Assignment-ICorporate FinanceTotal 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 expense17,090

Beginning inventory63,210

Depreciation expense12,510

Management salaries17,950

Advertising expenditures12,930

Ending inventory68,390

Gross Sales462,720

Taxes3,270

Returns and allowances10,210

Lease payments39,270

Materials purchases228,580

R&D expenditures4,890

Repairs and maintenance costs2,910

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 3120132012

Cash2,00,0001,80,000

Accounts Receivable5,80,0005,10,000

Inventory1,020,0009,70,000

Prepaid expenses50,00070,000

Property, Plant, & EquipmentLess Accumulated Depreciation30,000,000

(15,000,000)25,000,000

(12,000,000)

Goodwill (net)9,000,00010,000,000

Total Assets25,850,00024,730,000

Accounts Payable3,00,0003,40,000

Income Tax Payable4,50,0002,90,000

Long-Term Debt9,000,00010,000,000

Common Stock8,000,0008,000,000

Retained Earnings8,100,0006,100,000

Total Liabilities and Owners Equity25,850,00024,730,000

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 Sales16,277

Cost of Goods Sold4,994

Other Expenses4,980

Depreciation3,097

Earnings Before Interest and Taxes (EBIT)3,156

Interest Expenses843

Income Before Tax2,313

Taxes701

Net Income1,612

Dividends1,175

BALANCE SHEET(figures in millions of euros)

End of YearStart of Year

Assets

Cash and marketable securities109194

Receivables2,9303,063

Inventories231293

Other Current Assets1,0661,146

Total Current Assets4,3664,696

Net Property, Plant, & Equipment24,56724,495

Other Long-Term Assets5,1854,637

Total Assets

34,08833,828

Liabilities and Shareholders Equity

Payables3,1543,739

Short-Term Debt1,7451,935

Other Current Liabilities998968

Total Current Liabilities5,8976,642

Long-Term Debt & Leases8.6328,405

Other Long-Term Liabilities7,5997,563

Shareholders Equity11,96011,218

Total Liabilities & Shareholders Equity34,08833.828

1) Calculate the following financial ratios:a. Long-term Debt ratiob. Total debt ratioc. Times Interest earnedd. Cash coverage ratioe. Current ratiof. Quick ratiog. Operating profit marginh. Inventory turnoveri. Days in inventoryj. Average collection periodk. Return on equityl. Return on assetsm. Net profit marginn. Equity Multiplier2) 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)20122013

Revenue$ 4,000$ 4,100

Cost of goods sold1,6001,700

Depreciation500520

Inventories300350

Administrative expenses500550

Interest expenses150150

Federal and State Taxes*400420

Accounts payable300350

Accounts receivable400450

Net fixed assets*5,0005,800

Long-term debt2,0002,400

Notes payable1,000600

Dividends paid410410

Cash and marketable securities800300

*Taxes are paid in their entirely in the year that the tax obligation is incurred.*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.