Judy Picoo, CFA, a portfolio manager for Hillcrest Mutual Funds, was evaluating Maui Macadamia Corporation for possible inclusion into her portfolio. During an analyst conference call, the management of the company publicly announced the following information for the year ended December 31, 2004:
Revenues for 2004 were expected to be up 44% for the year.
Net Income was expected to be up 50%.
Costs of revenues were up 36% and general expenses were up 20%.
Interest expenses were down because interest rates have dropped from 5.5% to 4.5%.
Maui Macadamia had been paying interest only on its long-term debt of $1,000,000, but it was delinquent on one monthly payment at year end.
Maui Macadamia had depreciation expenses of $100,000 per year. Maui Macadamia uses the straight-line method to depreciate its fixed assets.
Income taxes were fully paid during the year.
Maui Macadamia wrote down the value of its inventory by $20,000 for 2004.
Maui Macadamia paid dividends on its 10% preferred stock during the year. There were 1,000 preferred shares outstanding at a par value of $100.
Maui Macadamia’s net working capital increased by $200,000.
Since Maui Macadamia did not yet issue the financial statements for the 2004 year, Picoo had to use the results for the year ended 2003 for her analysis so that she could develop a reasonable basis for her investment in Maui Macadamia.
Using the following template, compute and prepare a projected income and cash flow statement for 2004 (using the indirect method) based on the information publicly disclosed by Maui Macadamia and the information from Maui Macadamia’s income statement for 2003. Use the results from the template to answer the questions below:
12/31/2003
12/31/2004
Revenues
10,000,000
Cost of revenues
3,500,000
Gross profit
6,500,000
General expenses
1,200,000
Depreciation
100,000
Inventory adjustment
50,000
Interest expenses
55,000
Pretax income
5,095,000
Income taxes
1,834,000
Net income
3,261,000
Maui Macadamia Corporation is expected to report respective estimated 2004 revenues and gross profits of:
Revenues Gross Profits
A) $14,400,000 $9,640,000
B) $14,400,000 $4,891,500
C) $10,000,000 $9,640,000
D) $10,000,000 $4,891,500
——————————————————————————–
Maui Macadamia is expected to report respective estimated 2004 cash flow from operations and net income available to common shareholders of:
Cash Flow from Operations Net Income
Available to Common
A) $4,805,250 $4,881,500
B) $4,815,250 $4,881,500
C) $4,815,250 $4,891,500
D) $5,215,250 $4,891,500
——————————————————————————–
If there were no further changes in cash flow for 2004, the expected net change in cash would be:
A) $5,805,250.
B) $4,802,000.
C) $4,785,250.
D) $4,805,250.
——————————————————————————–
Assuming that Maui Macadamia had a cash balance at the end of December 31, 2003, of $1,000,000, the estimated cash balance at the end of December 31, 2004, would be:
A) $4,805,250.
B) $5,805,250.
C) $4,802,000.
D) $4,785,250.
——————————————————————————–
Assuming that on January 1, 2005, (one day after the close of the 2004 year), Maui Macadamia does not conduct any business other than retire (pay-off) its debt in entirety, the expected net change in cash would be:
A) $3,805,250.
B) $3,821,500.
C) $3,801,500.
D) $3,825,250.
——————————————————————————–
Assuming the cash balance at the end of December 31, 2004 was $5,805,250 and Maui Macadamia subsequently redeemed its preferred stock at face value (assuming no accrued dividends to be paid) along with the retirement of its debt, the estimated new cash balance would be:
A) $2,801,500.
B) $3,805,250.
C) $3,701,500.
D) $4,701,500.
I think it’s a really good way to drill on concepts and reinforce learning. So there.