Question

Page 5 EOR QUESTIONS 59.78: HERE ARE THE ASSUMATIONS AND RELEVANT DATA, PLEASE PAY CAREFUL ATTENTION TO THEM: ONE MISSED ASSUMPTION MAY AFFECT MANY ANSWERS YEAR 1: SALES REVENUE: $10,000,000 • COST OF GOODS SOLD: $5,000,000 NOTE: COST OF GOODS SOLD STAYS CONSTANT IS THE SAME AMO SOLD STAYS CONSTANT IS THE SAME AMOUNT FOR YEARS 1. 2. AND 3 • CORE OPERATING EXPENSES: $3.3 MILLION LIDO.NOTLINCLUDE THE FOLLOWING EXPENSES IN THE OPERATING EXPENSES, BULINSTEAD INCLUDE THE FOLLOWING THREE EXPENSES AFTER CALCULATING OPERATING INCOME. DEPRECIATION: THE BASE IS $3.000.000. DEPRECIATION IS OVER 5 YEARS AND IS TAKEN ON A STRAIGHT LINE BASIS; • INTEREST EXPENSE: $250,000; • TAX EXPENSE: $250,000 NOTE: DEPRECIATION INTEREST AND TAX EXPENSE REMAIN UNCHANGED FROM YEAR 1 >>FOR YEARS 2 & 3: SALES REVENUE: USING YEAR 1 AS THE BASE YEAR, APPLY A COMPOUNDED ANNUAL GROWTH RATE OF 4.5% COST OF GOODS SOLD: SEE NOTE: THIS REMAINS $5 MILLION FOR YEARS 2 AND 3. CORE OPERATING EXPENSES: USING YEAR 1 AS THE BASE YEAR, APPLY A COMPOUNDED ANNUAL GROWTH RATE OF 3%. AGAIN: DEPRECIATION, INTEREST, AND TAXES REMAIN UNCHANGED FROM YEAR 1 >>>FOR ALL YEARS: ASSUME 10 MILLION SHARES OF COMMON STOCK OUTSTANDING AND ASSUME THE FOLLOWING STOCK PRICE PER SHARE: YEAR 1: $6 YEAR 2: $7 YEAR 3: $10 59. YEAR 1 GROSS MARGIN: S 60. YEAR 1OPERATING INCOME: $ 61. YEAR 1 DEPRECIATION EXPENSE: $ 62. YEAR 1 NET INCOME: $ 63. YEAR 2 SALES REVENUE: $ 64. YEAR 2 OPERATING INCOME: $. 65. YEAR 2 INTEREST EXPENSE: $ 66. YEAR 2 TAXES: $ 67. YEAR 2 NET INCOME: $ 68. YEAR 3 SALES REVENUE: $_ 70. YEAR 3 INTEREST EXPENSE: $ 69. YEAR 3 OPERATING INCOME: $_ 72. YEAR 3 NET INCOME: $_ 71. YEAR 3 TAXES: $_ 73. EARNINGS PER SHARE (EPS) FOR YEAR 1 :$ 74. EPS FOR YEAR 2:$_ 75. EPS FOR YEAR 3:$__ 76. PE RATIO(PE) FOR YEAR 1: 78. PE FOR YEAR 3:_ 77. PE FOR YEAR 2: _ FOR QUESTIONS 79-80: ASSUME THE FOLLOWING BALANCE SHEET DATA FOR A DIFFERENT COMP (THERE IS ABOLSUTELY NO RELATION AT ALL TO QUESTIONS 59-78) • ASSETS: CASH $500,000 ACCOUNTS RECEIVABLE: $500,000 CURRENT INVENTORY: $1 MILLION OTHER SHORT-TERM ASSETS: $1 MILLION; 2-YR CD: $500,000 . CURRENT NOTE PAYABLE: $500,000 NOTES PAYABLE-DUE IN 2 YEARS: $2,000,000 . NET PROFIT FOR YEAR: $150,000 9. RETURN ON TOTAL ASSETS: % 80. NET WORTH: $

Answer 1

59-78

Sales growth rate	4.50%
Operating expenses growth rate	3%

Year	1	2	3
Sales revenue	1,00,00,000	1,04,50,000	1,09,20,250	(sales in year t+1=1.045*sales in year t)
Cost of goods sold	50,00,000	50,00,000	50,00,000	Remains same
Gross margin	50,00,000	54,50,000	59,20,250	(=sales revenue-cost of goods sold)
Core operating expenses	33,00,000	33,99,000	35,00,970	(operating expense in year t+1=1.03*operating expenses in year t)
Operating income	17,00,000	20,51,000	24,19,280	(=gross margin-core operating expenses)
Depreciation expense	6,00,000	6,00,000	6,00,000	(=3,000,000/5)
Interest expense	2,50,000	2,50,000	2,50,000	Remains same
Taxes	2,50,000	2,50,000	2,50,000	Remains same
Net Income	6,00,000	9,51,000	13,19,280	(=operating income-depreciation-interest-taxes)
Total shares outstanding	1,00,00,000	1,00,00,000	1,00,00,000
Earning per share($)	0.06000	0.0951	0.1319	(=net income/total shares outstanding)
Price of share	6	7	10
P/E ratio	100.00	73.61	75.80	(=price of share/ earning per share)

79. Return on Total assets = Net Income/Total Assets = 150,000/3,000,000 = 0.05

80. Net worth = Total Assets - Total Liablities = 3,000,000 - 3,000,000 = 0