Chapter 2 (Accounting refresher)
1. Consider two companies -- Laramie Inc. and Wyoming Co. â with the
following assets and liabilities on their balance sheets (figures in millions of
Balance sheet (in millions)
Laramie Inc.
Wyoming Co.
Cash
$5
$1
Marketable securities
$5
$2
Accounts receivable
$10
$2
Inventories
$10
$5
Current assets (a)
$30
$10
Plant & equipment (b)
$25
$65
Intangible assets (c)
$20
$0
Total assets (a + b + c)
$75
$75
Current liabilities* (d)
$10
$25
Long-term debt (e)
$50
$10
Total liabilities (d + e)
$60
$35
Shareholdersâ equity
$15
$40
dollars). We assume that both companies operate in manufacturing sector, i.e.
fishing & hiking equipment.
In our example, we assume that âcurrent liabilitiesâ only consist of accounts
payable and other liabilities, with no short-term debt. Since both companies are
assumed to have only long-term debt, this is the only debt included in the
solvency ratios shown below. If they did have short-term debt (which would
show up in current liabilities), this would be added to long-term debt when
computing the solvency ratios.
Laramie Inc.
Current ratio = ?
Quick ratio = ?
Debt to equity = ?
Debt to assets = ?
Wyoming Co.
Current ratio = ?
Quick ratio = ?
Debt to equity = ?
Debt to assets = ?
2. Consider a firm named Laramie Entertainment with a current ratio of 1.2, a
quick ratio of 0.9, and an inventory turnover ratio of 12.7. If the firm has
inventories of $1.2 million, what are their current assets and cost of goods sold?
3. The FC Soldiers allows us to relate the return on total assets and the return on
common equity to various measures of firm characteristics. Consider a firm with
a ROA of 0.04.
a) If you were analyzing a firm that had sales of $12500 and total assets of $10000,
how much in earnings were available for common shareholders?
b) If the firm had common stockholders' equity of $3300, what would be the
firm's ROE?
c) If we compare this firm to another similar firm, Laramie Soldiers, in the
industry we find that the comparison firm has an ROA and ROE of 0.05 and
0.191663, respectively. Given this information, calculate the comparison firm's
ratio of total assets to common stock equity. How does this ratio differ from our
firm?
d) Interpret the performance differences between these firms.
4. Express everything in the balance sheet as percentage of assets of respective
years.
Chapter 4
1. Calculate the value of a stock that paid a $1 dividend last year, if next
yearâs dividend will be 5% higher and the stock will sell for $13.45 at yearend. The required return is 13.2%.
2. A stock recently paid a dividend of $1.00, which is expected to grow at 5%
per year. The required rate of return of 13.2%. Calculate the value of this
stock assuming that it will be priced at $14.12 two years from now.
3. A firm currently pays no dividend but is expected to pay a dividend at the
end of Year 4. Year 4 earnings are expected to be $1.64, and the firm will
maintain a payout ratio of 50%. Assuming a constant growth rate of 5%
and a required rate of return of 10%, estimate the current value of this
stock.
4. Consider a stock with dividends that are expected to grow at 20% per year
for four years, after which they are expected to grow at 5% per year,
indefinitely. The last dividend paid was $1.00, and r = 10%. Calculate the
value of this stock using the multistage growth model.