FIN 300 – Final Exam (33 Problems)

Please answer all questions for this final exam using the data provided by Moore’s spreadsheet and the cash flow tips documents. The spreadsheet contains the numerical data to answer all of the questions located on the word document. Please note that there are two tabs at the bottom of Moore’s Spreadsheet for use. There are 33 questions in total.NOTE 1: Question 5 should use 2012 as the year, not 2013.NOTE 2: The cash flow tips excel sheet is designed to assist with questions 10-16.NOTE 3. Question 13 is for BUILDINGS only!!
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FIN 300 Final: Moore’s Family Restaurant Case Study
Note: All financial data in this case is found in the excel spreadsheet that goes along with
this case study.
A. Past & Current Operations
“Moore’s Family Restaurant” is a restaurant on the edge of the downtown area in a medium-size,
eastern city. It is on one corner of a major federal highway and a busy cross-town state highway
with easy access to the interstate. The restaurant has a reputation for good “home cookin’” at
reasonable prices. It provides an ample but simple “1920’s/1930’s” sit-down area for eating.
Many of its customers have been coming here for years although most of them have moved to
the suburbs so fewer stop in as much anymore.
The restaurant was founded in 1916 by Sam Moore who ran it until his son George took over in
1945. George Moore turned the business over to his son, George, Jr. in 1975. For the next 20
years or so George Moore, Jr. ran the business with his brothers and a sister until they lost
interest in the business. The last of Mr. Moore’s siblings relinquished any ownership in the
business to Mr. Moore in 1997.
The restaurant has always served meals prepared from fresh, home-made and local products
obtained from farms, provision houses and local merchants. The restaurant has an active alcohol
beverage license, but no longer uses it. The restaurant stopped serving alcohol in the ’70’s when
the neighborhood began to change. Furniture, fixtures and equipment are old, but fully
serviceable and reasonably efficient for the business volume. Despite its age and use many
customers comment on the “charm” of the décor and how the “place never changes.” The
restaurant has had no difficulty with health authorities, customers or neighbors.
Since the restaurant was founded the downtown area has changed from one thronged with
neighborhood residents, shoppers, factory and warehouse workers to one with a dwindling
number of office workers, government workers and transient motorists. During this same period
the number of family-owned and -operated restaurants has declined steadily, being replaced by
chain restaurants and up-scale “white table cloth establishments.” From being the only restaurant
in the neighborhood Moore’s Family Restaurant now has competition: Wendy’s, KFC, and Taco
Bell are on the other 3 corners of the intersection at which it’s located.
As a result of these changes, changes in consumer preference and other reasons, business and
profits have been on the decline for several years. In the last 2-3 years this decline has been
severe. In 2012 Mr. Moore asked his son, Tom, who is an executive with a local company and a
Wilmington University MBA, for a “strategic plan” for the restaurant. Tom, in turn, asked some
friends of his, a team of consultants with whom he worked, to “come in and take a look at the
business in order to help out my dad.”
The consulting team recommended that Mr. Moore take advantage of the “old fashioned” décor
and Moore Family Restaurant’s reputation to convert it into an upscale “theme” restaurant. They
also made these recommendations:
•
Re-appraise the value of the land, building and fixtures to reflect current values (increases
in the 30+ years since the values on the balance sheet were set). Apply for an “Inner City
Renovation Grant” for preferential loan and tax rates for renovated property in the city’s
core.
•
Activate the liquor license, refurbish the restaurant, put in a 1920’s “speakeasy” bar, but
don’t change the “antique” appearance.
•
Take out a revolving line of credit (which it could draw upon if needed) of up to $100,000
against the re-appraised value of land and buildings to pay for the improvements. This is
costing him 3% per year since interest rates are so low and is expected to remain at 3%
during the 10 year draw period. For now he won’t have to pay any loan balances off, just
interest only payments during the initial draw period.
•
Change the source (but not the nature or quality) of food, supplies and services to reduce
costs; upgrade and professionalize the labor (cooks and servers); revise pricing and the
“business model”.
•
Continue to accept credit cards (Master Card, Visa, American Express & Discover) for
50% of meals are charge sales. Use 365 as the number of “selling days” per year to
coincide with bank practice and calculations.
•
Consider opening up a catering business as a new revenue stream to reach out to new
Customers.
Mr. Moore followed all the recommendations, which resulted in the financial statements in
the excel spreadsheet that accompanies this exam.
Use the data in the excel document accompanying this exam to compute these ratios for 2012 in
the Final Exam Test (next item on the Blackboard site). You may find this worksheet helpful to
make your calculations and review them before submitting them to the actual test in Blackboard.
B. Potential Retirement
Through good years and not so good, Mr. Moore maintained that he enjoyed the business and
wanted to stay in business as long as possible, particularly in order to participate in the current
economic boom. But, Mr. Moore is in his 60’s. He is concerned about the business’ future as well
as his own. On the one hand he says he would like to “run the business as always, for as long as
I’m able”; on the other hand he has been heard to say “it gets harder all the time. Maybe I should
just pack it in.”
At the end of 2013 Mr. Moore asked if he would be able to retire at that time. The consulting team
evaluated selling the business for its book value (Owner Equity). The team would use the Owner
Equity in the business realized from a sale in order to buy an investment that would pay Mr.
Moore 3% per year (paid annually in one payment). At the end of 2013 Mr. Moore was 61 years
old. It was suggested that he plan to live until he is 100 to make sure his money lasts, thus the
money would be invested for 40 years. Mr. Moore said he’d consider retiring if the investment
could produce $100,000 per year for his retirement so he can indulge in his passions –
badminton, bocce and butterflies.
C. Ongoing Operations
Use data below for questions 17-23 in this section and the data in the MS Excel attachment to
calculate a budget for 2015. Hint: You may find it helpful to create a “standard” P&L which states
all data as a percent of sales. Some “planning” questions will provide all needed data in the
questions themselves.
Mr. Moore believes that roughly 8% more meals can be served in 2015 (due to the new strategy
kicking into high gear) so he plans to serve 261,714 meals in 2015. He also plans to adjust prices
so an average meal will be $7.35 per meal. Hint: “Sales” have been calculated as number of
meals served x average price per meal.
The consulting team believes that the cost of product (calculated as a percent of sales) can be
35% of sales in 2015. Mr. Moore wants to keep the good staff he hires and so is planning to give
“cost of living raises” of 2.5% over 2014 in the next year. Benefits will remain at the current 35%
of the labor cost next year. The utility companies have advised all business customers that rates
will increase by 15% next year.
According to the loan agreement, there will be no repayment of principle on the revolving line of
credit (since we are currently in the draw period). Hence payments being made are just interest
payments which are expected to be $3,000 total in 2015.* Because of agreements with the city
and the insurance company (from whom he received his loan) taxes and insurance will remain
the same in 2015.* Likewise depreciation expense will remain the same as in 2014.*
Service costs are expected to grow by 15% next year plus an added $55,000 is to be budgeted
for extra accounting services. Other Expenses (GSA, advertising and promotion and other) are
expected to increase by 10% from 2014. The heavy advertising of the new restaurant should not
be necessary and there’s been time to plan for some other efficiencies. The income tax rate is
expected to be 28% of EBITD which is reduced for interest and depreciation, the same percent of
EBITD as in 2014.
D. Retirement Revisited (Questions 25 and 26)
Assume Mr. Moore operates the “Reengineered Business” until the end of your budget period
(2015). At that time he would sell the business for its book value (Owner Equity). It is estimated
that the Owners Equity would grow to at least $1,825,684. Mr. Moore would use this amount to
buy an investment that would pay him 6% per year (paid annually in one payment). At the end of
2015 Mr. Moore will be eligible for Social Security payment of $14,500 per year at that time.
It was suggested that he plan to live until he is 100 to make sure his money lasts, thus the money
would be invested for 40 years. Mr. Moore said he’d consider retiring if the investment and Social
Security produced a total of $150,000 per year for his retirement.
FIN 300 – FINAL EXAM QUESTIONS
You will find the excel worksheet that goes along with this final essential to make your
calculations. Please use the numbers off that spreadseheet and review your calculations for
accuracy before submitting your answers to Blackboard. Ignore categories or calculations not
mentioned in this case or for which there are no questions on the exam.
Exam Questions:
1. What is the profit margin on sales for 2014? Round the answer to the nearest whole
percentage and show the percent (%) sign.
2. What is the current ratio for 2014?
3. What is the average collection period for 2014? Assume there are 365 “selling days” in the
year. Show the answer rounded to the nearest whole number.
4. What is the fixed asset turnover for 2014?
5. The balance sheet (not shown in the excel document) as of 12/31/12 shows that Owner
Equity was $798,918. If this amount were invested at 3% paid out annually for 40 years, what
annual income would the investment produce? (Tip: His investment would be a “payment”).
6. The following are options for increasing the return on Mr. Moore’s retirement income (as
calculated in number 5 ): Work a little longer, invest at a higher rate of return, sell the
business for more (that is, increase “PV”), increase the number of years for which the money
is invested, wait to become eligible for social security payments T/F
7. What is the Return on Equity for 2014?
8. What is the Return on Total Assets for 2014?
9. In your opinion is this a “viable business” that Mr. Moore can operate for “as long as he wants
to”? Evaluate the business from 2009 to 2014 in the process of answering this question.
*
These values have been entered on the worksheet; there is no need to calculate these
amounts. Calculate and enter only those amounts on the exam with question numbers’ shown.
Since this problem requires a financial analysis, I am including information about the answer
choices you will encounter on the exam in Blackboard below:
1
2
3
4
5
6
7
Yes, but into 2015 he should figure out how to make his company more
cost and expense, efficient, so that ROS improves
YES, but in 2015 he should be mindful of keeping total costs as a percent
of sales under control
YES, because Return on Sales has always been trending upwards
NO, because Cost of Product continues to increase and Cost of Product as a
% of sales is decreasing.
NO, because income taxes are out of control
Both 1 and 2
Both 2 and 3
10. What is the net income figure to use as a starting point for the statement of cash flows?
11. The total adjustments to net income to determine cash flows from operating activities
are……(Hint: be sure to add up changes in current assets and current liabilities as noted on the
balance sheet going from year 2013 to year 2014) to get the answer.
12. Net cash flows from operating activities are….(hint: don’t forget about net income).
13. Cash flows from investing activities are…..
14. Net Cash flows from investing activities are….
15. Cash flows from financing activities are…(hint: since this is a partnership common and preferred
stocks and bond financing does not exist).
16. Net increase/decrease in cash flows is….
17. What is to be the Sales budget for 2015?
18. What is to be the Cost of Product for 2015?
19. What is to be the Labor budget for 2015?
20. What is to be the Benefits budget for 2015?
21. What is to be the Cost of Services for 2015?
22. What are Total Costs to be budgeted for 2015?
23. What are Earnings before Interest, Taxes and Depreciation (EBITD) to be for 2015?
24. Mr. Moore is considering selling the business at the end of 2015 for his Owners Equity
(projected to be at least $1,825,684) and using that amount to buy an investment that would
pay him 6% per year (paid annually in one payment) for 40 years. What would the annual
payment from such an investment be?
25. Will the combination of investment return and Social Security payments described in the text
of the case meet Mr. Moore’s minimum retirement goals?
1) No, it will fall short of his goal by approximately $14,160
2) Yes, it exceeds his goal by approximately $14,160
3) Yes. It exceeds his goal by well over $40,000.
4) Not enough information to tell.
26. When he was 30 years old, about the time he took over the restaurant from his father, Mr.
Moore bought an unusual insurance policy: it was in the form of a “zero coupon” bond. The
bond paid 5% per year and guaranteed him $475,000 when it matured in 50 years. He paid a
single premium amount and no further payments were necessary. What did Mr. Moore pay for
the policy when he bought it? Hint: This is a problem in PV (present value).
27. Mr. More wants to get into the catering business, specifically by using his family’s secret
sauce recipe which can be used on any meat product (i.e. hamburgers, hotdogs, chicken,
etc.). To transport food, he bought a small SUV as a delivery truck for $75,000. He financed it
for 2 years at 12% and will make equal payments each month for the 6 years. What will the
monthly payments be?
28. About the SUV that Mr. Moore was thinking of buying for $75,000.00 and financing at 12% for
2 years: When the vehicle is paid off, how much will have been paid for the truck?
29. When shopping to buy the SUV for a delivery truck, a competing dealer offered him two
options to finance the purchase price of $65,000 for the same truck:
Cash Back Option – $10000 “Cash Back” and the balance paid in yearly installments at 5%
(compound interest) per year for 5 years (to be applied as a downpayment to reduce the
price)
Full Price Option – full price ($65,000) paid at no interest over 5 years.
Under which option will the truck cost the LEAST? Hint: Don’t forget to take “cash back” into
account.
1) Can’t tell. Need more information about alternative investment and finance rates.
2) The “Cash Back” option
3) The “Full Price” option
4) Either option. They both produce the same result.
30. In your new position as head accountant (so OK – you’re the only accountant but it will sound
better on your resume) working for Mr. Moore, you note that last month on July 2, 2012 they
bought “research equipment and certain special tools” for $60,000 (you don’t want to know
what they will do with those “special tools”) anyway your job is to lower their corporate taxes if
possible. So you decide to use MACRS for depreciation and you want to see if there is any
possible depreciation that could be used. How much can they take for these years listed
below?
2012, 2014, 2015, 2017.
31. Mr. Moore was thinking of taking a vacation and going to the Sun Highway in Glacier
National Park – located in northwestern Montana – since it is one of the most spectacular
drives in North America. Unfortunately he found out from some relatives in the area that the
road needs to be resurfaced due to many harsh winters. Him being the finance wizard that he
is, he was thinkint about how the state would finance such a project with bonds. If the State of
Montana has decided to sell state bonds to cover the needed repairs, A Montana state
savings bond can be converted to $100 at maturity six years from purchase. If the state
bonds are to be competitive with U.S. savings bonds, which pay 8% annual interest
(compounded annually), at what price must Montana sell its bonds? (Assume no cash
payments on savings bonds prior to redemption.)
32. Mr. Moore is thinking about how much the return of Apple stock could be given it’s beta of
1.11 for a possible investment he wants to make. Other data you have collected: the rate of
return on 90 day T-Bills is 1.5%, on 5 year T-Notes it 3% and on the “long bond”, the 30-year
T- Bond = 6.5%. The Prime is 6%, LIBOR is 5.5% and the average return on the overall
stock market is estimated to be 8%.After doing some research and crunching the numbers
what would Mr. Moore expect the rate of return on Apple’s stock to be?Hint: note that term
“beta” – there’s a classic formula that uses “beta”!
33. Mr. Moore plans on replacing and/or upgrading the furniture, fixtures and machinery (stoves,
refrigerators, AC, etc) in 10 years when it’s expected to wear out at the end of its useful life.
The estimated replacement cost is $350,000. How much must the company save each year
at 3% to accumulate enough to replace the machine? (Hint: Switch “mental gears” to TVM?)
Again, please refer to the excel spreadsheet that comes with this exam for data needed to
answer the problems. In that sheet is located current and historical P&L information along
with balance sheet information. This information is critical to your being able to answer
the questions.
Moores Familay Restaurant Financial Data
Income & Expense Statement
Sales
Cost of Product
Labor
Benefits
Utilities
Loan Principle Repayments
Insurance
Property Taxes
Services (accounting, trash, cleaning, etc.)
Other: SG&A, advertising, promostions
Total Costs
Earnings Before Interest, Income Taxes, & Depreciation (EBITD)
Interest on loan
Income Taxes
Depreciation on values
Earnings After Interest, Income Taxes, & Depreciation
Meals Sold
Average Meal Value
Historic Performance (Old Business Mod
2009
2010
$1,794,000 $1,677,120
$485,000 $714,250
$298,600 $294,856
$46,269
$48,651
$58,500
$61,425
$35,000
$65,000
$7,560
$8,505
$20,000
$21,000
$6,800
$13,600
$957,729 $1,227,287
$836,271 $449,833
$234,156 $125,953
$602,115 $323,880
312,000.00 279,520.00
5.75
6.00
ormance (Old Business Model)
2011
2012
$1,635,750 $1,620,060
$784,963 $797,211
$292,516 $330,772
$48,265
$57,647
$58,047
$67,721
$100,000 $115,000
$8,505
$9,072
$25,000
$29,000
$27,200
$35,360
$1,344,496 $1,441,783
$291,254 $178,277
$81,551
$49,918
$209,703 $128,359
261,720.00 249,240.00
6.25
6.50
% Change
2009-2012
-9.70%
64.37%
10.77%
24.59%
15.76%
n/a
228.57%
20.00%
45.00%
420.00%
50.54%
-78.68%
n/a
-78.68%
n/a
-78.68%
-20.12%
13.04%
Moores Familay Restaurant Financial Data
Budget Worksgheet
Sales
Cost of Product
Labor
Benefits
Utilities
Loan Principle Repayments
Insurance & Property Taxes
Services (accounting, trash, cleaning, etc.)
Other: SG&A, advertising, promostions
Total Costs
Earnings Before Interest, Income Taxes, & Depreciation (EBITD)
Interest on loan
Income Taxes
Depreciation on values
Earnings After Interest, Income Taxes, & Depreciation
Meals Sold
Average Meal Value
2013
$1,575,396
$697,211
$330,772
$79,872
$54,340
$0
$110,000
$41,051
$77,629
$1,390,875
$184,521
$3,500
$51,666
$71,176
$58,179
233,392
6.75
2014 (Present Day)
$1,696,296
$597,211
$340,695
$114,519
$50,644
$0
$110,000
$43,908
$84,771
$1,341,748
$354,548
$3,000
$99,273
$61,777
$190,497
242,328
7.00
2015 Budget Forecast
Answer to number 17
Answer to number 18
Answer to number 19
Answer to number 20
$58,241
$0
$110,000
Answer to number 21
$93,248
Answer to number 22
Answer to number 23
$3,000
#VALUE!
$61,177
#VALUE!
261,714
7.35
Moore’s Family Restaurant
Assets & Liabilities as of 12/3 …
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