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Please submit the completed exam under Midterm Exam in the Assignment Folder.
Problem
Problem 1
Problem 2
Problem 3
Total
Grading Sheet
Your Points Maximum
17
25
6
15
9.5
10
32.5
50
68.0%
40.0%
95.0%
65.0%
ONLY. You are not allowed to consult with anyone in answering the questions (please remember the pledge signed at the
am, please post them in the Midterm Test Forum. That way, I can deal with all students as fairly as possible, especially those who
ete posts or comments that provide solutions or answers to problems.
work will also ease getting partial credit. I have shown the weights of each problem. Remember that quite often providing just a
dation or explanation.
h includes the text of the problem in the textbox and a suggested template. These templates are for your convenience only; you dont
responsibility to include all required information from the problems in the templates. If there is a discrepancy between
e use the numbers from the textbox. Feel free to add additional cells, rows and even separate tabs, if you need them.
r files as well (last name and first initial, e.g., Doe_J_Fin630_Midterm). I will download all files first and I dont want tens of files
es, please consolidate all your Excel work in one workbook with multiple spreadsheets. It will help me if you name the spreadsheets
blems. If you need more than one spreadsheet per question, please name them accordingly.
pecified in the Syllabus will be followed for any exam submitted after the due date.
Solution Legend
Value given in problem
Formula/Calculation/Analysis required
Qualitative analysis or Short answer required
Goal Seek or Solver cell
Score (filled by professor)
signed at the
ecially those who
providing just a
Problem-1
PROBLEM 1
Solution Legend
Value given in problem
Formula/Calculation/Analysis required
Qualitative analysis or Short answer required
Goal Seek or Solver cell
Score (filled by professor)
This exercise asks you to forecast Square (SQ) free cash flow and discuss risks the company is facing. You may use and modify if necessary the
template below or you may create your own template.
a) download 2013-2015 historical financial data for the company, using one of the sources listed in Course Content (you may enter numbers in the
template below or create your own). I recommend using 424B4 (prospectus) filing with the SEC
b) Based on historical financial data calculate ratios that to be used later in pro-forma financial statements (revenue growth, gross margin etc., see
chapter 6 for details);
c) Using historical data from a) and ratios from b) create pro-forma statements (see chapter 6 for details);
d) Estimate free cash flows FCF for 2016-2019 (see chapters 2 and 6 for details);
e) What are risks the company is facing? Discuss, how its tornado diagram would look like (see chapter 3 for details). You don't have to build the
diagram itself, unless you want to earn bonus points (5 points maximum);
Solution
a. Download Financial Data
In Thousands, unless otherwise specified
Assets, Current
Cash and cash equivalents
Restricted cash
Settlements receivable
Merchant cash advance receivable, net
Other current assets
Total current assets
Property and equipment, net
Goodwill
Acquired intangible assets, net
Restricted cash
Other assets
Total assets
Current liabilities:
Accounts payable
Customers payable
Accrued transaction losses
Accrued expenses
Other current liabilities
Total current liabilities
Debt
Other liabilities
Total liabilities
Commitments and contingencies (Note 16)
Stockholders equity:
Convertible preferred stock
Common stock
Additional paid-in capital
Accumulated other comprehensive loss
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
Author:
These numbers are for
September 30, 2015
Score
Dec 31, 2015
Income Statement
In Thousands, except Per Share data
Revenues
Transaction revenue
Starbucks transaction revenue
Software and data product revenue
Hardware revenue
Total net revenue
Cost of revenue:
Transaction costs
Starbucks transaction costs
Software and data product costs
Hardware costs
Amortization of acquired technology
Total cost of revenue
Gross profit
Operating expenses:
Product development
Sales and marketing
General and administrative
Transaction and advance losses
Amortization of acquired customer assets
Impairment of intangible assets
Total operating expenses
Operating loss
Interest (income) and expense
Other (income) and expense
Loss before income tax
Provision (benefit) for income taxes
Net loss
Basic and diluted net loss per share (in dollars per share)
Weighted-average shares used to compute net loss per sh
Pro forma net loss per share attributable to common sto
$174,083
$12,017
$156,188
$43,638
$32,561
$418,487
$85,012
$56,899
$20,726
$14,579
$243
$595,946
$225,300
$11,950
$115,481
$29,302
$27,834
$409,867
$63,733
$40,267
$10,279
$14,394
$3,348
$541,888
$166,176
$10,000
$64,968
$0
$12,658
$253,802
$51,656
$602
$612
$9,270
$2,399
$318,341
$7,528
$238,085
$16,004
$35,669
$13,954
$311,240
$0
$50,244
$361,484
$5,436
$148,648
$8,452
$17,368
$11,202
$191,106
$30,000
$47,110
$268,216
$4,541
$95,794
$7,488
$9,272
$12,646
$129,741
$0
$26,306
$156,047
$514,945
$0
$249,954
($1,277)
($529,160)
$234,462
$595,946
$514,945
$0
$155,166
($807)
($395,632)
$273,672
$541,888
$366,197
$0
$38,329
($693)
($241,539)
$162,294
$318,341
2015
$707,799
$123,024
$12,046
$7,323
$850,192
$433,737
$114,456
$0
$4,240
$552,433
$479,937
$118,542
$13,820
$16,636
$2,886
$631,821
$260,937
$450,858
$150,955
$2,973
$18,330
$1,002
$624,118
$226,074
$277,833
$139,803
$0
$6,012
$0
$423,648
$128,785
$140,452
$107,170
$97,743
$40,840
$1,373
$0
$387,578
($126,641)
$995
$1,390
($129,026)
$2,502
($131,528)
$0.88
149,058
$0.46
$144,637
$112,577
$94,220
$24,081
$1,050
$0
$376,565
($150,491)
$1,058
$1,104
($152,653)
$1,440
($154,093)
$1.80
142,042
$0.56
$82,864
$64,162
$68,942
$15,329
$0
$2,430
$233,727
($104,942)
($12)
($950)
($103,980)
$513
($104,493)
$0.82
127,845
$0.56
($385,659)
$4,455
-0.0115516557
Score
Max
5
Author:
Growth in Sales
You have
17.35% Current
assetstwo
to periods
should be 2
29.23% AR periods
collection
instead of 3.
38.69% Invetory turnover
3.32% Payable turonver
0.16% Debt/Equity ratio
-1.16%
Author:
Income tax should be
from a)
a percentage of
12/31/2018
$281,323
$19,420
252,404
123,140
676,287
137,382
71,254
33,494
23,560
393
942,370
Score
2
12/31/2019
$330,133
$22,789
296,197
144,505
793,623
161,218
73,589
39,305
27,648
461
1,095,843
12,165
384,752
48,413
35,669
481,000
0
0
81,196
14,276
451,507
56,813
35,669
558,265
0
0
95,283
361,484
418,013
484,350
562,196
653,548
$514,945
$0
($1,277)
$249,954
($529,160)
234,462
$595,946
$514,945
$0
$1,631
$249,954
($490,387)
276,143
$694,156
$514,945
$0
$1,914
$249,954
($441,475)
325,338
$809,688
$514,945
$0
$2,246
$249,954
($386,971)
380,174
$942,370
$514,945
$0
$2,636
$249,954
($325,240)
442,295
$1,095,843
2015
2016
2019
$847,128
$45,630
$892,758
$994,105
$53,547
$1,047,652
$1,166,582
$62,837
$1,229,419
$1,368,984
$73,739
$1,442,723
$1,606,503
$86,533
$1,693,036
$598,479
$33,342
$631,821
$260,937
$702,315
$39,127
$741,442
$306,210
$824,167
$45,915
$870,082
$359,337
$967,160
$53,882
$1,021,041
$421,682
$1,134,962
$63,230
$1,198,192
$494,844
$182,665
$107,170
$97,743
$387,578
($126,641)
$214,357
$125,764
$114,701.41
$454,823
($148,613)
$251,548
$147,584
$134,602.11
$533,735
($174,398)
$295,192
$173,190
$157,955.57
$626,337
($204,656)
$346,408
$203,238
$185,360.86
$735,007
($240,163)
$995
$1,390
$0
$2,385
($129,026)
$2,502
($131,528)
$1,666
$1,631
$0
$3,298
($151,911)
$1,762
($153,673)
$1,956
$1,914
$0
$3,870
($178,267)
$2,068
($180,335)
$2,295
$2,246
$0
$4,541
($209,197)
$2,427
($211,623)
$2,693
$2,636
$0
$5,329
($245,492)
$2,848
($248,340)
2016
($148,613)
($148,613)
$0
4,685
$24,796
($178,094)
Year
2017
($174,398)
($174,398)
$0
$5,781
$29,098
($209,277)
2018
($204,656)
($204,656)
$0
$3,889
$34,147
($242,691)
Score
5
EBIT
EBIT(1-T) = NOPAT
Plus: Depreciation Expense
Less: CAPEX
Less: Working Capital Investment
Firm Free Cash Flow
0.4688
20.4583
19.4042
83.9295
0.0000
c. Using historical data from a) and ratios from b) create pro-forma statements
income, not revenue
Assets, Current
12/31/2015
12/31/2016
12/31/2017
Cash and cash equivalents
$174,083
$204,286
$239,730
Investments, current portion
$12,017
$14,102
$16,549
Accounts receivable, net
$156,188
183,287
215,087
Prepaid expenses and other current assets
$76,199
89,420
104,934
Total current assets
418,487
491,094
576,299
Investments, non-current
85,012
99,762
117,070
Property and equipment, net
56,899
61,584
67,365
Intangible assets, net
20,726
24,322
28,542
Goodwill
14,579
17,108
20,077
Other assets
243
285
335
Total assets
595,946
694,156
809,688
Current liabilities:
Accounts payable
7,528
8,834
10,367
Accrued payroll and compensation
238,085
279,393
327,867
Accrued expenses and other liabilities
29,958
35,156
41,255
Deferred revenue, current portion
35,669
35,669
35,669
Total current liabilities
311,240
359,052
415,158
Deferred revenue, non-current
0
0
0
Other liabilities, non-current
0
0
0
Total non-current liabilities
50,244
58,961
69,191
Income Statement
In Thousands, except Per Share data
Revenues
License
Maintenance and services
Total revenues
Cost of revenues
License
Maintenance and services
Total cost of revenues
Gross profit
Operating expenses
Research and development
Sales and marketing
General and administrative
Total operating expenses
Operating loss
Interest and other income (expense), net
Interest income, net
Other income (expense), net
Change in fair value of preferred stock warrants
Total interest and other income (expense), net
Loss before income taxes
Provision for income taxes
Net loss
$751,929
$95,199
$35,628
$10,002
$892,758
b. Calculate historical ratios, which you will need to create proforma statements
Total liabilities
Commitments and contingencies (Note 3)
Stockholder's equity
Preferred stock
Common stock2014
Accumulated other comprehensive income (loss)
Additional paid-in capital
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
Max
2
2019
($240,163)
($240,163)
$0
$2,335
$40,071
($282,569)
Your Score
e) What risks is the company facing? Discuss, how its tornado diagram would look like.
Max
5
Author:
Assumption?
Author:
Preferred stock is
converted to common
at IPO.
Author:
The company did IPO
in December and
raised a lot of new
equity. Where did
proceeds from IPO go?
Author:
Accumulated deficit
should be equal to
previous year
accumulated deficit
plus non-distributed
income this year. Once
positive, it is called
retained earnings
Maximum
6
Author:
Why depreciation is
zero?
Maximum
5
Your Score
Maximum
5
Total revenues
Total revenues
Cost of goods sold
Research and
development
expenses
1
Page 4
PROBLEM 2
MacroHard considers selling a Virtual Reality device set HoloGlobe. The management anticipates that new sy
20%. Operating costs are 70% of revenues.
The project requires $600 Mil investment in equipment, which will have a five year anticipated life and will be
MACRS official depreciation rates are given below - it does require 6 years, this is not a typo!). However, the c
original cost. The company requires an 12% rate of return from its investment and faces a 35% tax rate (overa
net working capital equal to 20% of revenues in the coming year. I.e., at time 0 (beginning of year 1) net worki
recovered after the project's end.
a) Calculate the NPV and IRR for the project. Should the company undertake the project? (see chapter 2 for de
b) The marketing and operations department disagree with current projections for operating costs, first year re
initial revenues, and revenues growth (decline) the project will break-even (NPV=0)? (see chapter 3 for details)
c) Looking at percentage difference between the predicted level and critical (break-even) level of each of the th
Given
$ (600,000,000)
5 years
20.00% of revenues
$ 500,000,000
70.00% of revenues
20% of initial investment
20.00%
12.00%
35%
Solution
a.
Year
Cash flow estimation
Investment
Revenues
Operating costs
EBITDA
Less: Depreciation
Incremental EBIT
Less: Taxes
0
$ (600,000,000)
$
$
$
500,000,000
350,000,000
150,000,000
(96,000,000)
54,000,000
18,900,000
NOPAT
Plus: Depreciation
Change in NWC
After-Tax Cash from Asset Sale
FFCF
NPV
IRR
Analysis
b.
$
$ (600,000,000)
35,100,000
96,000,000
131,100,000
###
94,731,120
17.31%
NPV and IRR are both positive and grater then required rate of return so w
b) The marketing and operations department disagree with current projections for operating costs, first
one factor at a time, at what level of operating costs, initial revenues, and revenues growth the project wil
Base case
Break-even
70.00%
$ 500,000,000
20.00%
0
$ (600,000,000)
NPV
IRR
$ (172,930,338)
-0.19%
$
$
$ (600,000,000)
6.33
500,000,000
350,000,000
150,000,000
(96,000,000)
54,000,000
18,900,000
35,100,000
96,000,000
131,100,000
###
c. Looking at percentage difference between the predicted level and critical (break-even) level of each of the
Base case
Break-even
70.00%
54.00%
$ 500,000,000 $
540,000,000
20.00%
14.00%
PROBLEM 2
Globe. The management anticipates that new system will have the first year revenues of $500,000 K with subsequent annual reve
ill have a five year anticipated life and will be depreciated using five year MACRS depreciation method toward a zero book val
ire 6 years, this is not a typo!). However, the company will be able to sell the equipment on the after-market at the end of year 5
ts investment and faces a 35% tax rate (overall the company is profitable). In addition to capital investment, the project requir
. I.e., at time 0 (beginning of year 1) net working capital requirement is $100,000 K and will grow in subsequent years. All NWC
(480,000,000)
Solution
Year
2
$
$
$
600,000,000
420,000,000
180,000,000 $
(153,600,000) $
26,400,000 $
9,240,000
3
720,000,000
504,000,000
216,000,000 $
(92,160,000)
123,840,000 $
43,344,000
4
864,000,000
604,800,000
259,200,000 $
(55,296,000)
203,904,000 $
71,366,400
5
1,036,800,000
725,760,000
311,040,000
(82,944,000)
228,096,000
79,833,600
Author:
With MACRS value is
depreciated to zero
17,160,000 $
153,600,000
170,760,000
$ 170,760,000
80,496,000 $
92,160,000
172,656,000
$ 172,656,000
132,537,600 $
55,296,000
187,833,600
$
187,833,600
148,262,400
82,944,000
231,206,400
$120,000,000
###
tive and grater then required rate of return so we accept the project.
urrent projections for operating costs, first year revenues and revenue growth . Considering
enues, and revenues growth the project will break-even (NPV=0)? (see chapter 3 for details)
Using Goal Seek
$
$
$
400,000,000
280,000,000
120,000,000 $
(153,600,000)
(33,600,000) $
(33,600,000) $
153,600,000
120,000,000
$ 120,000,000
320,000,000
224,000,000
96,000,000 $
(92,160,000)
3,840,000 $
1,344,000
2,496,000 $
92,160,000
94,656,000
$ 94,656,000
256,000,000
179,200,000
76,800,000 $
(55,296,000)
21,504,000 $
7,526,400
13,977,600 $
55,296,000
69,273,600
$
69,273,600
5
204,800,000
143,360,000
61,440,000
(82,944,000)
(21,504,000)
(21,504,000)
82,944,000
61,440,000
$120,000,000
###
nd critical (break-even) level of each of the three factors, which of them is the most critical?
Author:
Wrong approach
Difference (%)
16.00%
108.00%
6.00%
Depreciation
$
(96,000,000)
$ (153,600,000)
$
(92,160,000)
$
(55,296,000)
$
(55,296,000)
$
(27,648,000)
Author:
With MACRS value is
depreciated to zero
Solution Legend
Value given in problem
Formula/Calculation/Analysis required
Qualitative analysis or Short answer required
Goal Seek or Solver cell
Score (filled by professor)
Author:
Wrong approach
Score
Maximum
3
5
Score
Maximum
2
Score
Maximum
PROBLEM 3
LDM Inc. has the balance sheet as shown below.
Recently the yield on bonds similar to the ones that company has had dropped to 4.25%, so that the market value
the bonds is now about $325 million
The rate on company' short-term notes is equal the market's rate on these notes, which is 2.95%.
a) What are the company's enterprise value and capital structure weights?
b) What is the company's cost of equity according to CAPM, if the U.S. T-bond yield is 2.70 %, the long-term
market risk premium is 5.00% and the company's levered equity beta is 1.2?
c) What is the company's WACC?
Given
31-Mar-16
Balance Sheet
Invested Capital
(Book Values)
(Market Values)
7,550,000
10,000,000
22,266,000
39,816,000 $
$
$
300,000,000 $
339,816,000 $
324,590,842
334,590,842
20,000,000
200,025,000
255,000,000
475,025,000 $
814,841,000 $
1,400,000,000
1,734,590,842
2.70%
5.00%
70.00
1,400,000,000
4.25%
10,000,000
10,000,000
2.95%
10,000,000
35%
Solution
a) What are the company's enterprise value and capital structure weights?
Enterprise value = Market capitalization + Debt
$
1,734,590,842
Notes payable / Enterprise Value
0.58%
Long-Term Debt / Enterprise Value
19.29%
Equity / Enterprise Value
80.71%
b. What is the company's cost of equity according to CAPM?
After-Tax Cost of Sources of Capital
Notes Payable (after-taxes)
Long-term Debt (after-taxes)
Levered equity beta
Cost of Equity (using the CAPM)
Author:
Not all liabilities are
long-term debt
Your total weights are
more than 100%!
1.92%
2.76%
1.20
8.70%
Source of Capital
Notes Payable
Long-term Debt
Equity
Capital Structure
Weight
(Proportion)
0.58%
19.29%
80.71%
After-Tax Cost
1.92%
2.76%
8.70%
WACC
Weighted
After-Tax
Cost
0.0111%
0.5329%
7.0218%
7.5658%
hich is 2.95%.
Solution Legend
Value given in problem
Formula/Calculation/Analysis required
Qualitative analysis or Short answer required
Goal Seek or Solver cell
Score (filled by professor)
Score Maximum
2.5
3
Author:
Not all liabilities are
long-term debt
Your total weights are
more than 100%!
Score
Maximum
4
4
Score
Maximum
3