GRADUATE EXECUTIVE PROGRAM   BUSI 7110 – FINANCIAL ANALYSIS

AUBURN UNIVERSITY

RAYMOND J. HARBERT COLLEGE OF BUSINESS

SUMMER 2021

EXAM I

Please read the following instructions/information carefully before you begin.

Instructions/Information

1. Your exam is due no later than Tuesday, June 22, 2021, at 11:59pm CST.

2. The exam contains 7 questions for a total of 100 points.

3. You must type your responses in the space provided.

4. You should only add sheets for additional responses if absolutely necessary.

Question 1

James Bond Inc is a film production company that provides pre- and post-production services, and studio rentals, tours and other services for films and other special events.  Roger Moore is currently the Chief Executive Officer (CEO) of James Bond Inc. and was recently also appointed Chairman of its board of directors.  Roger currently earns a fixed salary of $2,000,000 irrespective of the company’s financial performance.  Also included in Roger’s compensation package is a golden parachute of $50,000,000 cash which must be paid by the company if his employment is terminated.  Separately, the chairman position is awarded $30,000,000 cash payment if the company is merged or acquired, and Roger is not retained in the new company.  Roger’s reputation precedes him as a risk-taker, sometimes, too risky, and dominant and cavalier personality.  Under Roger’s leadership as CEO, the company acquired studios in Australia and Brazil which have yet to turn a profit.  Robert’s ethos is to “go big or go home” which has influenced his expansionist strategy.  Oftentimes these expansions occur without the required board approval.  However, now that Roger is board chairman, there are growing concerns that his dominant personality will continue its expansionism but with coerced board support.

1. Describe the agency problem that you see in James Bond, Inc. (4 points)

1. How would you propose that James Bond, Inc. solve this agency problem? Your response should include an explanation with at least THREE solutions                   (9 points)

Question 2

Dr. Jaime Football, Dr. Jackie Swimmer, and Dr. Doug Track have known each other since freshman year of medical school.  They are meeting for lunch today to celebrate Dr. Football’s recent completion of her medical certification in sports medicine.  Dr. Swimmer is currently employed as a sports masseuse with the Los Angeles Lakers, and Dr. Track has his own sports psychologist private practice.  Dr. Football has been trying to figure out her next career move which is her real motive for this lunch meeting.  She intends to propose to her college friends that they join forces in a business venture to provide sports medical related services to professional athletes.

What business structure would you recommend that Dr. Jamie Football propose to her friends?  In your explanation, advice Dr. Football of THREE ADVANTAGES and THREE DISADVANTAGES of implementing this business structure.                                      (12 points)

Question 3

Select the business structure that is described by the following features.  An answer may be selected once, more than once, or not at all.  Some features may have more than one answers.

1. Corporation
2. Partnership
3. Sole Proprietorship

1. The business structure does not pay corporate taxes.
2. The owners of the business structure have limited Liability.

• The business structure’s continuity is tied to the owner(s)’ life expectancy.

1. There is usually limited access to money to finance the business structure.
2. It is easy to transfer ownership from one party to another in this business structure.
3. It is inexpensive to form this business structure.

(12 points)

Questions 4 and 5 are based on the following information for Walmart Inc.

Walmart Inc. engages in the operation of retail, wholesale, and other units worldwide. The company operates through three segments: Walmart U.S., Walmart International, and Sam’s Club. It operates supercenters, supermarkets, hypermarkets, warehouse clubs, cash and carry stores, and discount stores; membership-only warehouse clubs; ecommerce websites, such as walmart.com, walmart.com.mx, walmart.ca, flipkart.com, and samsclub.com; and mobile commerce applications. The company offers grocery products, including dry grocery, snacks, dairy, meat, produce, deli and bakery, frozen foods, and alcoholic and nonalcoholic beverages, as well as consumables, such as health and beauty aids, pet supplies, household chemicals, paper goods, and baby products; and health and wellness products covering pharmacy, over-the-counter drugs and other medical products, and optical and clinical services. It also provides gasoline stations and tobacco; home improvement, outdoor living, gardening, furniture, apparel, and jewelry, as well as tools and power equipment, housewares, toys, seasonal items, mattresses, and tire and battery centers; and consumer electronics and accessories, software, video games, office supplies, appliances, and third-party gift cards. In addition, the company offers fuel and financial services and related products, including money orders, prepaid cards, money transfers, and check cashing and bill payment.

Source: https://finance.yahoo.com/quote/WMT/profile?p=WMT

Walmart Inc.

Consolidated Statement of Income

(all $ are in millions)

Walmart Inc.

Consolidated Balance Sheets

(all $ are in millions)

Additional Information:

1. Earnings per share (EPS) are $4.77 FYE 2021 and $5.22 FYE 2020.
2. Book values per share are $31.26 as at January 31, 2021, and $29.13 as January 31, 2020.
3. Stock prices are $139.36 for January 31, 2021, and $111.70 for January 31, 2020.
4. Dividends of $6,116 was declared FYE 2021 and $6,048 FYE 2020.

Question 4

Limit your responses to FOUR sentences or less.

1. What conclusion can you draw about Walmart’s liquidity position for the financial year ended January 31, 2021? Use at least TWO relevant financial ratios to support your response.  Hint: It would be useful to compare it to the previous year’s results

(5 points)

1. What conclusion can you draw about Walmart’s management of its inventory (based on its days’ sales in inventory) and receivables (based on days’ sales in receivables) for the financial year ended January 31, 2021? Hint: It would be useful to compare it to the previous year’s results

(5 points)

1. What conclusion can you draw about Walmart’s profitability for the year ended January 31, 2021? Use at least TWO relevant financial ratios to support your response. Hint: It would be useful to compare it to the previous year’s results

(5 points)

1. What conclusion can you draw about investors’ perception of Walmart’s financial performance in 2021? Support your conclusion using the PE and Market to Book value ratios.

(5 points)

Question 5

2021. Walmart’s 2022 sales are projected to grow by 5%. All its costs, expenses, current assets, and current liabilities will grow proportionately.  Noncurrent assets, noncurrent liabilities, and all elements of equity, except for retained earnings, will remain constant.  Advice Walmart whether it will need any additional external financing in 2022 and if so, how much?  Assume that Walmart intends to maintain the same profit margin and dividend payout ratio in 2022 as in 2021.                                                          (10 points)

1. Advice Walmart’s CEO of the maximum growth in sales at which point the company would not need any additional external financing. (3 points)

1. Advice Walmart’s CEO of the maximum sales at which the company’s financial leverage would remain constant.                                                                                               (3 points)

Question 6

Your company is currently negotiating a contract with a major client to provide professional accounting services for the next 4 years.  The contract provides one of five compensation options:

1. $250,000 to be paid at the end of each year for the next 4 years.
2. $1,000,000 to be paid now.

• $1,000,000 to be paid at the end of the contract period.

1. $500,000 to be paid now and the remainder at the end of the contract period.
2. $300,000 to be paid now and $200,000 to be paid at the end of the second year and each year thereafter.

Demonstrate which of the preceding compensation option provides the company with the greatest value at the end of the contract life using discounted cash flow methodology.  Assume the company can earn an annual rate of return of 4% with annual compounding on its investments.                                                                                                                      (15 points)

Question 7

Your company borrowed a 24-month $500,000 8% fixed rate loan on June 1, 2021.  The loan requires payment at the end of each month.  Hint: It would be useful to prepare an amortization schedule.

1. How much is the company’s monthly payment on the loan? (3 points)

1. What will be the balance on the loan at the end of May 2022?               (3 points)

1. How much will the company need to refinance the loan at the end of December 2022?

(3 points)

1. How much of the monthly payment in March 2023 will be used to repay the loan’s principal?

(3 points)

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