Final Exam II Fall 2023 Student Version

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Rutgers University *

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530

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Finance

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Jan 9, 2024

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xlsx

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Uploaded by DrTarsier3954

Instructions Each question is worth 25% of the total grade. All answers must be in Excel on the Excel exam spread sheet. Do not use any other spread sheet language for your exam. You can use the class material Powerpoint slides, excel spread sheets as needed. Use of any other materials including but not limited to inputs from any search engine, old exams, or ChatGPT will be considered as a violation of academc integrity. For questions involving calculations, show how you got to your answer. Incorrect answers may earn partial credit when I can follow what you've done in your excel exam file. Word questions have no "correct" answer. Word questions are graded on your demonstrating understanding of the concepts and the strength of your arguments. Answer these questions using as few words as possible. More words do not make a weak argument stronger. Inputs are highlighted in light blue. To avoid mistakes, do not change these cells. Assume that projections of expected results are the best possible. When asked for a decision, make a decision. Answer should be unequivocal - don't be wishy washy. When completed, save the exam using your last name as prefix, e.g. KiessFinalExamFall2023. If you have trouble uploading your Exam to Canvas please email it to me kiess@busi Question 1 2 3

iness.rutgers.edu 4 Average

69115794d57d6cce863e37e1de02ca02130aefb3.xlsx 12/17/2023 Question 1 Parts A, B, and C Please remember to highlight your answers and show all work (all $s in millions) You are the CEO of Itelanet, Inc. a heathcare IT start-up. Time (present): end of year 5, company was founded 5 years ago. ($s in millions) Expected Operating Cash Flows Year 6 7 8 9 10 Operating Cash Flow ($9.0) ($15.0) ($17.0) ($20.0) ($25.0) Founders invested $3.5 in Year 0 and now, after A Round, own 70.0% of Itelanet's equity A Round investors invested $15.0 at end of Year 3 and own 30.0% of Itelanet's equity Cash balance end of Year 5 $4.5 excluding new equity investment. PART A (i) Construct the capitalization tables (% ownership and $s) for the Founders and A Round. Show pre and post-money valuation for both Founder and A Rounds. (ii) What was the valuation step-up for the A Round? Itelanet completed its A Round at end of Year 3 and is now raising money for its B Round.

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69115794d57d6cce863e37e1de02ca02130aefb3.xlsx 12/17/2023 (ii) Why or why not would the Founders be pleased with the valuation of the A Round? Part B Snowscape Ventures has submitted a term sheet for Itelanet's Round B. Amount Invested % Ownership $30.0 62.5% Funding will be provided at the end of Year 5, two years after the A Round. (i) If Itelanet accepts Snowscape's term-sheet, when will the next round of financing be required? (ii) Calculate capitalization tables at the end of the B for the SnowScape proposal. Show pre and post-money valuation. (iii) What is the valuation step up from the A Round to the B Round? (iv) What factors might have contributed to this?

69115794d57d6cce863e37e1de02ca02130aefb3.xlsx 12/17/2023 PART C Mesa Blanca, another VC fund, is considering making a $45 million investment in Itelanet's B Round Mesa Blanca is using the following in their valuation of Itelanet Required rate of return 45% per year Their expectations: Exit Valuation $1,750 Yrs to Exit 8 from time of Round B financing This is different from Itelanet's expectations. Future Dilution 35.0% (i) What % Ownership would Mesa Blanca want at the B Round? (ii) If Itelanet accepts Seascape's proposal, when would the next round of financing be required? (iii) What are the advantges and disadvantages of the Mesa Blanca and Snowcape proposals? (iii) Which would you choose? Why?

69115794d57d6cce863e37e1de02ca02130aefb3.xlsx 12/17/2023 Question 2 Parts A and B Please remember to highlight your answers and show all work (All $s in 000s) Piscataway Valves - Background (This is from the case done in class.) The expected cash flows for the Do-Nothing and Expand Capacity scenarios are as shown below. Year 1 2 3 4 5 Expected Operating Cash Flow: Do Nothing $7,546 $5,894 $5,382 $4,124 $3,177 The CFO decided to use a required rate of return of 7% to evaluate the Do Nothing scenario. Using this required rate of return, the value of the business w/o investment is $22,005 Expected Cash Flow - Invest $7.5 million Expand Capacity Year 1 2 3 4 5 Expected Operating Cash Flow: Expand Valve Capacity in New Jersey $5,350 $6,045 $12,687 $14,164 $15,357 Expanding in New Jersey would require Year 0 spending of $7,500 To evaluate expanding capacity in New Jersey, Piscataway's CFO decided to use a 12% required rate of return reflecting the risk of generating additional sales in the Middle East. Piscataway valves concluded that the expansion would be worthwhile since the incremental value created by investing to expand capacity would be $9,153 Part A As an alternative to expanding its Piscataway facility, Piscataway Valve's management wants to consider shutting their New Jersey operations and relocate their entire chemical industry valve operations - executive, marketing, manufacturing - to Houston, Texas. Relocating to Texas would reduce spending for distributing valves to Texas customers, lower salaries for factory labor, and generate significant tax savings. The resulting expected net operating cash flows for relocation to Texas are: 1 2 3 4 5

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69115794d57d6cce863e37e1de02ca02130aefb3.xlsx 12/17/2023 $4,025 $9,150 $17,125 $16,593 $25,640 Year O spending to relocate $18,670 (i) To evaluate moving to Texas what required rate of return should Piscataway use? Select one of the following and explain your choice. 7% 12% 18% 24% (ii) Using the required rate of return selected above, should Piscataway consider relocating? Part B (i) Which alternative - Do Nothing, Expand Capacity in New Jersey, relocate to Texas - should Piscataway Valves choose? (Use financial criteria only). Expected Flows: Relocate to Houston

69115794d57d6cce863e37e1de02ca02130aefb3.xlsx 12/17/2023 (ii) Marphang Engineering has contacted Piscatway Industries, Piscataway Valve's parent company, about acquiring the valve business. Piscataway Industries would consider selling if the acqusition price were attractive. What is the minimum price for Piscataway Industries to sell the business?

69115794d57d6cce863e37e1de02ca02130aefb3.xlsx 12/17/2023 Question 3 Parts A, B, and C Please remember to highlight your answers and show all work Clearpane sells windows. They have two product lines: Valley View and Skyline. Valley View is sold through big box retailers such as Home Depot, Loews, and Walmart. Skyline, their premium line, is sold exclusively by building contractors for high priced homes. Sales and Cost of Sales data for each line are as shown below. Valley View 2022 2021 Units (Thousands) 3405 3300 Average Selling Price ($s/unit) $45.00 $48.00 Manufacturing Costs Variable ($s/unit) $28.25 $27.50 Fixed Costs (000s) $35,100 $35,005 Skyline 2022 2021 Units (Thousands) 1125 950 Average Selling Price ($s/unit) $87.00 $80.00 Manufacturing Costs Variable ($s/unit) $34.50 $33.50 Fixed Costs $26,550 $25,755 Part A: Valley View (i) What were Valley View's sales, gross profit, and gross profit margin for 2022 and 2021? Show % change in sales and gross profit.

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69115794d57d6cce863e37e1de02ca02130aefb3.xlsx 12/17/2023 (ii) What contributed Valley View's sales increase/decrease? (iii) Clearpane is considering increasing Valley View's average selling price to $47.25 What is their breakeven sales volume (units)? (Assume variable costs/unit and fixed costs are the same as 2022.) (iv) How should they decide whether to increase selling price? Part B: Skyline (i) What were Skyline's sales, gross profit, and gross profit margin for 2022 and 2021? Show % change in sales and gross profit.

69115794d57d6cce863e37e1de02ca02130aefb3.xlsx 12/17/2023 (ii) What was Skyline's cost of goods sold/unit in 2022 and 2021? (Show variable and fixed costs and year to year % change) (iii) What was the most significant factor in the % change in cost of goods sold/unit? (iv) How did the % change in total costs/unit contribute to change in gross profit margin? Part C: Clearpane (i) What were Clearpane's sales, gross profit and gross profit margin for 2022 and 2021? Show % change in sales and gross profit. (iv) What was the mix in each year? (v) With respect to sales and gross profit was mix favorable or unfavorable? Explain

Question 4 Parts A, B and C Please remember to highlight your answers and show all work Lenox Industrial Ceramics manufactures and sells high performance ceramics used in jet engines, wind turbines, and other industrial applications. 2018 to 2020 financial data is shown below. Lennox Industrial Ceramics ($s in 000s except for per share data) Consolidated Income Statement for Year Ending 12/31 2020 2019 2018 Sales $102,550 $106,870 $110,780 Cost of Goods Sold $49,650 $48,750 $45,500 Gross Profit $52,900 $58,120 $65,280 Operating Expenses $35,650 $34,555 $35,500 Goodwill Write Off $6,775 Operating Profit $17,250 $16,790 $29,780 Interest Expense $1,420 $1,460 $1,550 Income Before Tax $15,830 $15,330 $28,230 Taxes $2,150 $1,160 $1,340 Net Income $13,680 $14,170 $26,890 Shares Outstanding (000s) 26,450 26,250 26,500 Earnings Per Share $0.52 $0.54 $1.01 Dividends Per Share $0.67 $0.67 $0.67 Share Price (12/31) $9.75 $18.75 $20.65 Consolidated Balance Sheet As of 12/31 2020 2019 2018 Cash $4,350 $4,150 $4,250 Other Current Assets $36,135 $36,640 $36,250 Current Assets $40,485 $40,790 $40,500 Long Term Assets (Net) $56,550 $54,345 $58,200 Total Assets $97,035 $95,135 $98,700 Current Liabilties $25,085 $18,075 $15,845 Long-Term Debt $35,450 $36,500 $38,750

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Equity $36,500 $40,560 $44,105 Liabilities + Equity $97,035 $95,135 $98,700 Sales by Geographic Area 2020 2019 2018 United States $76,100 $75,225 $72,150 EU $12,150 $16,100 $22,105 Rest of World $14,300 $15,545 $16,525 Total $102,550 $106,870 $110,780 Part A (i) Market analysis showed that from 2018 to 2020, ceramic sales ($S) grew 3%/year in the U.S., 1% in the EU, and the Rest of the World. How well did Lennox do versus its industry? What might have contributed to this? (ii) What was Lennox's gross profit margin for each of the three years? What might have contributed to the changes in gross profit margin? (iii) What else effected Lennox's operating profit ($s) and net income ($s)? Part B (i) Deconstruct Lennox's return on equity.

(ii) What contirbuted to changes, if any, in Assets/Equity? (iii) Did the change in Assets/Equity serve to increase or decrease Return on Equity? Explain. Part C (i) What would have been your return if you purchased Lennox's shares at the end of 2017 and sold the at the end of 2020? (Lennox's share price at 12/30/17 was $25.54 (ii) What might have accounted for this return? (ii) EV/EBITDA ratio for 12/31/2020 for Lennox and four of its competitors is shown below. What does this suggest about the market's expectations for Lennox? Company EV/EBITDA Amalgamated International 14.5 Lennox 15.8 Mansfield Industries 20.7 Trevor and Ferrow 22.1 Transpacific Materials 24.5