MBA/MSC Financial Management Question and Answers
Question 1 (15 marks)
The Analtoly Corporation is an electronics dealer and distributor. Sales for the last year were
$4.5 million, and cost of goods sold was $2 million and operating expenses totaled $1.2 million. Analtoly also paid $150,000 in interest expense, and depreciation expense totaled
$50,000. In addition, the company sold securities for $120,000 that it had purchased 4 years earlier at a price of $40,000.
- Compute Taxable Income (5 marks)
- Compute the tax liability for Analtoly. (5 marks) Corporate Tax Rates
Taxable Income Corporate Tax Rate
$1 – $50,000 15%
$50,001 – $75,000 25%
$75,001 – $10 million 34%
over $10 million 35% and
$100,000 – $335,000 5% surtax
$15m – $18.333 m 3% surtax Apply the usual important considerations.
- Explain objectives of Corporate Financial Management. (500 words,5 marks)
Question 2 Attempt any 8. (8×3= 24 + 1 Bonus Point) (25 Marks)
- (Inflation and Interest Rates) What would you expect the nominal rate of interest to be if the real rate is 4 percent and the expected inflation rate is 7 percent?
- (Expected Rate of Return and Risk) Syntex, 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?
| Common Stock A | Common Stock B | ||
| Probability | Return | Probability | Return |
| .30 | 11% | .20 | 25% |
| .40 | 15% | .30 | 6% |
| .30 | 19% | .30 | 14% |
| .20 | 22% | ||
- (Common Stock Valuation) Header Motor, Inc., paid a $3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20-percent rate of return?
- (Preferred Stock Valuation) What is the value of a preferred stock where the dividend rate is 14 percent on a $100 par value? The appropriate discount rate for a stock of this risk level is 12
- (Cost of Trade Credit) Calculate the effective cost of the following trade credit terms where payment is made on the net due
- 2/10, net 30
- 3/15, net 30
- (Trade Credit Discounts) Determine the effective annualized cost of forgoing the trade credit discount on the following terms:
- 1/10, net 20
- 2/10, net 30
- A) Calculate Economic Ordering Quantity ( EOQ ) if cost of carrying 1 unit in inventory = $24
total demand in units over planning period = 60,000 units ordering cost per order = $800
B) Calculate average inventory to be maintained if Safety stock is 3,000 units.
- Calculate Chim Inc. Weighted Cost of Capital based on following information of their capital sources and structure:
Source Cost Capital Structure
| Debt | 5% | 20% |
| Preferred | 8% | 20% |
| Common | 14% | 60% |
- Explain any 5 axioms of finance with real examples. (300 words)
- “Finance managers spend up to 60 percent of their time in working capital management.” Explain the importance of working capital management. (300 words)
Question 3 (15 marks)
X construction is considering two projects to develop. The estimated net cash flow from each project is
as follows:
| Year | Project X ($) | Project Y ($) |
| 1 | 110,000 | 75,000 |
| 2 | 65,000 | 150,000 |
| 3 | 100,000 | 60,000 |
| 4 | 115,000 | 55,000 |
| 5 | 35,000 | 60,000 |
| Total | 425,000 | 400,000 |
Each project requires an investment of $ 200,000.
The cost of capital is 10%.
Require to
- Calculate Net Present Value, Payback period, ARR and Profitability Index.
- Which Project is to be recommended to develop based on NPV, Profitability Index, Payback period and ARR? Suggest
Question 4 (15 marks)
A). (Leverage Analysis) You have developed the following analytical income statement for the Hugo Boss Corporation. It represents the most recent year’s operations, which ended
| Sales | $ 50,439,375 |
| Variable costs | (25,137,000) |
| Revenue before fixed costs | $ 25,302,375 |
| Fixed costs | (10,143,000) |
| EBIT | $ 15,159,375 |
| Interest expense | (1,488,375) |
| Earnings before taxes | $ 13,671,000 |
| Taxes at 50% | (6,835,500) |
| Net income | $ 6,835,500 |
Your supervisor in the controller’s office has just handed you a memorandum asking for written responses to the following questions: (10 marks)
- At this level of output, what is the degree of operating leverage?
- What is the degree of financial leverage?
- What is the degree of combined leverage?
- What is the firm’s break-even point in sales dollars?
- If sales should increase by 30 percent, by what percent would earnings before taxes (and net income) increase?
B). “Understanding Operating, Financial and Combined leverage is important in business financial risk analysis.” Elaborate the statement. (Word limit: 500 words) (5 marks)
Question 5 (20 marks)
RPI, Inc. is a manufacturer and retailer of high-quality sports clothing and gear. The firm was started several years ago by a group of serious outdoor enthusiasts who felt there was a need for a firm that could provide quality products at reasonable prices. The result was RPI, Inc.
Since its inception, the firm has been profitable with sales that last year totaled $700,000 and assets in excess of $400,000. The firm now finds its growing sales outstrip its ability to finance its inventory needs. The firm now estimates that it will need a line of credit of $100,000 during the coming year. To finance this funding requirement, the management plans to seek a line of credit with its bank.
The firm’s most recent financial statements were provided to its bank as support for the firm’s loan request. Joanne Peebie, a loan analyst trainee for the Morristown Bank and Trust, has been assigned the task of analyzing the firm’s loan request.
RPI, Inc. Balance Sheets for 12/31/18 and 12/31/19
Assets
| 2018 | 2019 | |
| Cash | $16,000 | $17,000 |
| Marketable securities | 7,000 | 7,200 |
| Accounts receivable | 42,000 | 38,000 |
| Inventory | 50,000 | 93,000 |
| Prepaid rent | 1,200 | 1,100 |
| Total current assets | $116,200 | $156,300 |
| Net plant and equipment | 286,000 | 290,000 |
| Total assets | $402,200 | $446,300 |
Liabilities and Stockholders’ Equity
| 2018 | 2019 | |
| Accounts payable | $48,000 | $55,000 |
| Notes payable | 16,000 | 13,000 |
| Accruals | 6,000 | 5,000 |
| Total current liabilities | $70,000 | $73,000 |
| Long-term debt | $160,000 | $150,000 |
| Common stockholders’ equity | $172,200 | $223,300 |
| Total liabilities and equity | $402,200 | $446,300 |
RPI, Inc. Income Statement For the Year Ended 12/31/2019
| Sales (all credit) | $700,000 |
| Less: Cost of goods sold | 500,000 |
| Gross profits Less: Operating and interest expenses General and administrative $50,000 Depreciation 30,000 Total |
$200,000 80,000 |
| Profit before Interest and taxes (EBIT) | $120,000 |
| Less: Interest | 10,000 |
| Profit before taxes | $110,000 |
| Less: Taxes | 27,100 |
| Net income available to common stockholders Less: Cash dividends |
$82,900 31,800 |
| Change in retained earnings | $51,100 |
Calculate the financial ratios for 2019 corresponding to the industry norms provided below: (13 Marks)
| Ratio Norm | ||
| Current ratio | 1.80 | |
| Acid-test ratio | 0.90 | |
| Debt ratio | 0.50 | |
| Long-term debt to total capitalization | 0.70 | |
| Times interest earned | 10.00 | |
| Average collection period | 20.00 | |
| Inventory turnover (based on COGS) | 7.00 | |
| Return on total assets | 8.40% | |
| Gross profit margin | 25.0% | |
| Operating income return on investment | 16.8% | |
| Operating profit margin | 14.0% | |
| Total asset turnover | 1.20 | |
| Fixed asset turnover | 1.80 |
- Which of the ratios reported above in the industry norms do you feel should be most crucial in determining whether the bank should extend the line of credit? Why? (4 Marks)
- Use the information provided by the financial ratios to decide if you would support making the loan. (3 Marks)
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