ICM335 Financial Reporting - Seminar 2

Global used $20 million of its available cash to repay $20 million of its long-term debt. Which line items in Global’s balance sheet would be affected?

• Cash

• Long-term Debt

• Book Value of Equity

• Accounts Receivable

Answer explanation

When Global repays its long-term debt, it uses its cash reserves, decreasing the Cash line item. Simultaneously, the Long-term Debt line item decreases because the debt is repaid.

A warehouse fire destroyed $5 million worth of uninsured inventory.

What is the change to Global's book value of equity?

• 1. Decrease by $5 million

• Increase by $5 million

• No change

• Increase by $10 million

Answer explanation

The loss of uninsured inventory directly reduces the assets.

Because of the balance sheet identity (i.e., Assets = Liabilities + Stockholders Equity), the book value of equity will also be decreased by $5 million.

Global used $5 million in cash and $5 million in new long-term debt to purchase a $10 million building.

Which line items in Global’s balance sheet would be affected?

• Cash

• Long-term Debt

• Assets

• Inventory

Answer explanation

ASSET SIDE:

-Cash decreases by $5 million;

Assets increase by $10 million due to the new building.

Tot change: +$5 million

LIABILITY SIDE:

-Long-term debt increases by $5 million.

Tot change: +$5 million

A large customer owing $3 mln for products it already received declared bankruptcy.

Which line items in Global’s balance sheet would be affected?

• Cash

• Accounts Receivable

• Equity

• Long-term Debt

Answer explanation

The accounts receivable (amounts owed to the firm by customers who have purchased goods or services on credits) would decrease by $3 million due to bad debts, and this would also affect the equity.

Global’s sales revenue in 2018 is $186.7 million.

After an aggressive marketing campaign, Global’s sales revenue increases by 15%,

but their operating margin fell from 5.57% to 4.50%.

What is Global's EBIT in 2019?

• $2.57 million

• $9.66 million

• $29.26 million

• $12.23 million

Answer explanation

The sales revenue for 2019 can be calculated as

186.7 million × 1.15 = 214.705 million

Since Operating Margin = EBIT / Sales Revenue,

then, the EBIT for 2019 would be:

Sales Revenue × Operating Margin = EBIT

214.705 million × 0.045 = 9.66 million

Global’s EBIT in 2018 is $9.66 million.

Given that Global's interest expenses are $7.7 million and the tax rate is 26%,

what is Global’s net income in 2019?

• • + $1.45 million

• • - $0.55 million

• • + $3.96 million

• • + $0.51 million

Answer explanation

Net Income is calculated as follows:

Net Income = (EBIT - Interest) * (1- Tax Rate)

Net Income = (9.66 - 7.7) * (1 - 0.26)

Your firm receives a $5.9 million order.

You fill the order with $1.9 million worth of inventory.

The customer pays $2.8 million upfront and will pay $3.1 million later.

Order the following from the one that increases the most to the one that increases the least (or decreases).

• Receivables

• Gross profit (i.e, Revenues minus Cost of Goods Sold)

• Inventory

• Cash

• Revenues

Answer explanation

Revenues: Increase the most, by $5.9 million, as the order was completed.

Gross profit: Increase by $4 million (Revenue of $5.9 million - Cost of $1.9 million).

Receivables: Increase by $3.1 million, the amount to be paid later.

Cash: Increase by $2.8 million, the upfront payment.

Inventory: Actually decreases by $1.9 million due to the cost of the goods sold.

What is Mydeco’s market capitalization at the end of 2019?

• 1. $550 million

• $599 million

• $601 million

• $650 million

Answer explanation

Market capitalization is calculated by multiplying the total number of shares outstanding by the stock price per share. For Mydeco Corp., the market capitalization at the end of 2019 is 55 mln * $10.89 = $598.95 million.

What is Mydeco’s market-to-book ratio at the end of 2019?

• 1.92

• 2.19

• 0.46

• 1.12

Answer explanation

The market-to-book ratio is calculated by dividing the market capitalization by the book value of stockholders' equity. For Mydeco Corp., the ratio at the end of 2019 is

598.95 / 273.7=2.19

What is Mydeco’s enterprise value (EV) at the end of 2019?

• $1,100 million

• $1,113.95 million

• $1,120 million

• $1,150 million

Answer explanation

To calculate enterprise value, take current shareholder price — for a public company, that's market capitalisation. Add outstanding long term debt and then subtract available cash. Enterprise value is often used to determine acquisition prices.

We subtract cash from the company’s total debt so to get to net debt — if you buy the company and inherit its liquid assets, the cash and liquid assets can offset some of the total debt, leaving only the company’s net debt

For Mydeco Corp., it would be:

598.95 + 600 - 85 = 1,113.95