The Gamma Systems Manufacturing Corporation has reached its maturity stage and its net sales are expected to grow at a 6 percent compound rate for the foreseeable future. Management believes that as a mature venture the appropriate equity discount rate for Gamma Systems is 18 percent. Gamma Systems Manufacturing Corporation Balance Sheets 2015 2016 Cash $50,000 $40,000 Accounts receivable 200,000 260,000 Inventories 450,000 500,000 Total current assets 700,000 800,000 Fixed assets, net 400,000 500,000 Total assets $1,100,000 $1,300,000 Accounts payable $130,000 $170,000 Accruals 50,000 70,000 Bank loan 90,000 90,000 Total current liabilities 270,000 330,000 Long-term debt 300,000 400,000 Common stock ($10 par) 300,000 300,000 Capital surplus 50,000 50,000 Retained earnings 180,000 220,000 Total liabilities and equity $1,100,000 $1,300,000 Income Statements 2015 2016 Net sales $1,400,000 $1,600,000 Cost of goods sold 780,000 900,000 Gross profit 620,000 700,000 Marketing 130,000 150,000 General and administrative 150,000 150,000 Depreciation 40,000 53,000 EBIT 300,000 347,000 Interest 45,000 57,000 Earnings before taxes 255,000 290,000 Income taxes (40%) 102,000 116,000 Net income $153,000 $174,000 A. Estimate the free cash flows available to the equity investors for 2017. B. Estimate the value of Gamma Systems equity at the end of 2016 by applying the terminal value perpetuity equation. C. By applying the terminal value equation at the end of 2016, what are we assuming about the future?
> What is the meaning of operating leverage?
> What is the meaning of contribution margin ratio? How is this ratio useful in planning business operations?
> Assume that a company has two processing departments—Mixing followed by Firing. Explain what costs might be added to the Firing Department’s Work in Process account during a period.
> How do direct labor costs flow through a job-order costing system?
> How do you compute the unadjusted cost of goods sold?
> How do you compute the cost of goods manufactured?
> How do you compute the total manufacturing costs within a schedule of cost of goods manufactured?
> How do you compute the raw materials used in production?
> What is underapplied overhead? Overapplied overhead?
> Stillicum Corporation makes ultra-light weight backpacking tents. Data concerning the company’s two product lines appear below: The company has a traditional costing system in which manufacturing overhead is applied to units based on di
> A number of terms relating to the cost of quality and quality management are listed below: Appraisal costs ……………………………………………………………… Quality circles Quality cost report …………………………………………………………… Prevention costs Quality of conformance ………………………………………………………
> Describe the terms (a) “control premium” and (b) “illiquidity discount” when discussing possible external or outside buyers of a venture.
> What is an employee stock option plan (ESOP)? How is an ESOP used to buy out a venture?
> What is foreclosure?
> What is meant by loan default? Also, describe (a) an acceleration provision and (b) a cross-default provision.
> What is the purpose of the U.S. Bankruptcy Code? What are some of the characteristics of ventures that use instead of private liquidation?
> Describe a venture bankruptcy. Also, indicate the difference between (a) a voluntary bankruptcy petition and (b) an involuntary bankruptcy petition.
> What is bankruptcy and how is it used by ventures?
> What are the steps or stages in a “typical” execution and time line schedule used in planning and executing an IPO?
> Describe the absolute priority rule.
> What is a private liquidation? What does the process of assignment mean?
> What is a private workout? Also, describe some of the characteristics of ventures that are likely to engage in private workouts.
> What is a systematic liquidation of a venture? What are some of the advantages and disadvantages of a systematic liquidation?
> What is meant by initial public offering (IPO) underpricing?
> Describe the two following terms that may be involved in underwriting a new securities issue: (a) green shoe and (b) lockup provision.
> When an investment banking firm decides whether to underwrite or market a securities issue, what is meant by a firm commitment and best efforts?
> What is meant by due diligence? How does a traditional registration differ from a shelf registration?
> An insolvent venture is one where equity is negative and/or the cash flow of the firm is unable to meet debt obligations.
> Define asset restructuring and describe how it can be implemented to escape from financial distress.
> Define operations restructuring and describe how it can be implemented to escape financial distress.
> What do we mean when we say a venture is insolvent?
> Use the concept of cash flow insolvency over time and describe what would happen if the problem is temporary rather than permanent.
> Describe what is meant by (a) a leveraged buyout (LBO), and (b) a management buyout (MBO).
> Describe how the relative value method is used to value a firm’s equity.
> Describe an outright sale of a venture. What are the four categories of possible buyers?
> What are the three types or methods of restructuring available when trying to turn around financially troubled ventures?
> What is meant by financial distress?
> What evidence exists as to whether entrepreneurs think about and/or develop exit strategies?
> What is the meaning of harvesting a venture?
> Brian Motley founded the MiniDiscs Corporation at the end of 2011. After nearly one year of development, the venture produced an optical storage disk about the size of a silver dollar that could store more than 500 megabytes of data along with a mechani
> Endco is a wireless solutions provider that facilitates wireless Internet access through small remote devices that connect to portable computers. During the past several years, Endco was lavished with an abundance of equity financial capital from a vari
> EnCal is a small West Coast-based power company specializing in power generation methods that use clean burning fuels and renewable natural resources. However, due to complex and confusing power pricing structure, EnCal is reeling from the aftereffects
> Following are the financial statements for the Chenhai Manufacturing Corporation for 2015 and 2016. The venture is in financial distress and hopes to turn around its financial performance in the near future. CHENHAI MANUFACTURING CORPORATION *Note a ta
> It was shown earlier in the chapter that Eastland Industries was suffering from cash flow insolvency. Let’s assume that scenario 1 projects that year 3 and following years will be like the results incurred for year 2 where profitability is low and conti
> What are unicorns? How might their exit values be impacted when they go public?
> It was shown earlier in the chapter that Westland Industries was suffering from cash flow insolvency in terms of its earnings before interest, taxes, and depreciation (EBITDA). Two scenarios are possible for Westland in year 3. Scenario 1 suggests that
> It was shown earlier in the chapter that Northland Industries was suffering from balance sheet insolvency. Two scenarios are possible for Northland in year 3. In scenario 1, year 3 for Northland is expected to result in an additional $150,000 operating
> New information for the Gamma Systems Manufacturing Corporation has been brought to the management’s attention. Use the financial statement information in Problem 5 and take into consideration that sales will grow at a 15 percent rate in 2017 and a 10 p
> Assume that some of the information relating to the Gamma Systems Manufacturing Corporation has changed. Using the financial statement data, answer the following questions. A. How would your valuation estimate change if the sales growth rate had been 6
> Benito Gonzalez, founded and grew the BioSystems Manufacturing Corporation over a several year period. However, Benito has decided to exit BioSystems as of the end of 2016 with the intention of starting a new entrepreneurial venture. The Fuji Electron
> Describe the business model turnaround Necton undertook. Comment on what you think would have been the challenges and your perceptions about the likelihood the new business model will succeed.
> Briefly define the following terms: cram down procedure, debtor-in-possession financing, and prepackaged bankruptcy.
> Comment on Tesla’s trip from incorporating in 2003 to its IPO in 2010. What impact do you think the IPO had on competitors in the electric car market?
> Briefly describe the common pool and holdout problems that often make it necessary for a venture to enter into a court-supervised reorganization.
> Identify major factors that cause ventures to get into financial trouble.
> Describe some of the preparations that a venture can undertake that may increase the possibility of IPO success.
> Indicate some of the differences between the NASDAQ’s National Market System and SmallCap listing requirements.
> Briefly describe how securities are traded on an organized stock exchange such as the New York Stock Exchange.
> The WestTek privately held venture is considering the sale of the venture to an outside buyer. WestTek has net sales = $21.2 million, EBITDA = $11.1 million, net income = $2.9 million, and interest-bearing debt = $12 million. Three publicly-traded comp
> The BETA firm is proposing to acquire the ACE Products venture described in Problem 1. BETA estimates that ACE’s free cash flow for next year could be improved to $5.5 million because of synergistic benefits in the form of operating or distribution econ
> What are some of the basic requirements of a successful turnaround plan?
> Define financial restructuring and describe what is meant by debt payments extension and debt composition change.
> Describe the terms “tombstone ad” and “red herring disclaimer.”
> What is investment banking? What is an underwriting spread?
> Describe an initial public offering (IPO). What are the differences between a primary offering and a secondary offering?
> The venture investors and founders of the ACE Products venture, a closely held corporation, are contemplating merging the successful venture into a much larger diversified firm that operates in the same industry. ACE estimates its free cash flows that wi
> Make the journal entry (or entries) necessary to record the following transaction: Gave land to an employee. The land originally cost $52,000, and it had that same value on the date it was given to the employee. This land was given in exchange for serv
> Make the journal entry (or entries) necessary to record the following transaction: Declared and paid a $12,000 cash dividend to shareholders.
> Using the following information, compute total current assets: Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 Prepaid Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
> Make the journal entry (or entries) necessary to record the following transaction: Sold land that had an original cost of $50,000. Received $40,000 cash. Also received a piece of equipment with a fair value of $90,000.
> Using the following information, compute total current liabilities: Accrued Income Taxes Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 Notes Payable (due in 14 months). . . . . . . . . . . . . . . . . . . . . . . . . .
> Make the journal entry (or entries) necessary to record the following transaction: Purchased equipment with a fair market value of $100,000. Paid $10,000 cash as a down payment and signed two notes for the remaining cost—a 6% note for $20,000 tha
> Account balances taken from the ledger of High Flying Logistics Co. on December 31, 2013, follow: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,000
> Dylan’s Taxidermy Corporation reports revenues and expenses of $142,300 and $91,500, respectively, for the period. Give the remaining entries to close the books assuming the ledger reports Additional Paid-In Capital of $400,000 and Retained Earni
> On the Clark and Company Inc. balance sheet, indicate the amount that should appear for each of the items (a) through (n) on the balance sheet.
> For the years 2011–2013, Robbins Soccer Company had net income and average shares outstanding as follows: What was the percentage of change in earnings per share (EPS) in 2012? In 2013?
> Use the following account balance information to construct a trial balance: Salary Expense …………………………………………… $24,000 Unearned Ser
> The following accounts were taken from the trial balance of Cole Company as of December 31, 2013: Sales ………………………………………………&he
> Use the following account balance information to construct a trial balance: Cost of Goods Sold ……………………………. $ 9,000 Accounts Payable …………&helli
> Refer to Practice 4-1. Assets with the same productive capacity as the assets comprising the $365,000 beginning asset balance had a current cost of $437,000 at the end of the year. Using the physical capital maintenance concept, determine the company&r
> Make the adjusting journal entry necessary at the end of the period in the following situation: Bad debts created by selling on credit during the year are estimated to be $1,200. So far, none of these accounts have been specifically identified and writ
> Match the numbered statements below with the lettered terms. An answer (letter) may be used more than once, and some terms require more than one answer (letter). 1. Key ingredients in quality of relevance. 2. Traditional assumptions that influence th
> Refer to Practice 4-16. Use that information to compute the price-earnings ratio. In Practice 4-16 Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.67 Cost of
> Use the following information to compute return on sales. Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.67 Cost of goods sold . . . . . . . . . . . . . . .
> The company started business in 2011. In 2013, the company decided to change its method of computing oil and gas exploration expense. The company has only two expenses: oil and gas exploration expense and income tax expense. The following sales and oil
> Use the following information to compute net income and comprehensive income. For simplicity, ignore income taxes. Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,000 U
> Make the closing entry (or entries) necessary to close the following accounts: Salary Expense ………………………………………….. $18,000 Unearned Servic
> Make the closing entry (or entries) necessary to close the following accounts: Cost of Goods Sold ………………………………….. $ 7,000 Accounts Payable ……&h
> Make the adjusting journal entry necessary at the end of the period in the following situation: On June 1, the company received $9,600 in advance for 12 months of service to be provided, with the service period beginning on June 1. This $9,600 was reco
> Make the adjusting journal entry necessary at the end of the period in the following situation: On August 1, the company paid $3,600 in advance for 12 months of rent, with the rental period beginning on August 1. This $3,600 was recorded as Prepaid Ren
> Make the adjusting journal entry necessary at the end of the period in the following situation: On August 1, the company borrowed $10,000 under a 1-year loan agreement. The annual interest rate is 8%. As of the end of the year, no entry has yet been ma
> From the following list of accounts, determine which ones should be closed and whether each would normally be closed by a debit or by a credit entry. Cash Land Rent Expense Interest Revenue Depreciation Expense Advertising Expense Sales Notes P
> Make the journal entry (or entries) necessary to record the following transaction: Sold merchandise costing $14,000 for $22,000. Of the $22,000, $4,000 was received in cash and the remainder was on account. Assume a perpetual inventory system, meaning
> Make the adjusting journal entry necessary at the end of the period in the following situation: Equipment depreciation for the year was computed to be $5,500.
> The following information describes the company’s sales for the year: (a) A sale for $100,000 was made on March 23. As of the end of the year, all work associated with the sale has been completed. Unfortunately, the customer is a significant cre
> Use the following information to compute the quick ratio: Long-Term Loan Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,100 Accounts Receivable . . . . . . . . . . . . . . . . .
> Prepare two income statements, one using the information in Practice 2–8 and the other using the information in Practice 2–9. In Practice 2–8 Use the following account balance information to construct a trial balance: Cost of G
> Use the following information to compute the current ratio: Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,700 Paid-In Capital. . . . . . . . . . . . . . . .
> The company had the following total asset and total liability balances at the beginning and the end of the year: During the year, the company received $100,000 in new investment funds contributed by the owners. Using the financial capital main
> Refer to the IBM information in Exhibit 4-5. Compute the overall gross profit percentage for 2007, 2008, and 2009.
