Determining Financial Performance
Discussion Question 1
Part A
Bigco’s balance sheet one year ago indicated retained earnings of $450 million. This year, Bigco’s net income was $35 million. It paid its preferred shareholders a dividend of $5 million and paid its common shareholders a regular dividend of $6 million, along with a special one-time dividend of $10 million. What should be the retained earnings amount on this year’s balance sheet?
Part B
Wholesale Lumber, Ltd. is a firm that distributes lumber to building supply and home improvement retail stores. The firm’s cost of sales for the most recent year was $45 million, its beginning inventory was $16 million, and its ending inventory was $18 million. Estimate Wholesale Lumber’s purchases of lumber materials for the year.
Part C
Star Inc. has year 1 revenues of $80 million, net income of $9 million, assets of $65 million, and equity of $40 million, as well as year 2 revenues of $87 million, net income of $22 million, assets of $70 million, and equity of $50 million. Calculate Star’s return on equity (ROE) for each year based on the DuPont method and compare it with a direct ROE measure. Next, explain why the firm’s ROE changed between year 1 and year 2.
Discussion Question 2
Calculate the following:
1. What is the payback period of a project with average annual cash outflows of $8,000, average annual cash inflows of $10,000, and an initial investment of $13,000?
2. What is the net present value of a simple one-period project with an initial investment of $12,000 and an expected net cash flow in one year of $15,000, assuming a discount rate of 8 percent?
3. What is the net present value of a project with a $40,000 initial investment and expected net cash flows of $15,000, $20,000, and $25,000 in each of the next three years, assuming an appropriate discount rate of 10 percent?
- What is the internal rate of return for the project?
- What is the profitability index for the project?
- What is the payback period for the project?
- What is the modified internal rate of return for the project if the finance rate is 10 percent and the reinvestment rate is 13 percent?