GMCR_exam - 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 readinglcomprehension). 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 necassary. 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 Your Topic Difficulty Suggested Time Marks Score Profitability Med Analysis 25 min 24 Cash Flow Analysis Med 25 min i 26 ualit of Earnins Eats 15 min 20 Forecasting Easy 10 min 10 Valuation Medz’Hard 30 min 30 Totals 120 min 124 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 supennarket, 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 andlor brew and sell coffee beverages at their place of business. Green Mountain roasts high-quality arabica coffees and offers over 75 coffee selections. Green Mauntain 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 c0untry, 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 con5umers of the Company's coffee by the cup. demand for whole bean sates of the Company's coffee for home con5umption also increases. The National Coffee Association of USA, lnc., in its National Coffee Drinking Trends through 2001 study. states that "over 30% of coffee drinkers drink coffee at home.“ As brand equity is built, wholesale expansion typically 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 whote bean specialty coffee sales include Gevalia. Peet’s. llly 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 of42.00 over the past 52-weeks. Section 1. Profitabilig Analfiis 3. Using numbers from Green Mountain‘s income statement and balance sheet, compute its ROA forthe year ended September 29, 2001 (based on ending total assets}. 4 pts. 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. 0. 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 RCA? 2 pts. 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. e. Compute the ROE for Green Mountain (using ending equity). 4 pts. Use the following information for question (f) 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. Part 2. Cash Flow Analysis a. How much cash did Green Mountain generate internally over the past three years? 3 pts. b. What were the three main uses of this cash (in terms of aggregate three-year dollar impact)? 6 pts\ C. 00mpute the current and quick ratios for Green Mountain ior 2001. What does this suggest about Green Mountain’s liquidity? 5 pts. 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. f. Compute Green Mountain's free cash flow to equity for fiscal 2001. 4 pts. h. Based solely on the aggregate cash flows over the past three years (i.e. CFO. CF]. and CFF), at what stage of their life cycle does Green Mountain appear to be in (Introduction, Growth, Maturity, or Decline)? Explain. 4 pts. 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. 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 Accounts 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. __ The allowance for bad debts increased as a percentage of accounts receivable The Beneish Model shows the following: DSRI 1.078 GMI 0.934 AQl 1.789 SGI 1.138 ( DEPI 1.025 SGAI 1.012 Total AccrualsiTA -0.09l LVGI 0.729 M = 4.84 + .920 DSRI 4- .528 GM] + .404 AQI + .892 SCI + .115 DEPI -.l 72 SGAI + 4.679 Accrual to TA - .327 Leverage M-score (S-variable model) -2.34 0. Does this company fit the profiie ofa manipuiator? 2 pts. (1. Explain intuitively what an A0! score of 1.789 represents. 2 pts. 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 Q1 and Q2 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 01 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. Fiscall Year 01 Dec I Q4 September b. In a recent analyst report, Mitchell Pinheiro and Hatie Weissman forecast fiscal 2002 sales of $109,995 and basic EPS of $106. 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 I sales)? 4 pts. Part 5. Valuation The answers to the following questions should be assumed to hold throughout this Section. 3. 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. b. Assume that Green Mountain has made net repurchases of $2,781,000 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. 0. Consensus analyst forecasts for Green M0untain on Mar. 4, 2002 are $0.93 and $1.1 5 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 ofshares outstanding). 6 pts. 10 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 EEO model to calculate a stock price (Le. intrinsic value estimate) for GMCR at the end of fiscal 2001. 6 pts. e. if you expand the valuation in part ((1) 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 ((3) above? Why? (Note: you don‘t have to actually compute the value, just explain why it w0uld be higher or lower). 4 pts. f. Compute the PE ratio for GMCR at the end of fiscal 2001 (the current stock price is 19.15). 2 pts. 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. 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 modets. Explain, in simpte terms. why his statement is inaccurate, and be sure to comment on the relation between earnings management and valuation. 10 pts. ' 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. 13 Exhibit 1. Common Size Financials and Basic Ratios assumes—_--— _‘__ Ml 19901999 Industry Average 2001* 0.67% 1.30% 4.06% 0.00% 0.00% 0.00% m . % . —- E — mm 1996-1999 7.70% 1.66% . . 0.15% 'CCRUED EXPENSES OTAL CURRENT LIAB - ONG TERM DEBT OTAL LIABILITIES OMMON STOCK NET APITAL SURPLUS a GOOD 88 gees GD 8 a2 1.90 10.93% 11.74% 11.48% 10.46% 11.82% . 21.38% 23.65% . 0.00% 0.71% 0.85% . 4 16.11% 25.92% 39.39% 8 .5 ammonia: h N 38: *e*e*e ETAINED EARNINGS .03 3.31% -6.26% REASURY STOCK 35% 3.37% 0.27% THER EQUITIES 0.32% 0.00% 0.00% 4.47% 20.09% 55.43% 43.75% 96.68% — 2001 2000 1995-1999 Inclust Avera 5 e 2001 HAREHOLDER EQUITY 18.54% 11.05% 0T LIAB 8. NET WORTH 36.09% 32.43% h “3 “HI was 3? ANNUAL INCOME Z Z "— 2"” II 3 ma .2 *0 e if? I'l'l mfi § “’3- : 3 Z 0 ‘3' E _ o 5 100.00% 100.00% 100.00% 100.00% 031 OF GOODS Ross PROFIT 42.75% ELL GEN & ADMIN EXP .m— NTEREST EXPENSE NCOME BEFORE TAX ROV FOR INC TAXES ET INC BEE EX ITEMS flail—3E- - x rrEMS & Disc 0P8 m1! ET iNCOME .m- rofilabilit Ratios refit Ma in for ROA mai Assets Turnover .l E 1'." E El 0 3 5'1. 60 :0 O ) - mon Eamins Levera : Ratio Ca ital Slructure Leve - e Ratio *The industry average reflects an-equaiiy weighted average of other smaii-oap firms in the specieify foods industry. 15 Green Mountain Coffee. Inc. Consolidated Balance Sheet éDollars in thousands _ Assets Cash and cash equivalents ' $ 979 $ 559 Receivables, less allowances of $492 at September 29, 2001 and 9,142 7,454 $320 at September 30. 2000 Inventories 6,059 5,350 Other current assets 524 551 income taxes receivable 743 29 Deferred income taxes, net 738 182 Total current assets 18,185 15,125 Fixed assets. net 14,397 11,274 Goodwill and other intangibles 1,546 - Other long-term assets 295 348 Deferred income taxes, net 73 497 $ 34,496 $ 27,244 Liabilities and Stockholders' Equity Current liabilities: Current portion of long-term debt $ 195 $ 135 Accounts payable 6,099 6,125 Accrued compensation costs 1,682 1,381 Accrued expenses 1,664 684 Accrued losses and other costs of discontinued operations. net - 119 Total current liabilities 9,640 8,444 Long-term debt 256 283 Long-term line of credit 6,000 8,500 Total Liabilities 15,896 17,227 Stockholders' equity: Common stock. $0.10 par value: Authorized - 20,000,000 shares; issued — 7,805,000 and 7,342,000; Outstanding — 780 734 6,667,000 and 6,204,000 shares at September 29, 2001 and September 30, 2000, respectively Additional paid-in capital 18.390 13.534 Retained earnings 8,678 2,778 Accumulated other comprehensive (loss) (219) - ESOP unallocated shares, at cost — 73,800 shares (2,000) - Treasury shares, at cost - 1,138,000 shares at September 29. 2001 and September 30, 2000 (1029) (7329) Total stockholders' equity 18,600 10,017 $ 34,496 $ 27,244 16 GREEN MOUNTAIN COFFEE. INC. Consolidated Statement of Operations (Dollars in thousands except per share data) i. | I will Net sales 5 95,576 ‘ $ 84,001 $ 64,881 Cost of sales 54,714 50,465 39,261 Gross profit 40,862 33,536 25,620 Selling and operating expenses 23,769 20,747 16,381 General and administrative expenses 6,972 5,887 4,661 Loss on abandonment of equipment - 135 229 Operating income 10,121 6,767 4,349 Other income 39 48 10 Interest expense {533) (583) (736) Income from continuing operations before income taxes 9,627 6,232 3.623 Income tax expense (3.845) (2,079) (1,376) Income from continuing operations 5,782 4,153 2,247 Discontinued operations: Income on disposal of retail stores, net of income tax expense of $81, $40 and $114 for the years ended September 29. 2001, September 30, 2000 and September 25, 1999, respectiver 118 60 186 Net income $ 5,900 $ 4,213 $ 2,433 l? GREEN MOUNTAIN COFFEE. INC. Cash flows from operating activities. « Net income $ 5,900 $ 4,213 $2,433 Adjustments to reconcile net income to net cash provided by operating activities: Income from discontinued operations (118) (60) (186) Depreciation and amortization 3,673 2,968 2,943 (Gain) Loss on disposal and abandonment of fixed (20) 173 240 assets Provision for doubtful accounts 830 361 241 Deferred income taxes (132) (28) 966 Changes in assets and liabilities: Receivables (1.518) (2,592) (1.675) Inventories (108) 59 227 Income taxes receivable (714) 206 (301) Other long-term assets 53 (98) 20 Accounts payable (26) 1,574 1,420 Accrued compensation costs 301 376 178 Accrued expenses Zfl §_2_7_ (150) Net cash provided by continuing operations 8,910 7,489 6,587 Cash flows from investing activities: Payment for Frontier acquisition (2,474) - - Expenditures for fixed assets, excluding Frontier (6,666) (4,597) (2,655) assets Proceeds from disposals of fixed assets 215 365 89 Net cash used for investing activities (8,9251 (4,232) (2,408) Cash flows from financing activities: Proceeds from issuance of common stock 2,074 448 395 Purchase of treasury shares - (6,375) (617) Purchase of unallocated ESOP shares (2,000) - - Proceeds from issuance of long-term debt 196 123 - Repayment of long-ten'n debt (163) (2,740) (2,255) Borrowings under (repayment of) revolving line of (2.500) 5.444 (2.094) credit Tax Benefit from Employee Stock Options 2.828 ; (fl) Net cash from (used for) financing activities g (3,100) 4 583 Net increase (decrease) in cash and cash equivalents 420 144 (362) Cash and cash equivalents at beginning of year @ 41_5 fl Cash and cash equivalents at end of year $ 979 $ 559 $ 415 Supplemental disclosures of cash flow information: Cash paid for interest $ 526 $ 607 $ 719 Cash paid for income taxes S 1,656 $1,896 $ 248 18 ...
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GMCR_exam - JOHNSON GRADUATE SCHOOL OF MANAGEMENT CORNELL...

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