Assignment-I Corporate Finance
Total Marks: 100
Q.1: a) What is Corporate Finance? What is the goal of the financial management? What is the capital budgeting decision? (05) b) What is an agency relationship? What are agency problems and how they do come about? What are agency costs? What incentives do mangers in large corporations have to maximize the share value? (05) Q.2: Prepare a multi-step income statement for Freida, Incorporated (a furniture retailer) for the year ending December 31, 2013 given the information below: (04+02+04 = 10) Interest expense
17,090
Beginning inventory
63,210
Depreciation expense
12,510
Management salaries
17,950
Advertising expenditures
12,930
Ending inventory
68,390
Gross Sales
462,720
Taxes
3,270
Returns and allowances
10,210
Lease payments
39,270
Materials purchases
228,580
R&D expenditures
4,890
Repairs and maintenance costs
2,910
a) What is Frieda’s gross profit, operating profit, earnings before taxes, and net income? b) What is Frieda’s net profit margin? c) Assuming that on Frieda’ December 31, 2012 Balance Sheet, Accumulated depreciation was $212,820 and that during 2013 Frieda did not sell any fixed assets, what would Frieda’s Accumulated depreciation value be on December 31, 2013?
Q.3:
(06+04= 10)
a) During 2013, the London Prime Company reported net income of $5,000,000 and paid dividends of $3,000,000. The company had no sales of property, plant, and equipment during the year. Use the following information for the London Prime Company to prepare a statement of cash flows for the year ended December 31, 2013, using the indirect approach: London Prime Company Balance Sheets, December 31 Cash Accounts Receivable Inventory Prepaid expenses Property, Plant, & Equipment Less Accumulated Depreciation Goodwill (net) Total Assets Accounts Payable Income Tax Payable Long-Term Debt Common Stock Retained Earnings Total Liabilities and Owners’ Equity
2013 2,00,000 5,80,000 1,020,000 50,000 30,000,000
2012 1,80,000 5,10,000 9,70,000 70,000 25,000,000
(15,000,000) 9,000,000 25,850,000
(12,000,000) 10,000,000 24,730,000
3,00,000 4,50,000 9,000,000 8,000,000 8,100,000
3,40,000 2,90,000 10,000,000 8,000,000 6,100,000
25,850,000
24,730,000
b) What is a source of cash? Give three examples. What is a use, or application, of cash? Give three examples.
Q.4: Why corporations need financial markets and institutions?
(10)
Q.5: Here are simplified financial statements of MedPhone Corporation from a recent year, complete the tasks assigned below: (07 + 03= 10) INCOME STATEMENT (figures in millions of euros) Net Sales Cost of Goods Sold Other Expenses Depreciation Earnings Before Interest and Taxes (EBIT) Interest Expenses Income Before Tax Taxes Net Income Dividends
16,277 4,994 4,980 3,097 3,156 843 2,313 701 1,612 1,175
BALANCE SHEET (figures in millions of euros) Assets Cash and marketable securities Receivables Inventories Other Current Assets Total Current Assets Net Property, Plant, & Equipment Other Long-Term Assets Total Assets Liabilities and Shareholders’ Equity Payables Short-Term Debt Other Current Liabilities Total Current Liabilities Long-Term Debt & Leases Other Long-Term Liabilities Shareholders’ Equity Total Liabilities & Shareholders’ Equity 1) Calculate the following financial ratios: a. Long-term Debt ratio b. Total debt ratio c. Times Interest earned d. Cash coverage ratio e. Current ratio
End of Year
Start of Year
109 2,930 231 1,066 4,366 24,567 5,185 34,088
194 3,063 293 1,146 4,696 24,495 4,637 33,828
3,154 1,745 998 5,897 8.632 7,599 11,960 34,088
3,739 1,935 968 6,642 8,405 7,563 11,218 33.828
f. Quick ratio g. Operating profit margin h. Inventory turnover i. Days in inventory j. Average collection period k. Return on equity l. Return on assets m. Net profit margin n. Equity Multiplier 2) Prepare a common-size balance sheet for MedPhone using its balance sheet of both years. Q.6: Construct a statement of cash flows for Fincorp for 2013:
(10)
2012 Revenue $ 4,000 Cost of goods sold 1,600 Depreciation 500 Inventories 300 Administrative expenses 500 Interest expenses 150 Federal and State Taxes* 400 Accounts payable 300 Accounts receivable 400 Net fixed assets* 5,000 Long-term debt 2,000 Notes payable 1,000 Dividends paid 410 Cash and marketable securities 800 *Taxes are paid in their entirely in the year that the tax obligation is incurred.
2013 $ 4,100 1,700 520 350 550 150 420 350 450 5,800 2,400 600 410 300
*Net fixed assets are fixed assets net of accumulated depreciation since the assets was installed. Q.7: Solve the following:
(05*02 = 10)
a) Battles Fried Chicken Company has a debt–equity ratio of 0.80. Return on assets is 9.2 percent, and total equity is $520,000. What is the equity multiplier? Return on equity? Net income? b) If Roten Rooters, Inc., has an equity multiplier of 1.35, total asset turnover of 1.30, and a profit margin of 8.5 percent, what is its ROE? c) A firm has long-term debt equity ratio of 4. Shareholders’ equity is Rs. 1 million. Current Assets are Rs. 2,00,000, and the current ratio is 2.0. The only current liabilities are notes payable. What is the Total debt ratio? d) Star Lakes, Inc., has a total debt ratio of .29. What is its debt–equity ratio? What is its equity multiplier? e) Braam Fire Prevention Corp. has a profit margin of 8.70 percent, total asset turnover of 1.45, and ROE of 18.67 percent. What is this firm’s debt–equity ratio?
Q.8: A General Motors bond carries a coupon rate of 8 percent, has 9 years until maturity, and sells at yield to maturity of 7 percent. (02+04+04 = 10) a. What interest payments do bondholders receive each year? b. At what price does the bond sell? (Assume annual interest payments) c. What will happen to the bond price if the yield to maturity falls to 6 percent? Q.9: Eastern Electric currently pays a dividend of about $1.64 per share and sells for $27 a share. (05+05 = 10) a. If investors believe the growth rate of dividends is 3 percent per year, what rate of return do they expect to earn on this stock? b. If investors’ required rate of return is 10 percent, what must be the growth rate they expect of the firm? Q.10: If Gentleman Gym just paid its annual dividend of $3 per share, and it is widely expected that dividend will increase by 5 percent per year indefinitely. (04*2.5 = 10) a. What price should the stock sell at? The discount rate is 15 percent. b. How would your answer change if the discount rate were only 12 percent? Why does the answer change? c. What is market equilibrium? When a stock market will be considered in equilibrium? d. What is efficient market? What are different stages of efficient markets? Explain briefly.
