ACF 103 – Fundamentals of Finance
Tutorial 1 - Solutions
Chapter 1
1. When a firm is meeting the present needs of the firm without compromising the ability of future generations to meet their own needs it is commonly referred to as ______.
* A. sustainability
B. personal social responsibility
C. the investment decision
D. None of the above answers are correct.
2. The ______decision is concerned about the make-up of the right-hand side of the balance sheet with the dividend policy of the firm being integral as well as the mechanics of physically requiring the necessary funds.
A. investment
* B. financing
C. asset management
D. wealth management
3. The ______decision is concerned about charging the manager with an appropriate level of operating responsibility over existing assets to supervise the assets efficiently.
A. investment
B. financing
* C. asset management
D. wealth management
4. The price of a share of common stock in a publicly-traded firm represents ______.
A. earnings after tax divided by the number of shares outstanding
B. the book value of the firm's assets less the book value of its liabilities
C. the board of directors' assessment of the intrinsic value of the firm
* D. the market's evaluation of a firm's present and future performance
5. The long-run objective of financial management should be to ______.
A. maximize the firm's earnings after taxes
B. maximize the firm's earnings per share
* C. maximize the value of the firm's common stock
D. maximize the firm's percentage of product market share
Chapter 2
1. A 30-year corporate bond issued in 2005 would now trade in the ______.
A. primary money market
B. secondary money market
C. primary capital market
* D. secondary capital market
2. The expected return on a security typically increases as ______.
A. default risk decreases
B. marketability increases
* C. maturity increases
D. taxability decreases
3. The term structure of interest rates refers to the relationship between yield and ______.
* A. maturity, for the same security class
B. risk, for securities with the same maturity
C. rating, for securities with the same maturity
D. marketability, for securities with the same tax status
4. Text book Ch 2 problem # 2 (p.37)
Answer:
Equipment Machine
Cost $28,000.00 $53,000.00
Depreciation in year:
1 9,332.40 10,600.00
2 12,446.00 16,960.00
3 4,146.80 10,176.00
4 2,074.80 6,105.60
5 6,105.60
6 3,052.80
$28,000.00 $53,000.00
5. Text book Ch 2 question # 13 (p.36)
Answer:
Financial markets allow for efficient allocation in the flow of savings in an economy to ultimate users. In a macro sense, savings originate from savings-surplus economic units whose savings exceed their investment in real assets. The ultimate users of these savings are savings-deficit economic units whose investments in real assets exceed their savings.
Efficiency is introduced into the process through the use of financial markets. Since the savings-surplus and savings-deficit units are usually different entities, markets serve to channel these funds at the least cost and inconvenience to both.
As specialization develops, efficiency increases. Loan brokers, secondary markets, and investment bankers all serve to expedite this flow from savers to users.
6. In general, what would be the likely effect of the following occurrences on the money and capital markets?
a. The savings rate of individuals in the country declines.
b. The government taxes capital gains at the ordinary income tax rate.
c. Unanticipated inflation of substantial magnitude occurs, and price levels rise rapidly.
d. Savings institutions and lenders increase transaction charges for savings and for making loans.
Answer:
a. All other things being the same, the cost of funds (interest rates) would rise. If there are no disparities in savings pattern, the effect would fall on all financial markets.
b. It would lower the demand for common stock, bonds selling at a discount, real estate, and other investments where capital gains are an attraction for investment. Prices would fall for these assets relative to fixed income securities until eventually the expected returns after taxes for all financial instruments were in equilibrium.
c. Great uncertainty would develop in the money and capital markets and the effect would likely be quite disruptive. Interest rates would rise dramatically and it would be difficult for borrowers to find lenders willing to lend at a fixed interest rate. Disequilibrium would likely to continue to occur until the rate of inflation reduced to a reasonable level.
d. Financial markets would be less efficient in channelling funds from savers to investors in real estate.
Chapters 6 & 7
1. Here are Fang Jiang's balance sheets for 2011 and 2012.
Current Assets 2012 2011 Change
Cash and Equivalents $3,122 $3,600 -$ 478
Short-Term Investments $2,104 $6,020 -$3,916
Accounts Receivable $7,232 $6,258 $ 974
Inventories $3,632 $3,086 $ 546
Other Current Assets $ 1,414 $ 1,202 $ 212
Total Current Assets $17,504 $20,166 -$2,662
Current Liabilities
Accounts Payable $10,346 $10,222 $ 248
Short-Term Debt $ 576 $ 554 $ 22
Other Current Liabilities $2,802 $2,196 $ 606
Total Current Liabilities $13,724 $12,972 $ 752
a. What is the Net Working Capital for
(i) 2012?
(ii) 2011?
b. What is the Change in Net Working Capital (NWC)?
c. Assuming the Operating Cash Flows (OCF) are $14,130 and the Net Capital Spending (NCS) is $4,744, what is the Cash Flow from Assets?
Answer:
a. Net Working Capital for 2012 is $17,504 - $13,724 = $3,780
b. Net Working Capital for 2011 is $20,166 - $12,972 = $7,194
Decrease in Net Working Capital (NWC) = $3,780 - $7,194 = -$3,414
c. Assuming that Operating Cash Flows (OCF) are $14,310, Net Capital Spending (NCS) is $4,744, and Decrease in Net Working Capital is -$3,414, we get:
Cash Flow from Assets = OCF - NCS – Decrease in NWC
= $14,310 - $4,744 - (-$3,414) = $12,980.
2. From the following balance sheet accounts of Hubei Corporation:
a. construct balance sheets for 2013 and 2014
b. list all the working capital accounts
c. find the net working capital for the years ending 2013 and 2014
d. calculate the change in net working capital for the year 2014
Account Balance 2013/12/31 Balance 2014/12/31
Accumulated Depreciation $8,468 $9,732
Accounts Payable $5,800 $6,420
Accounts Receivable $6,320 $7,288
Cash $2,420 $2,980
Common Stock $9,556 $14,556
Inventory $8,694 $10,332
Long-Term Debt $7,200 $4,860
Plant, Property & Equipment $17,350 $19,680
Retained Earnings $3,760 $4,712
Answer:
a. The Balance Sheets for the two years are:
Assets: 2013 2014
Current Assets
Cash $2,420 $2,980
Accounts Receivable $6,320 $7,288
Inventory $8,694 $10,332
Total Current Assets $17,434 $20,600
Long-Term Assets
Plant, Prop. & Equip $17,350 $19,680
Minus Acc. Depreciation ($8,468) ($9,732)
Net P P & E $8,882 $9,948
TOTAL Assets $26,316 $30,548
Liabilities
Current Liabilities
Accounts Payable $5,800 $6,420
Long-Term Liabilities
Long-term Debt $7,200 $4,860
Total Liabilities $13,000 $11,280
Owner’s Equity
Common Stock $9,556 $14,556
Retained Earnings $3,760 $4,712
Total Owner’s Equity $13,316 $19,268
TOTAL Liab. & O.E. $26,316 $30,548
b. The Working Capital Accounts are:
Cash, Accounts Receivable, Inventory, and Accounts Payable
c. The Net Working Capital for 2013 and 2014:
Net Working Capital = Cash + Accounts Rec. + Inventory – Accounts Pay.
2013 Net Working Capital = $2,420 + $6,320 + $8,694 - $5,800 = $11,634
2014 Net Working Capital = $ $2,980+ $7,288 + $10,332 - $6,420 = $14,180
d. The Change in Net Working Capital for 2014 is, $14,180 - $11,634 = $2,546 or an increase in Net Working Capital of $2,546.
or an increase in Net Working Capital of $2,546.
3. From the following income statement accounts of Xi’an Ltd
a. produce the income statement for the year
b. produce the operating cash flow for the year
Income Statement Accounts for the Year Ending 2014
Cost of Goods Sold $14,190
Interest Expense $ 2,880
Taxes $ 3,180
Revenue $29,840
SG&A Expenses $ 4,540
Depreciation $ 2,580
Answer:
a. Income Statement
Revenue $29,840
Cost of Goods Sold $14,190
SG&A Expenses $ 4,540
Depreciation $ 2,580
EBIT $ 8,530
Interest Expense $ 2,880
Taxable Income $ 5,650
Taxes $ 3,180
Net Income $ 2,470
b. Operating Cash Flow
OCF = EBIT – Taxes + Depreciation
OCF = $8,530 - $3,180 + $2,580 = $7,930
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ACF 103 HAUT 2014 Tutorial 1 Solns