ACT 670 Final Exam | Complete Solution

ACT 670 Final Exam Take Home Part Name: _____________________
Instructions:

1. You may use your book and notes for this exam take home part, but you may not discuss the questions or related ideas with any other person while you are taking the exam.
2. If you have to make any assumption(s) to answer any of the problems, please state your assumption(s) clearly, and explain why you needed to make the assumption(s).
3. Sign the honor code pledge after completing the examination.
4. Show all workings for full credit.

Good Luck
Honor Code Pledge:
I have neither given nor received any unauthorized assistance on this examination.
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Problem 1: (10 points)
The following balance sheet and income statement pertain to Goode Corp., using the following assumptions complete
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a forecasted 2016 income statement: Assumptions for 2016:
Revenue growth rate
32%
COGS
64% of sales
Operating expenses
23% of sales
Interest expense
10% of beginning long-term debt
Tax rate
35%
Goode Corp. Consolidated Statement of Income
(Thousands except per share amounts) 2015
Net Revenues $345,871
Cost of Revenue (226,546)
SG&A (83,009)
Operating Income 36,316 Interest Expense (484)
Income Before Income Taxes 35,832
Income taxes (12,541)
Net Income $23,291
Goode Corp Consolidated Balance Sheet
(Thousands) 2015
Current Assets
Cash and Equivalents 7,905
Merchandise inventory 6,308
Accounts receivable 6,614
PPE (including intangibles), net 39,458
Total Assets 60,285
Liabilities and Stockholders' Equity
Accounts payable 9,643
Long-term debt 13,500
Shareholders' Equity
Common stock and APIC 28,613
Retained earnings 8,529
Total Liabilities and Shareholders' Eq. 60,285
Forecasted income statement:
Goode Corp. Consolidated Statements of Income
(Thousands except per share amounts) 2016 2015
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Problem 2: (10 points)
The following information about Douglas Corp.’s Accounts Receivable and Sales are presented below:
Year 2015-Beginning Balance of A/R = $791M
Year 2015 -Ending Balance of A/R = $807M
Year 2015 - Sales = $3,002M
Assumptions:
Sales growth will be equal to 6% per year
A/R turnover will stay constant throughout the forecast period
Required:
a. Using this information, forecast Douglas Corp.’s the growth in Accounts Receivable for years 2016-2020.
(please attach excel file)
b. What problem does a constant A/R turnover assumption cause?
c. Provide a solution to the problem caused by a constant A/R turnover assumption.
Problem 3: (15 points)
General Mills (NYSE: GIS) is a large manufacturer and distributor of package consumer food products. Benoit Gagnon, a buy-side analyst covering General Mills, has studied the historical growth rates in sales, earnings, and dividends for GIS, and also has made projections of future growth rates. Gagnon expects the current dividend of 1.10 per share to grow at 6 percent for the next five years, and that the growth rate will decline to 3 percent and remain at that level thereafter.
The risk-free rate is 4%, the market risk premium is 6%, and GIS’s beta, assumed to be 0.50.
Required:
1. Calculate the required rate of return on equity for General Mills as of the beginning of Year +1.
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2. Calculate the sum of the present value of total dividends for Years +1 through +5.
3. Calculate the continuing value of General Mills at the start of Year +6 using the constant growth model with Year +6 total dividends.
4. Calculate the present value of continuing value as of the beginning of Year +1.
5. Compute the value per share of General Mills as of the beginning of Year +1. Remember to adjust the present value for midyear discounting.