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 Friedas gross profit, operating profit, earnings before taxes, and net income?
b) What is Friedas 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
Friedas 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 ows 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 debtequity 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 prot 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 debtequity ratio? What is its
equity multiplier?
e) Braam Fire Prevention Corp. has a prot margin of 8.70 percent, total asset turnover of
1.45, and ROE of 18.67 percent. What is this rms debtequity 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.