (500)Long-term liabilities: Notes payable 58,000 72,000 (14,000)Stockholders’ equity Common stock 143,000 125,000 18,000 Retained earnings 59,300 22,500 36,800Total liabilities and stockholders’ equity

$314,600 $266,600 $48,900

Motor TrendIncome Statement

Year Ended December 31, 2008Revenue Sales revenue $459,000 Interest Income 12,200 Total revenue 471,200Expenses Cost of goods sold $ 215,900 Salary expense 77,200 Depreciation expense 16,100 Other operating expense

53,700

Interest expense 26,200 Income tax expense 15,400

Total expenses 404,500Net Income $ 66,700

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Motor Trend had no noncash investing and financing transactions during 2008.

During the year, there were no sales of land or equipment, no issuances of notes

payable, no retirements of stock, and no treasury stock transactions.

Requirements

1. Prepare the 2008 statement of cash flows, formatting operating activities by the

indirect method.

2. How will what you learned in this problem help you evaluate an investment?

Answer:

Cash flow from operation:

Net income 66,700 Added:

Depreciation expense 16,100 Inventories decrease 4,700 Payable increase 7,700 28,500 Deducted: Receivables increase 3,600 Accrued liabilities decrease 500 (4,100)

Net Cash flow from operation 91,100 Cash flow from investment: Land purchase (30,500) Equipment purchase (23,500) Interest income 12,200

Net cash flow from investment (41,700)

Cash flow from financing: Stock issues 18,000 Financing (14,000) Dividend Payout (29,900)

Net cash flow from financing (25,900) (4,900)

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QUESTION 2

Assume that you are purchasing an investment and have decided to invest in a

company in the media business. You have narrowed the choice to IBM Corp. and

MAC, Inc., and have assembled the following data:

Selected income-statement data for the current year:

IBM MACNet sales (all on credit)................... $467,000 $525,000Cost of goods sold.......................... 310,000 272,000Interest expense.............................. — 22,000Net income...................................... 70,000 81,000

Selected balance-sheet data at the beginning of the current year:

IBM MACCurrent receivables, net................................... $ 50,000 $ 58,000Inventories....................................................... 92,000 97,000Total assets...................................................... 283,000 291,000Common stock, $1 par (20,000 shares)........... 20,000

$1 par (20,000 shares)........... 20,000

Selected balance-sheet and market-price data at the end of the current year:

IBM MACCurrent assets:

Cash............................................................... $  31,000 $  26,000Short-term investments.................................. 50,000 28,000Current receivables, net................................. 42,000 57,000Inventories..................................................... 73,000 104,000Prepaid expenses...........................................           3,000           4,000 Total current assets........................................ 199,000 219,000

Total assets........................................................ 275,000 343,000Total current liabilities...................................... 125,000 118,000Total liabilities................................................... 162,000 154,000Common stock, $1 par (20,000 shares)............. 20,000

$1 par (20,000 shares)............. 20,000

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Total stockholders’ equity................................. 185,000 207,000Market price per share of common stock.......... $         70 $   91.30

Your strategy is to invest in companies that have low price/earnings ratios but appear

to be in good shape financially. Assume that you have analyzed all other factors and

that your decision depends on the results of ratio analysis.

Requirements

Compute the following ratios for both companies for the current year, and decide

which company’s stock better fits your investment strategy. MAC is better

IBM MAC

a. Acid-test ratio 0.98 0.94

b. Inventory turnover 3.75 2.70

c. Days’ sales in average receivables 35.96 39.97

d. Debt ratio 0.58 0.44

e. Earnings per share of common stock 3.5 4.05

f. Price/earnings ratio 20 22.54

QUESTION 3

Longo National Products sells shirts with team logos. Longo has fixed costs of

$601,250 per year plus variable costs of $4.75 per shirt. Each shirt sells for $14.00.

Requirements

1. Use the income statement equation approach to compute the number of shirts

Longo must sell each year to break even.

Break even= (x*14)-[601,250+(x*4.75)]

X=65,000

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2. Use the contribution margin ratio CVP formula to compute the dollar sales Longo

needs to earn $42,500 in operating income for 2007.

Cvp= (14-4.75)/14=0.66

Sales= (42,500+601,250)/0.66=975,378

3. Prepare Longo’s contribution margin income statement for the year ended

December 31, 2007, for sales of 75,000 shirts. Cost of goods sold is 60% of

variable costs. Operating costs make up the rest of variable costs and all of fixed

costs.

Sales (75,000*14) 1,050,000

Cost of goods sold (.6*(4.75*75,000)) 213,750

Operating costs (.4*(4.75*75,000) +601,250) 743,750 (957,500)

Gross income 92,500

4. The company is considering an expansion that will increase fixed costs by 20%

and variable costs by 50 cents per shirt. Compute the new breakeven point in units

and in dollars. Should Longo undertake the expansion? N0.

Fixed costs= 1.2*601,250=721,500

Variable cost=4.75+.5=5.25

Breakeven point= 82,457 ----1,154,400$

QUESTION 4

Alegra’s Meals on the Go is considering two alternative expansion plans. Plan A is to

open three new sites at a total cost of $2,590,000. Expected annual net cash inflows

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are $600,000, with residual value of $400,000 at the end of six years. Under plan B,

Alegra’s Meals on the Go would open six sites at a total cost of $2,900,000. This

investment is expected to generate net cash inflows of $800,000 each year for six

years, which is the estimated useful life of the properties. Estimated residual value of

the plan B sites is zero. Alegra’s Meals on the Go uses straight-line depreciation and

requires an annual return of 10%.

Requirements

1. Compute the payback period, the accounting rate of return, and the net present

value of each plan. Use the residual value when calculating the accounting rate of

return for plan A, but assume a zero residual value when calculating its net

present value. What are the strengths and weaknesses of these capital budgeting

models?

2. Which expansion plan should Alegra’s Meals on the Go adopt? Why?

3. Estimate the internal rate of return (IRR) for plan B. How does plan B’s IRR

compare with Alegra’s Meals on the Go’s required rate of return?

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