Engineering E2261: Introduction to Accounting and Finance

COLUMBIA UNIVERSITY, School of Engineering and Applied Science

Exam 2, 11/13/2012 Solutions
Instructor: Anthony Webster
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UNI

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Notes:
Please clearly organize your work, write legibly, show your computations for numerical answers,
and list your key assumptions. Points will be deducted for submissions that are illegible and
difficult to follow. The exam has 80 points, plus 6 points of extra credit (for part 1-c).
Problem 1 of 2: Ratio Analysis
Hertz Inc. (HRZ) is a pet food and supply company. It’s “comp” in the below analysis is
International SuperPet Holdings (ISH).
a) Fill in the missing ratios for HRZ. (18 points).
HRZ
Q8
DtEV = Total Debt/(Total Debt + MV{Equity}) % 83.42%
Comps DtEV
46.11%
ROE(mv) = NI(eop)/MV{Equity, bop} %
Comps ROE(mv)

Equity Ratio Analysis for Q1 Ending: 30-Jun-X0
Q4
Q3
Q2
Q1
TTM
77.17%
80.70%
81.62%
81.58%
81.58%
40.64%
45.02%
57.38%
54.00%
54.00%

Q7
83.78%
53.15%

Q6
77.69%
45.36%

Q5
77.22%
39.02%

-67.00%
12.36%

-38.78%
30.77%

-76.87%
26.56%

20.37%
20.85%

3.19%
17.99%

-42.88%
20.86%

11.89%
22.11%

0.12%
19.52%

-3.28
5.97

-3.07
6.61

-3.92
4.82

-3.60
4.01

610.47
4.03

610.47
4.03

8.12%
6.66%

8.23%
6.01%

10.88%
7.11%

4.91%
8.34%

5.01%
6.46%

7.99%
7.98%

-10.77%
34.06%

39.88%
31.95%

257.69%
33.43%

-11.59%
34.15%

-31.82
4.80

7.81
5.89

11.36
7.12

199.39
7.16

PE(ttm) = MV{Equity}/NI(ttm)
Comps PE(ttm)
DY = Div/MV{Equity} %
Comps DY
PR = Div/NI %
Comps PR
EVtEBITDA = (Total Debt(bop) + MV{Equity, bop})/EBITDA(eop)
-10.38
Comps EVtEBITDA
7.08

35.34
4.85

E2261 Exam 2 –

Page 1

41.35% 4880.00%
28.65%
32.13%
9.36
6.18

12.53
6.06

00% 2.62% 65.48% 0.70 -2.32% 83.07% 12.26% 0.19% 0.93% 5.71% 6.42% 0.10% 0.71% -4.94% 6.58% 22.91% 33.52% -99.83% 31.54% 1.08% 0.13% 40.70 43.14 8.56% 41.76% -13.62% 289.82% 16.90% -2.44% 3.61% 15.14% -277.12 7.53 #DIV/0! 5.52% 19.60 11.49% 12.11 10.57 0.00% 7.80% 17.47 16.30% 7.48% 325.00 1.33% 0.08 9.41% 14.81 1.17% 15.62% 8.29% 12.72% 6.77% 6.03 85.23 1.22% 0.16 2.48% 12.42 1.71% -150.46% 1.23 2.18 1.28% 0.78% 19.40% -6.00 1.19 0.15 1.90% 65.35 Comps QR 2.12% 441.38% 23.10 1.47 1.88% 9.99% 13.88% 65.60 -41.00 -83.65% 9.74% 38.94% Profit Margin = NI/Sales % Comps Profit Margin 3.45% 6.00 2.04% -29.11 37.71% -2.37 2.00 -25.50% -21.16 0.08% 7.74% -1.20 2.90 1.98 6.94% 2.46 0.14 #DIV/0! 6.83% 13.01% 353.00% 136.08% 940.53% 30.58% 8.74% 22.Inventory)/Current Liabilities1.74% -3.73% 84.30 -35.86 12.60 -28.50% 4.82 4.00% 50.45 0.65% 77.75% 31.30% 18.23 1.57 12.00 20.45% 8.20 -6.69% -2.98 1.61% 64.00% 3.63% 44.34% 12.52 2.50% 520.49 95.50 13.61% 23.33% 23.65 91.34% 22.41% 15.00% 2320.30% 24.03 9.11 1.06% 0.60 38.94% 31.54% 83.23% 22.86% 15.85% 18.70 14.43 -10.80 43.15 2.50% 65.59% 12.14% 0.00% -7.26 1.60 #DIV/0! 7.20 8.14% 0.54% -4.47% 32.95% 9.94% 4.16 1.49% 25.12% Tax Rate = Tax Expense/EBT (%) Comps Tax Rate 5.31% 11.05 1.94% 15.94% 27.52% 5.20 DtA = Total Debt/Total Assets % Comps DtA 64.26 1.92% 36.18 1.68 38.HRZ Sales ($MM) Comps Sales Ratio Analysis for Q1 Ending: 30-Jun-X0 Q8 Q7 Q6 Q5 Q4 Q3 Q2 Q1 TTM 353 84 315 73 272 98 279 100 308 92 300 90 286 73 306 85 1.38 2.00 5.75 12.34% 12.00% 2.62% 22.27% 60.00 83.13 10.65% 53.27% 64.34 0.36% 438.68% 20.83% 84.00% 20.11% 88.32 8.51% 12.80% 12.57% 81.63% 26.84 11.14 1.75% 30.99% 38.40 0.69 #DIV/0! 4.00% 5.24% 1.57% 40.58 2.00% 4.64 1.91% Interest Margin = Interest/Sales (%) Comps Interest Margin 0.69% 83.19% 62.67% 9.10 11.20% 20.66% 27.44% 34.75% 5.10% 22.74% 9.56 4.30% 5.03 -4.08 2.44% COGS Margin = COGS/Sales (%) Comps COGS Margin Gross Margin = (Sales .97% 24.95% 16.39 1.19% 9.68% -11.57 39.56% 3.53% 427.22% -229.41 0.22% 18.04 8.92 1.54% -18.15 1.24% 0.00% 2.69% 13.68 3.03% -4.06% 86.59% -7.32% 79.05 6.82% 0.COGS)/Sales (%) Comps Gross Margin 81.73% -14.61 -13.46% 79.89% 20.41% 0.28% -137.36% 32.33% 23.98 2.46% -4.41% 4.93 38.35% 22.03% -25.03% 75.91% 10.77% 23.64% 4.42% 1.95% 80.73% 25.27 0.67% -52.13% 20.16% 2.11% 26.Capx Comps NOCF Fixed Coverage Ratio = EBIT/Interest Comps FCR EBITDA-S = EBITDA/(Interest + CAPX) % Comps EBITDA-S Interest Rate = INT/Total Debt (bop) Comps Interest Rate DT = Depreciation /CAPX % Comps DT 0.60% 22.00% -8.68 1.92 3.25 0.56% 44.93% -10.80% 5.43 37.84% 41.01% 1.22 #DIV/0! 3.24% 5.75% 16.98 2.39 6.94% 11.73% 12.39% 30.63% 44.30 15.32% 38.51% 74.93% 61.46% 13.29% 22.81% 0.61% 14.60 1.70% 85.08 2.58% 0.61% 39.36% 75.17% 10.41% 29.00% 389.43% 12.11 85.50% 66.68% 12.00% 1.30% 0.00% 2.38% 11.00% 129.23% 27.53% 0.00% 4.00% 0.49% 12.73 1.36% -8.87% 3.15% 84.17% Sales Growth (Quarterly Y on Y) Comps Sales Growth Sales Growth (Q on Q) Comps Sales Growth -10.39% 81.80 -6.199 340 -12.56 146.43 2.60% 119.87% 13.97% 11.61% 29.13% 9.30 #DIV/0! 6.25% Asset Efficiency Ratio = Sales/Assets(bop) Comps AER ROA = NI/Assets(bop) % Comps ROA FAE = Sales/Net PPE(bop) Comps FAE INV-E = COGS/INV(bop) Comps INV-E AR-T = AR(eop)/Sales % Comps AR-T AP-T = AP(eop)/COGS % Comps AP-T CL = (Cash + ST Inv)/Sales % Comps CL FLR = Assets(eop)/OE(eop) Comps FLR DtEBIT = Total Debt(eop)/EBIT Comps DtEBIT SDItC = (SGA + Deprec + Interest)/COGS % CompsSDItC Del(EBIT)/Del(Sales) Comps Del(EBIT)/Del(Sales) CR = Current Assets/Current Liabilities Comps CR WCR = WorkingCapital/WCAssets % Comps WCR NOCF = OCF .82 3.62% -15.00% 12.27% 1020.33% 19.00% 4.60 7.82% 6.13% -34.31% 11.49% -4.54 2.44% 21.89% 0.24% 18.03% 5.21% 9.58% 27.27 1.61 0.53 109.20 1.64% 24.65% 61.05% 88.62% 15.89% -14.53% 0.58% -2.72% 7.40% 77.33% 0.91% -23.31% 84.64 1.56% 44.00% 1.00% 1.57% 6.94 1.18% 11.21 1.17% ROE = NI/OE(bop) % Comps ROE -56.19% -51.57 1.29% 48.03% 0.99 2.93% 4.98 1.35 2704.00% 4.40 19.64% 10.76% -6.00% 50.32% 11.38 33.37 70.27% 16.20% 3.43 0.02% 12.56% 25.11 10.00% 0.62% 2.51% 28.33% 0.83 37.29% 18.95% DtC = Total Debt/(Total Debt + Equity) % Comps DtC 80.50% 79.94% 36.19% 83.38% 0.00% 448.00% 4.03% 548.76% 12.26% 77.18% 34.38% 66.67 #DIV/0! 5.87% 4.00% 2.79 #DIV/0! 5.62% 76.17% 500.75% -13.41% 47.00% 4.00% 2.37% 85.47% 1480.89% 0.94 -6.59 1.21% 11.95% 65.86 35.38% 11.85% 38.07% 32.58% 0.40 32.67% -14.00% -7.28% 9.69% 9.54% 5.93 92.70% 10.38% 23.37% 10.00% 1.23 1.04% 320.64 QR = (Current Assets .54% -4.73% -1.12% 17.54% 33.68% 19.85% 0.58% 60.02% 9.77% 72.05% 18.94% 36.08% 6.80% 85.13% 7.93 111.17% 70.29% 0.40% 0.38 4.28% 0.06% 6.91% 36.01 39.83 1.15% 13.63% 0.73 10.38% SGA Margin = SGA/Sales (%) Comps SGA Margin 12.52% -2.73% 10.53 #DIV/0! 5.98% 19.23% E2261 Exam 2 – Page 2 .33% 502.92 1.

6 818.0 278.0 35.0 171.1 162.0 Q3 43.7 198.0 -0.3 -20.3 208.3 Q3 101.2 820.7 102.0 11.8 111.0 -20.0 18.9 106.0 33.0 0.7 43.8 839.2 30.4 228.3 202.0 441.0 0.6 0.4 299.199.3 Total Liabilities + Shareholder's Equity 940.2 Liabilities Accounts Payable Short-Term Debt Other Current Liabilities Total Current Liabilities Q8 27.9 0.9 55.1 478.8 Q1 91.6 22.8 850.2 0.3 Q1 41.6 0.9 193.0 25.2 0.8 Q2 50.1 0.3 839.2 21.0 41.1 TTM 4.0 27.0 10.3 286.1 Long-Term Debt Other Liabilities Total Liabilities 603.9 6.7 1.6 130.5 110.0 Q4 4.9 -12.5 176.4 1.3 16.1 Net Fixed Assets Other Assets Total Assets 202.1 -13.2 169.8 Q6 5.0 41.8 36.4 1.0 -10.9 735.7 135.4 0.8 0.1 49.3 496.3 192.8 Q6 125.0 248.5 0.5 0.3 717.1 3.0 460.2 526.8 105.3 18.4 448.7 265.5 835.6 287.1 820.0 25.0 820.4 229.1 44.4 123.5 Q7 5.5 836.3 546.0 26.7 176.2 451.0 509.9 0.7 Q4 34.2 522.9 748.2 Income Statement ($MM UON) Revenues COGS SGA INT Other Expenses/(Income) Pretax Income Tax After Tax Expenses/(Income) Net Income E2261 Exam 2 – Page 3 .4 0.3 63.8 0.5 0.7 0.0 28.0 30.7 189.1 0.8 114.3 872.3 Q2 87.0 23.3 872.2 534.Balance Sheet ($MM UON) HRZ Assets Cash Accounts Receivable Short-Term Investments Inventory Other Current Assets Total Current Assets Q8 4.3 6.0 10.8 534.0 41.8 728.2 157.3 0.6 8.0 27.2 188.0 441.8 940.9 741.3 272.7 144.6 0.5 757.7 134.5 0.8 9.7 189.0 9.5 23.3 0.9 750.007.6 0.0 140.5 10.8 105.0 42.6 103.6 72.3 165.3 TTM 91.4 137.6 193.9 22.0 18.1 -0.3 57.6 875.2 875.3 850.0 9.9 448.8 553.5 18.9 15.4 43.7 186.6 205.8 195.6 256.0 9.4 40.8 12.8 0.5 226.6 48.5 Q7 41.0 Q5 3.8 0.2 305.5 188.3 165.8 0.7 250.4 49.9 522.3 -13.1 Q3 6.5 477.0 9.8 -32.0 133.8 149.9 11.8 728.5 Q5 38.5 135.1 820.6 0.1 308.3 0.0 8.2 Q8 Q7 Q6 Q5 Q4 Q3 Q2 Q1 HRZ TTM 352.3 -0.1 1.6 37.8 102.7 Q2 4.9 190.1 151.7 0.0 10.5 -10.1 TTM 41.0 Q4 98.0 Q5 93.0 22.2 0.0 -0.2 190.1 252.6 Q6 28.0 28.6 0.7 0.4 818.0 -31.6 130.9 Shareholder's Equity Equity (Common) Q8 143.1 314.9 30.0 10.5 Q1 4.3 3.1 Q7 136.6 797.

3 49.99 30.2 TTM 9.5 16.32 30.1 4.1 Q1 3.9 3.3 14. Which company uses its assets most efficiently? ii.1 Q5 3.3 5.1 1.5 Cash Flow (Inv) CAPX Other Investing Flows CF Inv Q8 -18.7 -16.6 TTM 3. i.6 Q6 -3.9 Q8 4 30.6 16.8 1.2 57.4 4.5 1.1 4.8 Q1 1.5 0.4 Q6 -10.4 -18.1 -0.4 -16.5 1.3 61.44 Q4 5.7 -1.9 Q3 -4.7 2.2 -12.2 5.7 0.6 3.0 0.3 4.4 2.8 TTM -11.4 14.7 -38. As an expert pet supply analyst.6 -0.42 30.1 Q3 3.9 0.4 30.1 -1.0 0.2 Q5 -3.8 31.1 -3.5 0.7 14.5 -15.7 4.5 -42.8 -48.6 -8.4 25.4 -0.2 -22.7 -1.4 0.7 -3.42 Q5 5.5 -17.1 -35.3 15.9 -19.99 30.0 -0. Shares Stock Price Dates 28-Nov-08 27-Feb-09 29-May-09 31-Aug-09 30-Nov-09 26-Feb-10 28-May-10 31-Aug-10 31-Aug-10 b) Answer the following questions.8 -27.Cash Flow Statement ($MM UON) HRZ Cash Flow (Ops) NI Dprec Other Operating Flows CF Ops Q8 11. Despite HRZ’s low cash level.8 -10.6 Cash Flow (Fin) Dividends Other Financing Flows CF Fin Change in Cash Cash BOP Cash EOP Check on Change in Cash Market Data $MM except per share items Stock Price Average No.1 Q2 -13.08 30.5 15.1 15.1 Q4 -1.5 5.3 -4.3 Q7 3.34 Q6 5.6 Q3 1.5 32.2 14.8 -13.4 -1. in as few words as possible (9 points).3 5.43 Q3 4.3 33.1 4.7 Q7 -12.04 30.4 Q7 -20. which company has the better Working Capital ratio? Why do you say its better? E2261 Exam 2 – Page 4 .8 0. you believe that industry participants must generally maintain a cash level of at least 5.6 48.0 4.1 14.52 Q1 3. As of the most recently reported quarter.4 Q4 3.0% to be safe.7 6.4 56.5 3.0 14.8 -6.3 -2.7 6.6 0.9 0.2 Q4 8.3 0.2 32.6 Q2 -1.8 -41.0 -34.4 -44.4 Q5 -31.7 18.48 Q2 4.35 30.8 -9.7 Q8 Q7 Q6 -17.8 0.2 -18.9 TTM 0.2 -0.4 Q2 1.5 -1.4 Q1 -4. might it have enough quick access to cash for you to consider it safe? Why or why not? iii.7 4.

do you have 1) no faith. Using the as-provided data in HRZ’s income statements (data provided by Reuters). Describe in one sentence how you might improve HRZ’s SDItC ratios. 2) some faith. i. or 3) complete faith in HRZ’s as-computed SDItC ratios? ii.c) Extra Credit (6 points). E2261 Exam 2 – Page 5 . and where you would go to get the needed data.

E2261 Exam 2 – Page 6 .000 Noncurrent Liabilities Pension Obligations 6. the company uses linear depreciation.000 12.000 Total L+OE 27. accelerometers. and the principal ($1.000 Total Liabilities 12.000 Noncurrent Assets PPE Less Deprecation Net PPE Goodwill 20. Asset As of 3/31/20X0 3.000.000 -8. SMP is a publically-traded company that makes sensors for smartphones (GPS. SMP recently reported this financial statement: SMP Balance Sheet ($MM UON) Assets Current Assets Cash Accounts Rec.000 and its inception-to-date dividends totaled 4. • Its Loan obligation pays interest of $20 per quarter.Problem 2 of 2: Silicon Miniature Products.000 1. etc).000) must be paid on 12/31/20X0.000 4.000 3.000 Total Assets 27.000 1.000 4. Inc.000 Liabilities Current Liabilities Accounts Payable Loan Payable 5.000 Owners' Equity 15. (SMP).000 salvage value. • Its inception-to-date PIC was 1. Inventory Misc.000 SMP also reported these notes to accompany the balance sheet ($MM UON): • Its PPE was established with a useful life of 5 quarters and $10.

000 20. Estimated (noted) Q2 taxes at $200. Dealt with (in accounting terms) it’s PPE.000 R&D Expense Cash 5 dr cr 200 200 6 dr cr dr dr cr 2. 2.000 for some administrative costs in the quarter.000 Inventory AP 2 dr cr dr cr 20.000 2. associated depreciation. 8. Paid its Q2 taxes (IE: paid $200). Event Dr/Cr Amount Account 1 dr cr 4. and stop after you have found two events with incorrect entries). Purchased inventory costing 4.000 2.000 3 dr cr 2. Sold 20.000 20.000 7 dr cr 20 20 8 dr cr 200 200 AR Revenue COGS Expense Inventory Tax expense Accrued tax liability Deprec.000 5. etc.000 10. Received invoices for 2.During the second quarter of 20X0 (Q2-20X0.000 5. Paid 2.000 cash for Q2-20X0 R&D expenses. the company experienced the following ($MM UON): 1.000 SGA Expense AP 4 dr cr 2. 6. 4. and noted that its total inventory cost for these sales was 5.000 4.000 2. 5.000 10. (Hint: search one economic event at a time. 7.000 of goods to customers. Journal entries (or parts of journal entries) from just two economic events are wrong.000.000 on credit (ie: was invoiced). Expense Accumulated Depreciation Equipment held for sale Accumulated Depreciation PPE Interest Expense Accrued Interest Liability Accrued tax liability Cash E2261 Exam 2 – Page 7 . (R&D is not part of SGA for SMP). ending 6/30/20X0). Noted that interest had accrued on its Loan Payable. issued invoices for this amount. Find: a) (4 points) Fix the incorrect journal entries below. 3.

000 E2261 Exam 2 – Page 8 .000 14.000 8.000) 8.800 20 6.000 20 6.800 c) (18 points) Prepare a Q2-20X0 Sources and Uses Statement for SMP.000 Uses AR Accumulated Depreciation Equipment held for Sale Total Uses 20. Show Net Income (NI) as a single number.000 38.b) (12 points) Using the corrected journal entries above (and anything else you need).000) 10. instead of showing individual Revenue and Expense accounts.200 1.000 (1.780 38. or you may show as many individual Δ Equity accounts as you like.000 10.200) 20. create a “Delta Balance Sheet” (ΔBS) for SMP’s Q2-20X0.000 8.000 20. IE: Create a report showing the changes to SMP’s balance sheet in Q2-20X0.780 14. Sources and Uses Statement Q2-20X0 Sources Cash Inventory PPE Accrued Liabilities AP NI Total Sources 2.000 (20. Δ BS Δ Assets Cash AR Inventory Equipment held for sale PPE Accumulated Depreciation Total Δ Assets Δ Liabilities Accrued Liabilities AP Δ Equity NI Total Δ Liabilities + Δ Equity (2. You may report Δ Owners’ Equity via a single account (IE: Net Income). You do not have to show any accounts (A/L/or E) that experienced no change during the quarter.000 8.

In the Operating portion. be sure to show a sub-total for cash-associated income.980 E2261 Exam 2 – Page 9 .000 20 6.000 -1. Inventory Δ W Cap Liabilities Accrued Liabilites Accounts Payable Δ W Cap (Not Including Cash) 0 0 (2.980 (2.000 12. Indirect CFS Q2-20X0 Cash flow from Operations NI + Deprec = Cash-Associated Income 8.780 .Δ W Cap = Cash from operations -12.780 2.200) Δ NA 20.d) (19 points) Compute an indirect cash-flow statement for SMP’s Q2-20X0.200) Cash from Investing (by inspection) Cash from Financing (by inspection) Total Cash Flow Changes in Working Cap Δ W-Cap Assets Cash Accounts Rec.000 10.

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