The Walt Disney Company by HC120912075010

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									Key to Exam I; F5360; Summer, 2001; page 1 of 4
Short answer questions/problems

1. What basic assumption is crucial to the term structure theory known as the Expecations Hypothesis?

Use the following information to answer questions 2 and 3:

As of Thursday, June 7th, the yield to maturity on Treasury-strips varied according to maturity as follows:
    1-year = 3.78%, 2-year = 4.12%, 3-year = 4.52%.

2. What does the Expecations Hypothesis predict about the one-year rate a year from today?

3. What does the Inflation Risk Hypothesis predict about the one-year rate a year from today?

4. What typical shape does the Liquidity Preference Theory predict for the yield curve?

5. Why are long-term bonds riskier than short-term bonds according to the Inflation Risk Hypothesis?

6. What does the average collection period reveal about a firm and to what would you compare this ratio?

Use the information from the following pages to answer questions 7 and 8 below.

7. What is Schering-Plough’s average collection period for 2000?

8. What was Schering-Plough’s debt ratio for 2000?

9. Assume you have borrowed some money and invested all of your personal wealth along with the money you have borrowed
    into two stocks. Demonstrate on a graph how your optimal investment in the two stocks would change if the risk of one of the
    stocks suddenly fell.

10. What annual rate compounded quarterly would be equivalent to 5.5% per year compounded continuously?

Problems/Essays

1. Assume you want to calculate the EVA for Schering-Plough for 2000 using the Harnischfeger approach. What would NOPAT
    equal?

2. Your firm is considering investing in an asset that would produce net cash flows of $100,000 five months from today.
    Thereafter, net cash flows are expected to occur quarterly and are expected to increase by 2% per quarter. The asset will not
    produce any cash flows beyond 4 years from today. The expected return on the asset will depend on the economy as follows:

    Economy       Probability       Return S&P500
    Boom             35%            45%     35%
    Average          40%            12%     11%
    Bust             25%           -22%      -3%

    The risk-free rate is 3.78%.

    a. What is the beta of the asset?
    b. What is the value of the asset?
Key to Exam I; F5360; Summer, 2001; page 2 of 4

Additional Information on Schering-Plough

Information from Footnotes:


1.    Interest income for 2000,    1999 and 1998 was $159, $103 and $59,respectively.
     Interest income and interest expense are included in other(income) expense, net.

2.   INVENTORIES

     Year-end inventories consisted of the following:
                                                                                      2000         1999
     Finished products                                                                $459         $437
     Goods in process                                                                  261          267
     Raw materials and supplies                                                        231          254
     Total inventories                                                                $951         $958

     Inventories valued on a last-in, first-out basis comprised approximately 29
     percent and 31 percent of total inventories at December 31, 2000 and 1999,
     respectively. The estimated replacement cost of total inventories at
     December   31,   2000   and 1999    was   $995   and $972,    respectively.

3.    Total income    tax payments during 2000,                1999 and 1998 were   $606, $502 and $458,
     respectively.


SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
SIX-YEAR SELECTED FINANCIAL & STATISTICAL DATA

(Dollars in millions, except                per         2000     1999   1998   1997   1996      1995
share figures)
Research and development                           $1,333 $1,191 $1,007        $847    $723     $657




SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME

                                                         For the Years Ended December 31,
(Amounts in millions,        except per share                 2000        1999        1998
figures)

Net sales                                                  $9,815         $9,116      $8,027
Costs and Expenses:
    Cost of sales                                              1,902      1,800         1,601
    Selling, general and                                       3,485      3,374         3,091
    administrative
    Research and development                                1,333         1,191        1,007
    Other   (income)     expense,                 net         (93)          (44)           2
    Total costs and expenses                                6,627         6,321        5,701
Income before income taxes                                  3,188         2,795        2,326
    Income taxes                                              765           685          570
Net income                                                 $2,423        $2,110       $1,756
SCHERING-PLOUGH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                                                   At December 31,
(Amounts in millions, except per share            2000                 1999
figures)
ASSETS
Current Assets:
             Cash and cash equivalents          $2,397               $1,876
             Accounts receivable, less           1,413                1,022
             allowances: 2000, $96;
             1999, $92
             Inventories                           951                  958
             Prepaid expenses, deferred            959                1,053
             income taxes and other
             current assets
             Total current assets                5,720                4,909
Property, at cost:
             Land                                   56                   50
             Buildings and improvements          2,072                1,922
             Equipment                           1,861                1,760
             Construction in progress              938                  654
             Total                               4,927                4,386
             Less accumulated                    1,565                1,447
             depreciation
             Property, net                        3,362                2,939
Intangible assets, net                              627                  588
Other assets                                      1,096                  939
                                                $10,805               $9,375
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
               Accounts payable                $1,031                $1,063
               Short-term borrowings and          994                   728
               current portion of
               long-term debt
               U.S., foreign and state            589                  502
               income taxes
               Accrued compensation               312                  301
               Other accrued liabilities          719                  615
               Total current liabilities        3,645                3,209
Long-term Liabilities:
               Deferred income taxes              214                  284
               Other long-term                    827                  717
               liabilities
               Total long-term                   1,041                1,001
               liabilities
Shareholders' Equity:
               Preferred shares -                    -                    -
               authorized shares: 50, $1
               par value; issued: none
               Common shares -                   1,015                1,015
               authorized shares: 2,400,
               $.50 par value; issued:
               2,030
               Paid-in capital                    974                  675
               Retained earnings                9,817                8,196
               Accumulated other                 (318)                (233)
               comprehensive income
               Total                           11,488                9,653
               Less treasury shares:            5,369                4,488
               2000, 567; 1999, 558; at cost
               Total shareholders'              6,119                5,165
               equity
                                               $10,805               $9,375
Key to Exam I; F5360; Summer, 2001; page 4 of 4

Solutions:

Short answer questions/problems

1. Can perfectly predict future short-term interest rates

2. .04461
               1.04122   1
                1.0378
3. < .04461
4. upwards sloping
5. more difficult to predict inflation over a long-horizon than it is to predict inflation over a short-horizon
6. How long on average it takes to collect accounts receivable. Compare to industry averages, historical trends for
    the firm, and credit terms.
               9815                              365
7. RT                      8.0616 ; ACP             45.28
          1413  1022 2                      8.0616
           10,805  6119
8. DR                     .4337
               10,805
9. One point should remain unchanged, the other should shift to the left (a horizontal shift). The feasible set after
    the change should be to the left of the original feasible set and the line through the point of tangency should
    now be steeper (and should be tangent to the new feasible set).
                         1
10. e.055 - 1 = .05654; r   1.056541 4  1  .01384; APR = .01384 x 4 = .05538
                         4
Problems/Essays

1.   Operating Profit           4428 = 9815 - 1902 - 3485
     + Interest Income           159
     + R&D Expense                 0
     + Amortization of Goodwill    0
     + Change in LIFO Provision   30 =(995 - 951) - (972 - 958)
     - Cash taxes               -606
                                       1191  1007  847  723  657
     - Amortization of R&D      -885 
                                                      5
     NOPAT                      3126

2.   E(rA) = .35(45) + .4(12) + .25(-22) = 15.05
     E(rS&P) = .35(35) + .4(11) + .25(-3) = 15.90
     A,S&P = .35(45-15.05)(35-15.9) + .4(12-15.05)(11-15.9)+.25(-22-15.05)(-3-15.9) = 381.255
      S&P  .3535  15.92  .411  15.92  .25 3  15.92  226.59
        2

          381.255
                  1.68258
           226.59
     r = 3.78 + 1.68258(15.9-3.78) = 24.1728
     r     1.251728
         1
         4
                         14
                               1  .05562

           100,000   1.02   1 
                                       15            23
     V0                1                    1,089,765.35
           .05562  .02   1.05562   1.05562 
                                         

								
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