| Answer all the questions. | ||
| QUESTION 1: | ||
| A. Robbins Corporation is a retail dealer | for electrical equipment. The taxable income is | |
| $701,500. Calculate the tax liability. | ||
| Corporate Tax Rates | ||
| 15% | $ 0–$50,000 | |
| 25% | $ 50,001–$75,000 | |
| 34% | $75,001–$10,000,000 | |
| 35% | over $10,000,000 | |
| Additional surtax: | ||
| •5% on income between $100,000 and $335,000. | ||
| •3% on income between $15,000,000 and $18,333,333. | ||
- ‘Taxes are a fact of life, and businesses, like individuals, must pay taxes on Income’ –
Elucidate.
QUESTION 2:
- Fair, Inc. is considering an investment in one of two common stocks. Given the information
that follows, which investment is better, based on risk (as measured by the standard deviation)
and return?
| Stock A | Stock B | ||||
| Probability | Return | Probability | Return | ||
| .30 | 12% | .20 | 15% | ||
| .40 | 16% | .30 | 6% | ||
| .30 | 18% | .30 | 13% | ||
| .20 | 21% | ||||
3
- ‘Understanding the relationship between risk and return and how it’s affected by time is probably one of the most important aspects of investment’ – Discuss.
- Different types of risk
- Diversification reduces risk
- Common measures of risk
QUESTION 3:
Holy cross Industries perform adjusting entries every month, but close its accounts only at year end. The Agency’s year –end adjusted Trial Balance dated December 31, 2018, appears below.
DATA
| Accounts Payable | 57,000 |
| Accounts Receivable | 34,000 |
| Building | 255,000 |
| Cash | 15,000 |
| Equipment | 76,000 |
| Loan from bank | 320,000 |
| Prepaid Expenses | 12,000 |
| Sales | 123,000 |
| Salary Expense | 22,000 |
| Utility Expense | 8,000 |
| Long-term liability | 35,000 |
| Trademarks | 6,000 |
| Short-term Notes Payable | 44,000 |
| Interest Expenses | 4,500 |
| Inventory | 82,000 |
| Cost of Goods Sold | 62,000 |
| Income Tax Expense | 4,500 |
Prepare an Income Statement for the year ended December 31, 2018. Also prepare Holy cross Industries balance sheet dated December 31, 2018.
- ‘The finance department of an enterprise performs several functions in order to achieve the objectives. The scope of finance is very wide.’
QUESTION 4:
- In learning about ratios, we could simply study the different types or categories of ratios, or we could use ratios to answer some important questions about a firm’s operations. We prefer the latter approach and have chosen the following four questions as a map in using financial ratios:
- How liquid is the firm?
- Is management generating adequate operating profits on the firm’s assets?
- How is the firm financing its assets?
- Are the owners (stockholders) receiving an adequate return on their investment?
Let’s look at each of these questions in turn. In doing so, we will use the McDonald’s Corporation to illustrate the use of ratios in answering these questions. For ease of reference, we have again shown McDonald’s financial statements in followings Tables.
McDonald’s Corporation 2018 Income Statement ($ Millions)
| Sales | $11,508 | |||||
| Cost of goods sold | 6,537 | |||||
| Gross profits | $ 4,971 | |||||
| Marketing expenses and general | ||||||
| and administrative expenses | $ 1,832 | |||||
| Depreciation expense | 345 | |||||
| Total operating expenses | $ 2,177 | |||||
| Operating profits | $ 2,794 | |||||
| Interest expenses | 387 | |||||
| Earnings before taxes | $ 2,407 | |||||
| Income taxes | 765 | |||||
| Net income before preferred stock dividends | $ 1,642 | |||||
| Preferred stock dividends | 25 | |||||
| Net income available to common stockholders | $ 1,617 | |||||
5
McDonald’s Corporation December 31, 2018 Balance Sheet ($ Millions)Assets
| Cash | $ 341 | ||||
| Accounts receivables | 484 | ||||
| Inventories | 71 | ||||
| Prepaid expenses | 247 | ||||
| Total current assets | $ 1,143 | ||||
| Gross fixed assets | $20,088 | ||||
| Accumulated depreciation | 5,127 | ||||
| Net fixed assets | $14,961 | ||||
| Investments | 702 | ||||
| Other assets | 1,436 | ||||
| Total assets | $18,242 | ||||
| Liabilities and Equity | |||||
| Liabilities (debt): | |||||
| Short-term notes payable | $ 1,629 | ||||
| Accounts payable | 651 | ||||
| Taxes payable | 53 | ||||
| Accrued expenses | 652 | ||||
| Total current liabilities | $ 2,985 | ||||
| Long-term debt | 6,325 | ||||
| Total liabilities | $ 9,310 | ||||
| Equity: | |||||
| Preferred stock | $ 80 | ||||
| Common stock: | |||||
| Par value and paid in capital | $ 708 | ||||
| Retained earnings | 11,927 | ||||
| Treasury stock | (3,783) | ||||
| Total common equity | $ 8,852 | ||||
| Total equity | $ 8,932 | ||||
| Total liabilities (debt) and equity | $18,242 | ||||
Calculate and interpret the financial ratios for 2018 corresponding to the industry norms provided as follows:
| INDUSTRY NORMS | |
| Current ratio | 0.70 |
| Inventory turnover | 35 times |
| Total asset turnover | 1.9 |
| Operating profit margin | 6.1% |
| Operating income return on investment | 11.6% |
| Debt ratio | 69% |
| Fixed asset turnover | 3.2 |
| Return on equity | 12.78% |
- “Financial ratios calculated and analyzed in a particular situation depend on the user of the financial statements.”- Expound the advantages and limitations of ratio analysis.
QUESTION 5:
- JSN Enterprise is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales. Last year JSN had $14 million in sales with net income of $1.4 million. The firm anticipates that next year’s sales will reach $15 million with net income rising to $2 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments. The firm’s balance sheet for the year just ended is found below:
JSN Enterprises, Inc.
| Balance Sheet | ||||
| 12/31/2001 | % of Sales | |||
| Current assets | $4,000,000 | 25% | ||
| Net fixed assets | 6,000,000 | 50% | ||
| Total | $10,000,000 | |||
| Liabilities and Owners’ Equity | ||||
| Accounts payable | $4,000,000 | 25% | ||
| Long-term debt | 1,000,000 | NAa | ||
| Total liabilities | $5,000,000 | |||
| Common stock | 2,000,000 | NA | ||
| Paid-in capital | 1,900,000 | NA | ||
| Retained earnings | 1,100,000 | |||
| Common equity | 5,000,000 | |||
| Total | $10,000,000 | |||
Estimate JSN’s total financing requirements (i.e., total assets) for 2002 and its net funding requirements (DFN).
- Brief an overview of financial planning and its types.
QUESTION 6:
ABC construction is considering two projects to develop. The estimated net cash flow from each project is as follows:
| Project M | Project N | |||||
| Year 1 | 10,000 | 25,000 | ||||
| Year 2 | 15,000 | 25,000 | ||||
| Year 3 | 20,000 | 25,000 | ||||
| Year 4 | 25,000 | 25,000 | ||||
| Year 5 | 30,000 | 25,000 | ||||
Each project requires an investment of $ 1, 00,000. A rate of 10% has been selected for the NPV
analysis.
Require to
- Calculate Payback period, ARR, Net Present Value and Profitability Index.
- Which Project is to be recommended to develop based on NPV, Profitability Index, Payback period and ARR? Suggest
QUESTION 7:
- Write a short note on the following Financial Management Axioms
- Risk-return trade-off
- Time value of money
- Cash is king
- Incremental cash flows count
- It’s hard to find really profitable projects
- Efficient capital markets
- The agency problem
- Taxes bias business decisions
- All risk is not equal
- Ethical dilemmas are everywhere in finance
FORMULAE
- FINANCIAL RATIOS
- Firm Liquidity
- Operating Profitability
- Financing Decisions
- Return on common equity
(Initial Investment – Cumulative of Base Year)
Payback Period = Base Year + ————————————————————
Cash Inflow of Next Year
Average Profit
Accounting Rate of Return = ————————— x 100
Average Investment
Net Present Value = Cumulative Present Value of Cash Inflow – Initial Investment
PV of future cash flows
Profitability Index = ——————————
Initial Investment
