Reference no: EM13859176

Question 1

The comparative balance sheet of Cookie and Coffee Creations Inc. at October 31, for the years 2015 and 2014, and the income statements for the years ended October 31, 2014 and 2015, are presented below.

                COOKIE & COFFEE CREATIONS INC
                               Balance Sheet
                                 October 31

Assets	2015	2014
Cash	$34,324	$13,050
Accounts receivable	3,250	2,710
Inventory	7,897	7,450
Prepaid expenses	6,300	6,050
Equipment	96,500	75,500
Accumulated depreciation	(25,200)	(9,100)
Total assets	$123,071	$95,660

Liabilities and Stockholders' Equity
Accounts payable	$3,650	$2,450
Income taxes payable	10,251	11,200
Dividends payable	28,000	25,000
Salaries payable	2,250	1,280
Interest payable	188	0
Note payable - current portion	3,000	0
Note payable - long-term portion	4,500	0
Preferred stock, no par, $6 cumulative - 3,000 and 2,500 shares	15,000	12,500
Issued, respectively
Common stock, $1 par - 23,180 shares issued	23,180	23,180
Additional paid in capital - Treasury stock	250	250
Retained earnings	32,802	19,800
Total liabilities and stockholders' equity	$123,071	$95,660

               COOKIE & COFFEE CREATIONS INC
                           Income Statement
                        Year Ended October 31

	2015	2014
Sales	$485,625	$462,500
Cost of goods sold	222,694	208, 125
Gross profit	262,931	254,375
Operating expenses
Depreciation expense	17,850	9,100
Salaries and wages expense	147,979	146,350
Other operating expenses	43,186	42,925
Total operating expenses	209,015	198,375

 

Income from operations	53,916	56,000
Other expenses
Interest expense	413	0
Loss on sale of computer equipment	2,250	0
Total other expenses	2,663	0
Income before income tax	51,253	56,000
Income tax expense	10,251	11,200
Net income	$41,002	$44,800
Additional information:

The management are thinking about borrowing an additional $20,000 to buy more kitchen equipment. The loan would be repaid over a 4-year period. The terms of the loan provide for equal semi-annual payments of $2,500 on May 1 and November 1 of each year, plus interest of 5% on the outstanding balance.

Required

(a) Calculate the following ratios for 2014 and 2015.

1. Current ratio

2. Debt to total assets

3. Gross profit rate

4. Profit margin

5. Return on assets (Total assets at November 1, 2013, were $33,180)

6. Return on common stockholders' equity (Total common stockholder's equity at November 1, 2013 was $23,180)

7. Payout ratio

(b) Prepare a horizontal analysis of the income statement for Cookie & Coffee Creations

Inc. using 2014 as a base year.

(c) Prepare a vertical analysis of the income statement for Cookie & Coffee Creations

Inc. for 2015 and 2014.

(d) Comment on your findings from parts (a) to (c).

(e) What impact would borrowing an additional $15,000 to buy more equipment have on each of the ratios in (a) above, assuming that no changes are expected on the income statement and balance sheet? Comment on your findings.

(f) What would justify a decision by Cookie & Coffee Creations Inc. to buy the additional equipment? What alternatives are thee instead of bank financing?

Question 2

Currently Hambleton Ales dividends are growing by 10% pa and this is expected to continue for another two years. After that time they are expected to grow by 8% pa for the next two years, and then by 6% every year. Next year's dividend is expected to be $0.80, and the appropriate discount rate is 12%. If you have $20,700 to invest, how many shares can you buy in Hambleton Ales?

Question 3

Three years ago, Batlow Ltd. issued 10 year $1,000 bonds with a 7% coupon rate paid semi-annually, at par value. The market currently requires a 9% yield.

i. What was the price of the bond at issue?

ii. What is the current price of the bond?

iii. If the market yield falls to 6% in two years time, what will the bond's price be at that time?

iv. Explain your results in (i) - (iii).

Second Part

Question 1 

 

What is the project's net present value (NPV)? Explain the economic rationale behind the NPV. Could the NPV of this particular project be different for SRC than for one of Wang's other potential customers? Explain.

Question 2

 

Calculate the proposed project's internal rate of return (IRR). Explain the rationale for using the IRR to evaluate capital investment projects. Could the IRR for this project be different for SRC than for another customer? Explain.

Question 3

Suppose one of SRC executives uses the payback method as a primary capital budgeting decision tool and wants some payback information.

a.         What is the project's payback period?

b.        What is the rationale behind the use of payback period as a project evaluation tool?

c.         What deficiencies does payback have as a capital budgeting decision method?

 

d.        Does payback provide any useful information regarding capital budgeting decisions?

Question 4

 

Under what conditions do NPV, IRR, and PI all lead to the same accept/reject decision? When can conflicts occur? If a conflict arises, which method should be used, and why?