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.

  1. ‘Taxes are a fact of life, and businesses, like individuals, must pay taxes on Income’ – 

Elucidate.

QUESTION 2:

  1. 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

  1. ‘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.
  1. Different types of risk
  2. 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.

  1. ‘The finance department of an enterprise performs several functions in order to achieve the objectives. The scope of finance is very wide.’

QUESTION 4:

  1. 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:
  1. How liquid is the firm?
  1. Is management generating adequate operating profits on the firm’s assets?
  1. How is the firm financing its assets?
  1. 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%
  1. “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:

  1. 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).

  1. 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

  1. Calculate Payback period, ARR, Net Present Value and Profitability Index.
  1. Which Project is to be recommended to develop based on NPV, Profitability Index, Payback period and ARR? Suggest

QUESTION 7:

  1. Write a short note on the following Financial Management Axioms
  1. Risk-return trade-off
  1. Time value of money
  • Cash is king
  1. Incremental cash flows count
  1. It’s hard to find really profitable projects
  1. Efficient capital markets
  • The agency problem
  • Taxes bias business decisions
  1. All risk is not equal
  1. Ethical dilemmas are everywhere in finance

FORMULAE

  1. FINANCIAL RATIOS 
  1. Firm Liquidity 
  1. Operating Profitability
  1. Financing Decisions 
  1. 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