GMCR_key - JOHNSON GRADUATE SCHOOL OF MANAGEMENT CORNELL...

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Unformatted text preview: JOHNSON GRADUATE SCHOOL OF MANAGEMENT CORNELL UNIVERSITY NBA 506 Financial Statement Analysis Spring 2002 Exam Your Name (print) Student ID This exam is open-book, open-notes. Use of calculators is allowed and encouraged. It is 135 minutes long (2 hrs 15 minutes). Total points available is 120 (think of allocating your time as 1 point per minute, plus 15 minutes for readingicomprehension). Please observe the Honor Policy of the School. 1. Check that you have all 18 pages. but do not start until instructed to do so. 2. Questions will not be answered during the exam, except to explain words or phrases to those whose native language is not English. If you are stuck, make an assumption, state it, and continue. Your grade will reflect the need for the assumption and its reasonableness. 3. Do work you want graded in the space provided, use back of page if necessary. You must turn in the paper before you leave even if you don’t want to have it graded. 4. For most questions involving calculations, you’ll need to show your work to get full marks. 5. Monitor your time - there is time pressure built into this exam. Degree of Available Difficul Suggested Time Marks Profitability” Analysis Cash Flow Anal sis Quality of Earnings Easy Forecasting Easy Valuation M edf Hard Miscellaneous Totals Company Background Green Mountain Coffee, lnc. (NASDAQGMCR) is a leader in the specialty coffee industry. The Company sells over 75 coffee selections through both wholesale and direct-mail distribution channels. The majority of Green Mountain's revenue is derived from over 7,000 wholesale customer accounts located primarily in the northeastern United States. The wholesale operation serves supermarket. specialty food store, convenience store. food service. hotel, restaurant. university. travel and office coffee service customers. Wholesale customers resell the coffee in whole been or ground form for home consumption andfor brew and sell coffee beverages at their place of business. Green Mountain roasts high-quality arabica coffees and offers over 75 coffee selections. Green Mountain Coffee is focused on building the brand and profitably growing its business. At present. management believes that it can continue to grow sales on average over the next few years at a rate similar to its historical five—year average growth rate {in the range of 20 to 25 percent). by increasing market share in existing markets. expanding into new geographic markets, and selectively pursuing other opportunities. including opportunistic acquisitions. At the same time. management is working at growing earnings at a faster rate than its revenue growth rate. In recent years. the primary growth in the coffee industry has come from the specialty coffee category, driven by the wider availability of high quality coffee, the emergence of upscale coffee shops throughout the country. and the general level of consumer knowledge and appreciation for coffee quality. Green Mountain has been benefiting from the overall market trend plus some carefully developed and distinctive advantages over its competitors. The Company believes that its coffee's convenient availability for consumer trial through convenience stores. office coffee services and food service establishments is a significant advantage and a key component of its growth strategy. As brand awareness increases through trial by consumers of the Company's coffee by the cup. demand for whole bean sales of the Company’s coffee for home consumption also increases. The National Coffee Association of USA, Inc.. in its National Coffee Drinking Trends through 2001 study. states that "over 80% of coffee drinkers drink coffee at home.“ As brand equity is built, wholesale expansion typicalty continues through customers such as supermarkets and specialty food stores, who in turn. sell the Company's whole bean coffee to consumers. The whole bean specialty coffee category can be characterized as a highly fragmented industry. Green Mountain’s primary competitors in whole bean specialty coffee sales include Gevalia. Peet's, tlly Caffe. Millstone. Seattle's Best and Starbucks. There are an estimated 500 smaller and regional brands that also compete in this category. In addition. Green Mountain competes directly and indirectly against a number of nationwide coffee marketers. For example, Kraft Foods, Procter & Gamble and Nestle. all distribute premium coffee brands in supermarkets. These premium coffee brands may serve as substitutes for Green Mountain’s whole bean coffee. Although Green Mountain’s largest geographic segment is in New-England and the Mid-Atlantic region, they have recently tried to expand to the mid-west and west through strategic acquisitions of coffee producers and retail outlets. GMCR is currently trading at $19.15 per share. although their price ranged from a low of 14.50 to a high of 42.00 over the past 52-weeks. Section 1. Profitabilig Analfiis a. Using numbers from Green Mountain's income statement and balance sheet, compute its ROA for the year ended September 29. 2001 (based on ending total assets). 4 pts. m : 6700 r 53%; Cite}? l1." 5de .. .' - I ,1 CU“ \ Rbfl f’" " " 1 WC?) is b. Disaggregate the RCA in part (a) into its two main components and compare these components to the prior years' numbers provided for fiscal 2000 in exhibit 1. Which component(s) contributed to Green Mountain's increase in profitability? 4 pts. :2. PM :: (ta-2.2:; G. go. ‘1; g5 37 <5, 3'71}; been TC- .- rigqu E Q T} Flt-Rb " 3'“ /-I\ m (Jud. to int".me in (Tug-moves Cletkflb’:£(l\ c. Compare Green Mountain's RCA to the industry ROA for fiscal 2001. Which of the two main components of ROA is most responsible for Green Mountain's superior ROA? 2 pts. Lnt‘lfl’fiHKfi 3‘) 3 Jig To : lLOt C he; h Wm U in t": 5 “lrLl i fiOka-K moat [Qty-Lg" foam“? 3 s N f “ALMA 1ft 12C) . d. Provide two possible explanations (that are consistent with the information presented in Exhibit 1} for why Green Mountain‘s superior ROA might not indicate economically superior performance over the rest of the specialty foods industry. 6 pts. émtE» if") MGR [Du—Jilk “on” “WA—“mi I ’_ [\{kav‘hL‘Iny Lou—2 [24c “3.5 )fl‘i—CLHL)‘ aW/{A it}me I h.‘ C- 0-- tall mix um 9- Compute the ROE for Green Mountain (using ending equity), 4 pts_ ' t2! Use the following information for question (i) only. Three-months into fiscal 2002, Green Mountain believes they have accumulated $1 million in excess cash and is deciding whether to use this excess cash to pay off $1 million of their outstanding long-term credit facility or repurchase $1 million of outstanding shares. f. Assuming all other financial information is unchanged. which option will result in a higher ROE for Green Mountain? Why? 4 pts. hot N _ 6‘ J J ‘ ct debt J TLWL _\ [watt (3) imi‘mgwl) Part 2. Cash Flow Analfiis a. How much cash did Green Mountain generate internally over the past three years? 3 pts. %Qmw»7fl8fi'té384- :QQQfifib b. What were the three main uses of this cash (in terms of aggregate three-year dollar impact)? 6 pts. / _'] ' . - -_ . the: "- -"('-e'._ 3 (t) Fit-at”) flamia Qua-$sz {Cree-0 t “t J l} * 4L 3‘3 . (2 i pafwut-xwwy 4' T} 3 (' 5 '_\ tilt-fwd 9E teat-3.. em (filth-t 05g: :1 L[ 70 -r 22 55‘) C. Compute the current and quick ratios for Green Mountain for 2001. What does this suggest about Green Mountain's liquidity? 5 pts. C AWL/"exit :— Féll‘ég ___.__—-—-—-— r fiaflo m WCH 7H?— s" fieao [670 Mn N O/a/ LuCi-f'} Lee, [-1 [Mg/d? cw (id? (it/t ( “MK/7- Qut‘c: J A e. Compute the earnings—based interest coverage ratio for Green Mountain for fiscal 2001. Will the cash based-interest coverage ratio be higher or lower than the earnings—based coverage ratio? What does this suggest about Green Mountain’s solvency? 4 pts. inst L“— 6300 'F 1L S 5373 S5: Zr /DCLM_(;} 3‘5- SjLIrCn .. X1 MC) new”??? LU f. Compute Green Mountain’s free cash w to equity for fiscal 2001. 4 pts. FCFE’ 3 (FC- iCFI * m deli fix Mk : 3in r [ng3 ) a I‘m-ll; g #500 “#20 77:: #2902 h. Based solely on the aggregate cash flows over the past thréé Years (Le. Chaiéfif'ahd C . at what stage of their life cycle does Green Mountain appear to be in (Introduction, Growth, Maturity, or Decline)? Explain. 4 pts. ( Ff} c3 Hon c“, I, 0‘1: . / m my :mmuug CFt: i5 flcmi‘rpzy J Part 3. uali of Eamin s a. Compute the TATA ratio for Green Mountain for fiscal 2001. Does this imply a high or low quality of earnings? 4 pts. ,w- «jag-- two i _, @7191 H________._._._.—. 31m r. b. Upon closer inspection of GMCRs financial statements, you notice the following. Indicate whether each of these items increase or decrease the perceived quality of reported earnings (2 pts each, -2 points for each incorrect answer to discourage guessing). Min 0 Max 12 pts. Increases Q of E Decreases Q of E Acc0unts receivable increased as a percentage of sales Inventory increased as a percentage of sales _ Reported income from disposal of retail stores of $118. The firm reduced the estimate of the useful lives on PPE from 5 years to 4 years. The company reduced their advertising expense in Q4 \/ -/ of 2001. L, 'rr_'~'~;_\ The allowance for bad debts increased as a percentage 5 q .\ of accomts receivable [Ci-“‘4” ’“i‘ I: C {Cara t; km The Beneish Model shows the foilowing: DSR] GM] AQI SGI DEPI SGAI Total Accrualsi'I‘A LVGl M = 4.84 + .920 DSR] + .528 GM] + .404 AQI + .892 SGI + .115 DEPI -.I 72 SGAI + 4.679 Accrual to TA - .32? Leverage {VI-score 8-variable model) 4.34] 0. Does this company fit the profile of a manipulator? 2 pts. d. Explain intuitively what an A0! score of 1.789 represents. 2 pts. x h lam”) 1 ma? mist-'01 (6 -' CL GUM (bdkn Egan's-x. Part 4. Forecasting 3. Listed below is a recent history of Green Mountain's quarterly earnings per share history. Use the Foster model to forecast earnings for 01 and 02 of fiscal 2002. 'EPS figures for 2000 and 1999 are historically reported numbers, and do not reflect the 2:1 stock split that occurred in Q1 of 2001. All quarterly numbers for fiscal 2001 reflect the stock split. Assume an autoregressive (alpha) parameter of 0.35 and a drift term (delta) of 0.02. 6 pts. Fiscal Year 2001 m A 01 Dec 0.29 -' ' l So .44 l J5; .0 :0 ‘5— r 1 b. In a recent analyst report, Mitchell Pinheiro and Halie Weissman forecast fiscal 2002 sales of $109,995 and basic EPS of $1.06. What sales growth rate is implied for GMCR during fiscal 2002? What profit margin is implied {assume constant shares outstanding and define profit margin as net income l' sales)? 4 pts. :EtL-Q LfcwlL ‘3 C) .— 67o 9351s -' r . - {rem lit-(c! (get; it” _ Dill: 101(qu Part 5. Valuation The answers to the following questions should be assumed to hold throughout this section. a. The current beta for Green Mountain is 0.75. Assuming a return on the 10—year T—bond of 4.85%. a market risk premium of 5.4%, compute the cost of equity capital for Green Mountain (do not adjust beta). 2 pts. rt: List-5+ 4155's) 7mm b. Assume that Green Mountain has made net repurchases of $2,731 ,000 over the past two years. Treating repurchases as a substitute for dividends, compute the dividend payout ratio for Green Mountain over the past two years (round to two decimal places). 2 pts. _, Vn ' - ‘ } ‘\ +1: L-Js. k U C) ’L _ .3 FE ON“ C 4— 7o *5 L saw r 92. r 7; c. Consensus analyst forecasts for Green Mountain on Mar. 4. 2002 are $0.93 and $1.15 for fiscal 2002 and fiscal 2003. respectively. Based on this information and any other necessary information, calculate the expected book value per share for the beginning of fiscal 2004 (assume a constant number of shares outstanding). 6 pts. at (2&1; 2) I I: — “1;: a " [Caleb I 1;: (T («rm 1:4» sea-5i Bi’Ec-fi 9TH org-50:97) 45.5%; “a?” : (3%; d. Based on the necessary information from parts (a) through (c), and a long-ten-n growth forecast of 20%, apply a three-period expansion of the E30 model to calculate a stock price (Le. intrinsic value estimate) for GMCR at the end of fiscal 2001. 6 pts. 1.0195512}; (-013.51 - _}_ e. If you expand the valuation in part (d) to incorporate an additional year (Le. a four-period expansion) and re-compute a stock price for GMCR, will the value be higher or lower than the answer in part (d) above? Why? (Note: you don‘t have to actualiy compute the value, just explain why it would be higher or lower). 4 pts. k J 1:) I C w HM (LL/V‘IGWKU-sz i: LV'U'VUv‘l" (:55: CEO/h ‘7 C {up L- ( 1—9 Cr 1.x» ‘l awn-cs1; p0 C: (35/ (.1...- é - LU ‘ 11 flit-A L“, [yucca Hp (17% JUL-"Ac;- f. Compute the PE ratio for GMCR at the end of fiscal 2001 (the current stock price is 19.15). 2 pts. —-""."_' (gm-r? 11 g. The PIE ratio for the specialty foods industry is currently 28.4. What does this suggest that the market believes about GMCR'S profitability? 2 pts. Uri/k CFC) \fl_/\€corn1‘n(d§ [13 QMtcme' - . Wilt/it I h. The stock is currently trading at $19.15. Based on your analysis to this point, would you recommend buying this stock? Briefly explain why. Your conclusion should be consistent with (and summarize} your findings up to this point. 6 pts. 12 6. Additional Questions a. Your boss (a Wharton graduate) tells you that earnings based valuation models are less reliable. because they use net income as an input, and net income is subject to earnings management. Therefore, the output of earnings-based valuation models is less reliable than the output of DCF models. Explain. in simple terms, why his statement is inaccurate. and be sure to comment on the relation between earnings management and valuation. 10 pts. * I L)“*5 News Cow? whistles“ E m mettle to to 55m we. Tim.) { lid/L e it.» {a “W7: “W mil/a am mgr Mr Q'LijC-Qttifl {Libido / /r~£desfl it '1 m Pact/th em Bonus Question b. GMCR currently uses a FIFO inventory method. Suppose they switch to a LIFO inventory system. Assuming a rising input price environment, what impact will this accounting method switch have on reported net income, and what impact will it have on the value of the firm? 4 pts. it at“ CU‘ULQ 011;: ML . a K it , \"\r Lot“ villi—U}; ( HR) ( Co...hto Um; VMCLWA ‘H'NEIL Up} C63 (Ag-Cask? l3 ...
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This note was uploaded on 03/16/2010 for the course NBA 5060 taught by Professor Yehuda,nir during the Spring '08 term at Cornell University (Engineering School).

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GMCR_key - JOHNSON GRADUATE SCHOOL OF MANAGEMENT CORNELL...

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