Rutgers Business School

Corporate Finance - 29:390:330:01

Midterm Exam - Fall 2020

Professor Lisa Kaplowitz

You are required to show all work, and not change the font, to receive full credit. You may add rows or columns in between.

If using a financial calculator, please list your inputs and the function used.

Get Out & Vote, Inc. (GOV) is a for-profit company, non-partisan company that manufactuers apparel and other items encouraging 18-39 year olds to vote. 

A percent of all revenue goes to reducing voter supression, increasing voter turn-out and educating the public on the integrity of mail-in voting. 

Given the unprecedented 2020 election, GOV has seen a significant increase in business. That said, they believe 2021 is going to be more challenging.

Part A - Budgeting & Financial Analysis (33 points)

($ in thousands)

Statement of Income:

Balance Sheet

2020

2019

2020

Sales 

 $   6,230.0

Cash

 $    4,000.0

 $    4,380.0

CoGS

      3,050.0

Accounts Receivables

       7,050.0

       7,750.0

One-time inventory adjustment

         300.0

Inventory

       5,700.0

       6,000.0

Gross Margin

      2,880.0

Other current assets

       2,500.0

       3,520.0

SG&A

      2,130.0

     Current Assets

     19,250.0

     21,650.0

Depreciation

         490.0

PP&E

     11,500.0

     12,600.0

Op Income

         260.0

Goodwill

       2,750.0

       2,750.0

Interest expense

         125.0

     Total Assets

     33,500.0

     37,000.0

Pre-tax Income

         135.0

Taxes

           27.0

Accounts payable

       3,500.0

       4,200.0

Net income

 $      108.0

Accrued expenses

       1,750.0

       2,000.0

Line of Credit

          750.0

       1,000.0

Other current liabilities

       3,800.0

       4,400.0

     Current Liabilities

       9,800.0

     11,600.0

Notes Payable

       3,750.0

       4,500.0

Deferred taxes

       1,250.0

       1,100.0

Total Liabilities

     14,800.0

     17,200.0

Shareholders’ Equity

     18,700.0

     19,800.0

 $  33,500.0

 $  37,000.0

1. Calculate the 2020 recurring EBIT margin and explain what it means (6 pts).

2. Calculate the 2020 Debt to Total Capital Ratio and explain what it means. (6 pts)

3. Based on the following assumptions, what is the expected change (%) in reported net income in 2021 (14 pts)

a. Sales are expected to decline 15%

b. CoGS are expected to remain flat as a perecentage of Sales

c. SG&A is expected to deleverage 20 bps as a percentage of Sales

d. Depreciation and Interest Expense are projected to be flat at $490,000 and $125,000, respectively in 2021

e. Taxes are estimated to be 20%

4. How much is recurring operating margin projected to change in 2021 (bps)? What does this mean? (7 pts)

Part B - Financial Analysis Short Answer (67 points)

1a. If net income is growing faster than revenue, what does that mean with respect to the companies operations (3 pts)

1b. GOV is funded by the following types of capital (3 pts)

Common Stock

Subordinate Notes

Preferred Stock

Secured Bonds

Rank the securities in order of highest cost to company/greatest expected return to investors.

1c. Give one example of an (a) investment decision and (b) financing decision a firm may have to make. (4 pts)

2. Get Out & Vote, Inc. (GOV) issued a corporate bond that matures in 7 years.

The coupon rate is 2.6% and the par value is $1,000.  The bond pays interest semi-annually. 

The yield to maturity on the bond is 2.3%.

What is the current price of the bond?  Is this a premium or a discount bond and how do you know? (10 points)

4. GOV's major competitor, Vote, Vote, Vote Your Voice, Inc. (VOTE) has a long term growth rate estimated to be 4.0%.  VOTE's net income

is $500,000 and there are 400,000 shares outstanding.  VOTE has no debt and all of it’s income is paid to shareholders in the form of dividends. 

Assume VOTE has a 17.5% cost of capital.

What do you think it's stock should be valued at today? (10 pts)

5. Get Out & Vote, Inc. (GOV) is considering the purchase a new machine that is expected to generate additional cash flows of

-($75,000) in 2021, $200,000 in 2022, and increasing an additional 10% year over year for the following 3 years.

GOV's cost of capital is 15%.  The machine is estimated to cost $875,000 today. 

Calculate the Net Present Value of this decision.

Should GOV purchase the machine?  Why or why not? (10 points)

6.  You are the CEO of GOV and considering buying a new home.  The home costs $525,000.  You plan to put 25% down and finance the

balance with a 30-year mortgage.  The mortgage rate is 4.8%. 

What % of the house would you own and how much will you still owe after 15 years?  (15 pts)