Question: The Protek Company is a large manufacturer
The Protek Company is a large manufacturer and distributor of electronic components. Because of some successful new products marketed to manufacturers of personal computers, the firm has recently undergone a period of explosive growth, more than doubling its revenues over the last two years. However, the growth has been accompanied by a marked decline in profitability and a precipitous drop in the company's stock price. You are a financial consultant who has been retained to analyze the company's performance and find out what's going wrong. Your investigative plan involves conducting a series of in-depth interviews with management and doing some independent research on the industry. However, before starting, you want to focus your thinking to make sure you can ask the right questions. You'll begin by analyzing the firm's financial statements over the last three years. 
The following additional information is provided with the financial statements. Depreciation for 20X1, 20X2, and 20X3 was $200, $250, and $275 million respectively. No stock was sold or repurchased, and like many fast-growing companies, Protek paid no dividends. Assume the tax rate is a flat 34% and the firm pays 10% interest on its debt. a. Construct Common Size Income Statements for 20X1, 20X2, and 20X3. Analyze the trend in each line. What appears to be happening? (Hints: Think in terms of both dollars and percentages. As the company grows, the absolute dollars of cost and expense spending go up. What does it mean if the percentage of revenue represented by the expenditure increases as well? How much of an increase in spending do you think a department could manage efficiently? Could pricing of Protek's products have any effect?) b. Construct Statements of Cash Flows for 20X2 and 20X3. Where is the company's money going to and coming from? Make a comment about their free cash flows during the period. Is it likely to have positive or negative free cash flows in the future? c. Calculate the indicated ratios for all three years. Analyze trends in each ratio and compare each with the industry average. What can you infer from this information? Make specific statements about liquidity, asset management, especially receivables and inventories, debt management, and profitability. Do not simply say that ratios are higher or lower than the average or that they are going up or down. Think about what might be going on in the company and propose reasons why the ratios are acting as they are. Use only ending balance sheet figures to calculate your ratios. 
Do certain specific problems tend to affect more than one ratio? Which ones? d. Construct both Du Pont Equations for Protek and the industry. What, if anything, do they tell us? e. One hundred million shares of stock have been outstanding for the entire period. The price of Protek stock in 20X1, 20X2, and 20X3 was $39.27, $26.10, and $11.55 respectively. Calculate the firm's Earnings Per Share (EPS), and its Price Earnings Ratio (P/E). What's happening to the P/E? To what things are investors likely to be reacting? How would a slowdown in personal computer sales affect your reasoning? f. Would you recommend Protek stock as an investment? Why might it be a very bad investment in the near future? Why might it be a very good one?
Transcribed Image Text:
PROTEK COMPANY INCOME STATEMENTS For The Periods ended 12/31 (000,000) 20X1 $1,578 20X2 20X3 Sales $2,106 $3,265 1,502 $1,763 COGS 631 906 Gross Margin $ 947 $1,200 Expenses Marketing R & D Admin. $316 $495 $882 158 211 327 126 179 294 Total Expenses $ 600 $ 885 $1,503 EBIT $347 $315 $260 Interest 63 95 143 EBT $284 $220 $117 Таx 97 75 40 EAT $187 $145 $ 77 BALANCE SHEETS 12/31 ($000,000) 20X1 20X2 20X3 ASSETS Cash 30 40 62 Accounts Receivable 175 351 590 Inventory 90 $ 295 151 300 Current ASSETs $ 542 $ 952 Fixed ASSETs $2,373 (860) $1,513 Gross $1,565 (610) $ 955 $2,718 (1,135) $1,583 Accum. Depreciation Net Total ASSETs $1,250 $2,055 $2,535 LIABILITIES Accounts Payable $56 $81 $134 Accruals 15 20 30 Current Liabilities $71 $101 $164 Capital Long-Term Debt Equity Total Liability & Equity $630 S1,260 $1,600 549 694 771 $1,250 $2,055 $2,535 Industry Average 20X1 20X2 20X3 Current Ratio 4.5 Quick Ratio 3.2 42 days 1.5 ACP Inventory Turnover Fixed ASSET-turnover' data-toggle="tooltip" data-placement="top" title="Click to view definition...">ASSET Turnover 1.6 Total ASSET Turnover Debt Ratio 1.2 53% Debt-Equity 1:1 TIE 4.5 ROS 9.0% DA 10.8% ROE 22.8% Equity Multiplier 2.1
> Paul Dargis has analyzed five stocks and estimated the dividends they will pay next year as well as their prices at the end of the year. His projections are shown below. Compute the dividend yield, capital gains yield, and total one-year return implie
> Describe the sectors into which economists divide an industrialized economy and outline the financial flows between them.
> Calculate the market price of a $1,000 face value bond under the following conditions. Coupon Time Until Rate 12% Current Maturity Market Rate 15 уrs 5 yrs 25 yrs 30 уrs б уrs a. 10% b. 7% 12% с. 9% 6% d. 14% 9% е. 5% 8%
> Suppose Wings and Nantucket of the last problem agree to assume a $300,000 residual value for the plane at the end of the lease. How much will wings have to pay monthly to give Nantucket its 12% return?
> Wings Inc. is a commuter airline that serves the Boston area. Wings plans to lease a new plane through Nantucket Capital Inc. The lease term is fifteen years, and no residual value is expected at its end. a. What monthly lease payment must Nantucket
> The Altoona Company issued a 25-year bond 5 years ago with a face value of $1,000. The bond pays interest semiannually at a 10% annual rate. a. What is the bond's price today if the interest rate on comparable new issues is 12%? b. What is the price tod
> Taunton Manufacturing Inc. is a machine shop in Taunton Massachusetts. The firm recently leased a drill press for a 20-year term at payments of $9,000 per year payable at year-end. No residual value was assumed in the lease, which is clearly a financin
> Henderson Engineering Ltd. just leased a computer aided design system for five years with annual payments of $12,000 payable at the end of each year. The lease contains a provision that allows Henderson to purchase the machine at its fair market value a
> Caruthers Inc. is a small manufacturing firm and has the following summarized balance sheet. The firm is interested in acquiring a fleet of ten company cars for its sales staff. The cars have an economic life of seven years, but Caruthers plans to kee
> Harvester Inc. has net income of $75,000,000 and 15,000,000 shares of common stock outstanding. Several years ago it issued 10,000, 8% coupon, 30 year convertible debentures at a par value of $1,000. The conversion price was set at $25, the price of th
> Lindstrom Corp. reported earnings after tax of $2,160,000 last year along with basic EPS of $3.00. All of Lindstrom’s bonds are convertible, and if converted, would increase the number of shares of the firm’s stock outstanding by 15%. Lindstrom is subj
> Jake Cornwall just bought a $1,000 par value, 8% coupon rate, 30-year bond of the Pristine Corp. Interest rates had risen somewhat between the time the coupon rate was set and the bond was issued, so Jake got it at a discount paying only $950. The bond
> What problems does an institutional investor face when it places a very large buy or sell order for a block of stock through an exchange.
> The Rollins Metal Company is engaged in a long-term planning process and is trying to choose among several strategic options, which imply different future growth rates for the company. Management feels that the main benefit of higher growth is that it e
> A $1,000 par value, 30-year bond is 5 years old. It pays interest once a year at an annually compounded coupon rate of 12% The market is returning 8% on comparable bonds. What is the bond’s market price?
> The following preferred stocks are returning 8.5% to their owners: Calculate the prices at which they were issued. Dividend % Current Price $14.71 $41.18 $129.41 Stock A B C 5% 7% 11%
> Apollo’s Alpha-1 bond was issued at a time when interest rates were even higher. It has a coupon rate of 22%, a $1,000 face value, an initial term of 30 years, and is now 13 years old. Calculate its price if interest rates are now 12%, compare it with
> Apollo's Alpha bond was issued 10 years ago for 30 years with a face value of $1,000. Interest rates were very high at the time, and the bond's coupon rate is 20%. The interest rate is now 10%. a. At what price should an Alpha bond sell? b. At what pri
> Sudsy Inc. recently paid an annual dividend of $1.00 per share. Analysts expect that amount to be paid for three years after which dividends will grow at a constant 5% per year indefinitely. The stock is currently trading at $20, and investors require
> General Machine Works Inc. (GMW) has been losing money for some time but has managed to maintain an annual dividend of $1.. The company’s strategy is to restructure by getting smaller while working on labor and product line problems at the same time. O
> Softek has two potentially big-selling products under development. Alpha, the first new product, seems very likely to catch on and is expected to drive the firm's growth rate to 25% for the next two years. However, software products have short lives, a
> John Wilson is a conservative investor who has asked your advice about two bonds he is considering. One is a seasoned issue of the Capri Fashion Company, which was first sold 22 years ago at a face value of $1,000, with a 25-year term, paying 6%. The o
> Mountain Sports Inc borrowed money for two years last week at 12%. The pure rate is 2%, and Mountain’s financial condition warrants a default risk premium of 3% and a liquidity risk premium of 2%. The maturity risk premium for two-year loans is 1%. In
> What is meant by transparency in the context of trading stocks on an exchange?
> The Mariposa Co. has two bonds outstanding. One was issued 25 years ago at a coupon rate of 9%. The other was issued 5 years ago at a coupon rate of 9%. Both bonds were originally issued with terms of 30 years and face values of $1,000. The going int
> Fix-It Inc. recently issued 10-year, $1,000 par value bonds at an 8% coupon rate. a. Two years later, similar bonds are yielding investors 6%. At what price are Fix-Its bonds selling? b. What would the bonds be selling for if yields had risen to 12%? c.
> Pacheco Inc. issued convertible bonds 10 years ago. Each bond had an initial term of 30 years, had a face value of $1,000, paid a coupon rate of 11%, and was convertible into 20 shares of Pacheco stock, which was selling for $30 per share at the time. Si
> Your friend Marvin is excited because he believes he’s found an investment bargain. A broker at Quick Cash Investments has offered him an opportunity to buy a bond issued by Galveston Galleries Inc. at a very attractive price. The 30-year bond was issu
> Sally Guthrie is looking for an investment vehicle that will double her money in five years. a. What interest rate, to the nearest whole percentage, does she have to receive? b. At that rate, how long will it take the money to triple? c. If she can't
> Apollo's Beta bond has just reached the end of its period of call protection, has 10 years to go until maturity and has a face value of $1,000. Its coupon rate is 16%, and the interest rate is currently 10%. Should Apollo refund this issue if refunding
> Ernie Griffin just purchased a 5-year zero coupon corporate bond for $680.60 and plans to hold it until maturity. Assume Ernie has a marginal tax rate of 25%. a. Calculate Ernie’s after-tax cash flows from the bond for the first two years. Assume ann
> The interest rate outlook for Montrose Inc., a large, financially sound company, is reflected in the following information: (1) The pure rate of interest is 4%. (2) Inflation is expected to increase in the future from its current low level of 2%. Predi
> Hoste Corp. issued a $1,000 face value 20-year bond seven years ago with a 12% coupon rate. The bond is currently selling for $1,143.75. What is its yield to maturity (YTM)?
> Smithson Co.'s Class A bonds have 10 years to go until maturity. They have a $1,000 face value and carry coupon rates of 8%. Approximately what do the bonds yield at the following prices? a. $770? b. $1,150? c. $1,000?
> Describe the process that occurs when an investor places an order with a broker to buy or sell stocks under the market maker/specialist system.
> Daubert, Inc. planned to issue and sell at par 10-year, $1,000 face value bonds totaling $400 million next month. The bonds have been printed with a 6% coupon rate. Since that printing, however, Moody’s downgraded Daubert’s bond rating from Aaa to Aa.
> A bond that pays 10% interest compounded annually on a $1,000 face value will mature in 20 years. The interest rate is now 12%. What should the bond’s market price be?
> Adams Inc. recently borrowed money for one year at 9%. The pure rate is 3%, and Adams’ financial condition warrants a default risk premium of 2% and a liquidity risk premium of 1%. There is little or no maturity risk in one-year loans. What inflation
> Keena is saving money so she can start a two-year graduate school program two years from now. She doesn’t want to take any chances going grad school, so she’s planning to invest her savings in the lowest risk securities available, Treasury notes (short-
> Calculate the rate Nu-Mode in the last problem should expect to pay on a two-year loan. Assume a 4% default risk premium and liquidity and maturity risk premiums of ¾% due to the longer term. Inflation is expected to be 5% in the loan’s second year.
> The Libris Publishing Company had revenues of $200 million this year and expects a 50% growth to $300 million next year. Costs and expenses other than interest are forecast at $250 million. The firm currently has assets of $280 million and current liabi
> Fitch Inc’s financial statements are as follows: Fitch also sold stock for $2.5 million and paid dividends of $3.1 million. No fixed assets were retired during the year. (Hint: That implies fixed asset purchases and depreciation are
> Latigoe Inc. has the following financial statements for 20X8. In addition, the company paid stockholders dividends of $2.9 million and received $4.8 from the sale of new stock. No fixed assets were retired during the year. (Hint: That implies fixed as
> Ralph Renner just borrowed $30,000 to pay for a new sports car. He took out a 60-month loan and his car payments are $761.80 per month. What is the effective annual interest rate (EAR) on Ralph’s loan?
> Lap Dogs Inc. is planning for next year and has the following summarized results so far ($000): The firm pays interest of 12% on all borrowing and is subject to an overall tax rate of 38%. It paid interest of $20,000 this year and plans a $75,000 div
> Your friend Sally just returned from a trip to New York where she was very impressed by a visit to the stock market. Is it correct to say that she visited the stock market? What exactly did Sally visit? Is there more than one place in New York that sh
> Blanchard Inc. would like to borrow $12 million for 20 years through a bond issue but has been having difficulty finding lenders willing to advance that much. The firm’s investment banker has advised the CFO that potential bond buyers are not worried ab
> Comparative historical financial statements for Northern Manufacturing of the preceding problem are as follows. a. Use the ANALYS program to prepare common size statements and a set of financial ratios for each of the last three years. Notice that ANA
> At the close of 20X3, the financial statements of Northern Manufacturing were as follows. In addition, Northern paid dividends of $1.2M and sold new stock valued at $1.0M during 20X3. Use the CASHFLO program to produce Northern's statement of cash flo
> The Hardigree Hamburger chain is a closely held corporation with 400,000 shares of common stock outstanding. The owners would like to take the company public by issuing another 600,000 shares and selling them to the general public in an initial public of
> John Cleaver's grandfather died in 2015 and left him a trunk that had been locked in his attic for years. At the bottom of the trunk John found a packet of 50 U.S. Savings Bonds that had never been cashed in. The bonds were purchased for $11.50 each in
> Charlie owes Joe $8,000 on a note which is due in five years with accumulated interest at 6%. Joe has an investment opportunity now that he thinks will earn 18%. There’s a chance, however, that it will earn as little as 4%. A bank has offered to disco
> Paladin Enterprises manufactures printing presses for small-town newspapers that are often short of cash. To accommodate these customers, Paladin offers the following payment terms: 1/3 on delivery 1/3 after six months 1/3 after 18 months The Littleto
> Branson Inc. has sold product to the Brandywine Company, a major customer, for $20,000. As a courtesy to Brandywine, Branson has agreed to take a note due in two years for half of the amount due, and half in cash. a. What is the effective price of the
> Sam Lawson is a vice president at a large communications firm. His compensation includes a salary of $400,000, a bonus of $200,000 and a stock option package that allows him to purchase 30,000 shares of the company’s stock at $45 per share. He can exer
> Briefly describe the interest-debt planning problem and the approach that leads to its solution. (Use a few brief sentences. Don't list the procedural steps or give a numerical example.)
> Working capital spontaneously finances itself because it's being turned over all the time. Is this statement true, false, or a little of both? Exactly what is meant by spontaneous financing? Does working capital require funding? Why?
> How long does it take for the following to happen? a. $856 grows into $1,122 at 7%. b. $450 grows into $725.50 at 12% compounded monthly. c. $5,000 grows into $6724.44 at 10% compounded quarterly.
> What interest rates are implied by the following lending arrangements? a. You borrow $500 and repay $555 in one year. b. You lend $1,850 and are repaid $2,078.66 in two years. c. You lend $750 and are repaid $1,114.46 in five years with quarterly compoun
> Assume that interest rates on federal government bonds are as follows: Do the theories of the shape of the yield curve offer any insights into this rate pattern? Discuss the expectations, liquidity preference, and market segmentation theories separate
> The Owl Corporation is planning for 20X2. The firm expects to have the following financial results in 20X1 ($000). Management has made the following planning assumptions: Income Statement Revenue will grow by 10%. The cost ratio will improve to 37% of
> Economists have forecast the following yearly inflation rates over the next 10 years: Calculate the inflation components of interest rates on new bonds issued today with terms varying from one (1) to ten (10) years. Year.. Inflation Rate 1 3.0 2...
> Inflation is expected to be 5% next year and a steady 7% each year thereafter. Maturity risk premiums are zero for one-year debt but have an increasing value for longer debt. One-year government debt yields 9% whereas two-year debt yields 11%. a. What
> Use the interest rate model to solve the following problem. One-year treasury securities are yielding 12% and two-year treasuries yield 14%. The maturity risk premium is zero for one-year debt and 1% for two-year debt. The real risk-free rate is 3%. Wha
> Lytle Trucking projects a $3.2 million EBIT next year. The firm’s marginal tax rate is 40%, and it currently has $8 million in long-term debt with an average coupon rate of 8%. Management is projecting a requirement for additional assets costing $1.5 m
> The Waterford Wax Company had the following current account activity last year. a. Calculate and display the current account detail required for the Cash From Operating Activities section of the Statement of Cash Flows. b. If you also knew that Water
> The Dalmatian Corporation expects the following summarized financial results this year ($000) Use the EFR relation to estimate Dalmatian’s external funding requirements under the following conditions. a. Sales growth of 15%. b. Sal
> Define the following terms: primary market, secondary market, capital market, money market.
> The Blandings Home Construction Company purchased a new crane for $350,000 this year. They sold the old crane for $80,000. At the time it had a net book value of $20,000. Assume any profit on the sale of old equipment is taxed at 25%. These were the
> Fred Klein started his own business recently. He began by depositing $5,000 of his own money (equity) in a business account. Once he’d done that his balance sheet was as follows: During the next month, his first month of business, h
> Axtel Company has the following financial statements: In addition, Axtel retired stock for $1,000,000 and paid a dividend of $1,727,000. Depreciation for the year was $1,166,000. Construct a Statement of Cash Flows for Axtel for 2001. (Hint: Retiring
> A group of investors is considering buying the Wheelwright Corporation, but does not want to contribute to the company’s financial support after the purchase. Wheelwright’s management has offered the following financia
> Norton Industries recorded total cost of goods sold for 20X2 of $6.5 million. Norton had the following inventory balances for the months indicated (end of period balances): a. Compute inventory turnover for Norton using the following methods to calcula
> Epsom Co. manufactures furniture and sells about $40 million a year at a gross margin of 45%. a. What is the maximum inventory level the firm can carry to maintain an inventory turnover (based on COGS) of 8.0? b. If the inventory contains $1.2 million
> Slattery Industries reported the following financial information for 20X2: The firm expects revenues costs, expenses (excluding depreciation), and working capital to grow at 10% per year for the next three years. It also expects to invest $2 million p
> Prahm & Associates had EBIT of $5M last year. The firm carried an average debt of $15M during the year on which it paid 8% interest. The company paid no dividends and sold no new stock. At the beginning of the year it had equity of $17M. The tax rate
> Milford Inc. has the following summarized financial statements ($000): Milford’s equity investors have typically demanded an expected return of at least 25% before they will buy the company’s stock Evaluate Milford&
> Tribke Enterprises collected the following data from their financial reports for 20X3: Complete the following abbreviated financial statements and calculate per share ratios indicated. (Hint: Start by subtracting the formula for the quick ratio from th
> Explain the following terms: privately held company, publicly traded company, listed company, OTCBB, NASDAQ, BATS, IPO, prospectus, and red herring.
> Companies often use ratios as a basis for planning. The technique is to assume the business being planned will achieve targeted levels of certain ratios and then calculate the financial statement amounts that will result in those ratios. The process al
> You are given the following selected financial information for The Blatz Corporation. Calculate accounts receivable, inventory, current assets, current liabilities, long-term debt, equity, ROA, and ROE. Income Statement Balance Sheet $750 Net In
> The Paragon Company has sales of $2,000 with a cost ratio of 60%, current ratio of 1.5, inventory turnover ratio (based on cost) of 3.0, and average collection period (ACP) of 45 days. Complete the following current section of the firm's balance sheet.
> Home mortgage rates are determined by market forces and individual borrowers can't do much about them. The time it takes to pay off a mortgage loan, however, varies a great deal with the size of the monthly payment, which is under the borrower's control
> The Orion Corp. is evaluating a proposal for a new project. It will cost $50,000 to get the undertaking started. The project will then generate cash inflows of $20,000 in its first year and $16,000 per year in the next five years after which it will en
> Use amount and annuity techniques to calculate the present value of the following pattern of annual cash flows at an annual interest rate of 12%. Round to the nearest dollar. 5-9 $30,000 10 1-4 $20,000 Years $40,000 Cash Flow per year
> Lee Childs is negotiating a contract to do some work for Haas Corp. over the next five years. Haas proposes to pay Lee $10,000 at the end of each of the third, fourth and fifth years. No payments will be received prior to that time. If Lee discounts t
> Amy’s uncle died recently and left her some money in a trust that will pay her $500 per month for five years starting on her twenty fifth birthday. Amy is getting married soon, and would like to use this money as a down payment on a house now. If the tru
> Joan Colby is approaching retirement and plans to purchase a condominium in Florida in three years. She now has $40,000 saved toward the purchase in a bank account that pays 8% compounded quarterly. She also has five $1,000 face value corporate bonds th
> Carol Pasca just had her fifth birthday. As a birthday present, her uncle promised to contribute $300 per month to her education fund until she turns 18 and starts college. Carol’s parents estimate college will cost $2,500 per month for four years, but d
> A financial plan has to be either a prediction about the future or a statement of goals; it can't be both. Explain this statement and comment on its validity.
> Merritt Manufacturing needs to accumulate $20 million to retire a bond issue that matures in 13 years. The firm’s manufacturing division can contribute $100,000 per quarter to an account that will pay 8%, compounded quarterly. How much will the remaining
> Janet Elliott just turned 20, and received a gift of $20,000 from her rich uncle. Janet plans ahead and would like to retire on her 55th birthday. She thinks she’ll need to have about $2 million saved by that time in order to maintain her lavish lifest
> Joe Trenton expects to retire in 15 years and has suddenly realized that he hasn’t saved anything toward that goal. After giving the matter some thought, he has decided that he would like to retire with enough money in savings to withdraw $85,000 per ye
> Clyde Atherton wants to buy a car when he graduates college in two years. He has the following sources of money: 1. He has $5,000 now in the bank in an account paying 8% compounded quarterly. 2. He will receive $2,000 in one year from a trust. 3. He'll
> The Stein family wants to buy a small vacation house in a year and a half. They expect it to cost $75,000 at that time. They have the following sources of money 1. They currently have $10,000 in a bank account that pays 6% compounded monthly. 2. Uncle Mu
> The real risk-free rate is 2.5%. The maturity risk premium is 0.1% for 1-year maturities, growing by 0.2% per year up to a maximum of 1.0%. The interest rate on 4-year treasuries (federal government bonds) is 6.2%, 7.5% on 8-year treasuries and 8.0% on 1
> Local banks are all offering 6% compounded monthly on five-year Certificates of Deposit. Hanover Bank has offered continuous compounding at the same rate on new CDs hoping to attract additional customers. Sharon Shaker has just received a $50,000 royalt
> Roper Metals Inc. is in negotiations to acquire the Hanson Sheet Metal Company. Hanson’s after-tax earnings have averaged $19 million per year for the last four years without much variation around that average figure. So far discussions have been about
> How long will it take a payment of $500 per quarter to amortize a loan of $8,000 at 16% compounded quarterly? Approximate your answer in terms of years and months. How much less time will it take if loan payments are made at the beginning of each month
> Lansing Inc., a profitable food products manufacturer, has undertaken a major expansion that will be financed by new debt and equity issues as well as earnings. During the last year the company borrowed $5 million for a term of 30 years to finance a new
