Corporate Tax Liability and Balance Sheet Analysis

GB550M2-2: Calculate the value of a firm through the use of discounted cash flow analysis. Corporate Tax Liability and Balance Sheet Analysis Ratio analysis provides useful information for a company’s operations and financial conditions. Conducting analysis in a mechanical, unthinking manner is dangerous, but when the ratio analysis is used with good judgment, it can provide useful insights into a firm’s operations and identify the right questions to ask. In this competency assessment, you address the time value of money also known as discounted cash flow analysis. This type of analysis is crucial to being able to viably analyze financial statements. Problems: 1. Complete problem: Total Net Operating Capital o XYZ, Inc. reported $20 million in operating current assets, $25 million in net fixed assets, and $6 million in operating current liabilities. How much total net operating capital does XYZ, Inc. have? o Show your work. 2. Complete problem: Balance Sheet Analysis o Complete the balance sheet and sales information in the table that follows for XYZ, Inc., using the following financial data: o Show your work. Total assets turnover: 1.5 Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25% Total liabilities-to-assets ratio: 40% Quick ratio: 0.80 Days sales outstanding (based on 365-day year): 36.5 days Inventory turnover ratio: 3.75 Partial Income Statement Information Sales Costs of goods sold Balance Sheet Information Cash Accounts payable Accounts receivable Long-term debt 50,000 Inventories Common Stock Fixed Assets Retained earnings 100,000 Total Assets $400,000 Total liabilities and equity 3. Complete problem: Yield to Maturity for Annual Payments XYZ Corporation’s bonds have 14 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $950. What is their yield to maturity? Show your work. 4. Complete problem: Required Rate of Return Show your work. Suppose rRF = 6%; rM = 10%; and rA = 14% a. Calculate Stocks A’s beta. b. If Stock A’s beta were 2.0, then what would be A’s new required rate of return? 5. Complete problem: Portfolio Beta You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.1. You are considering selling $100,000 worth of one stock with a beta of 0.9 and using the proceeds to purchase another stock with a beta of 1.4. What will the portfolio’s new beta be after these transactions? Show your work. Prepare this Assignment by responding to the problems as an Excel® or Microsoft® Word®, showing all necessary formulas and steps. List each question, followed by your answer. The Module 2 Competency Assessment has 3 parts. Part 1 Prepare balance sheet analysis using financial data • Calculate corporate tax liabilities • Calculate liabilities and equity Part 2 Analyze Portfolio Beta • Calculate stock beta Part 3 Calculate corporate tax liabilities • Calculate yield to maturity for annual payments • Analyze portfolio beta sment should be a Microsoft Word document, with a minimum of 4–6 pages in addition to the title and reference pages. • Respond to the questions in a thorough manner, providing specific examples of concepts, topics, definitions, and other elements asked for in the questions. Your submission should be highly organized, logical, and focused. • Your submission must be written in Standard English and demonstrate exceptional content, organization, style, and grammar and mechanics. • Your submission should provide a clearly established and sustained viewpoint and purpose. • Your writing should be well ordered, logical and unified, as well as original and insightful. • A separate page at the end of your submission should contain a list of references, in APA format. Use your textbook, the Library, and the Internet for research. • Be sure to include references for all sources and to cite them using in-text citations where appropriate. Your sources and content should follow proper APA citation style. Review the writing resources for APA formatting and citation • Your submission should: o include an APA-formatted title page; o be double-spaced; o be typed in Times New Roman, 12-point font; o include correct citations; o be written in Standard English with no spelling or punctuation errors; o include correct references on the bottom of the last page page. Learn: Financial Management Theory and Practice: • Chapter 2: "Financial Statements, Cash Flow and Taxes" • Chapter 3: "Analysis of Financial Statements" • Chapter 4: "Time Value of Money" • Chapter 5: "Bonds, Bond Valuation, and Interest Rates" • Chapter 6: "Risk and Return" • Chapter 7: “Corporate Valuation, Stock Valuation, and Stock Market Equilibrium Rates” • Review Appendix C “Selected Equations” Chapter 2 describes basic financial statements, presents background information on cash flows, and provides an overview of the federal income-tax system. Key financial statements covered include the annual report, the balance sheet, and the income statement. Chapter 3 discusses techniques used by investors and managers to analyze financial statements. Financial statement analysis generally begins with a set of financial ratios designed to reveal a company’s strengths and weaknesses compared against other companies in the same industry and whether its financial position has been improving or deteriorating over time. Chapter 4 explores the time value of money, one of the most important concepts in finance. Timeline value analysis is used to examine particular problems. Future value, present value, interest rate, and time are discussed as the basic four time value of money variables. Annuities, perpetuities, and uneven cash flows are also reviewed. Chapter 5 describes the different types of bonds governments and corporations issue, explains how bond prices are established, and discusses how investors estimate the rate of return they can expect to earn. The various types of bond investment risk are covered. Chapter 6 examines the trade-off between risk and return. The chapter discusses how to calculate risk and return for both individual assets and portfolios. This chapter also develops the Capital

YTM = (C / PV) + (C / PV + YTM) * (n - 1)

YTM = (100 / 950) + (100 / (950 + YTM)) * (14 - 1)

YTM = 0.1053 + (0.1053 / (950 + YTM)) * (13)

Required rate of return = Risk-free rate + Beta * (Market return - Risk-free rate)

Required rate of return = 6% + 1.4 * (10% - 6%)

Required rate of return = 6% + 1.4 * 4%

Required rate of return = 6% + 5.6%

Required rate of return = 11.6%

Portfolio beta = Sum of (weight of each stock * beta of each stock)