Investment Management
Dr. Malekan
Mohammad Hossein Tajaddini
Mohammad Kian Maghsoudi
400115086
99115128
Group Homework #1
Mohammad Rahim Barzegar
400115085
0) Calculations present in attached MS-Excel file.
There was a mistake in C40, amortization must be a negative number.
1) What happens to various figures in the financial statements, if $100 is
added to the current depreciation account? (Assuming a tax rate of 30%)
− PP&E would decrease by $100, as stated above.
− Since depreciation effectively reduces tax, taxes would decrease by 100 × 0.3 = 30$.
− $100 would be deducted from earning, $30 added back due to reduced tax.
2) If you could use only one financial statement to evaluate the financial state
of a company, which would you choose?
The cash flow statement would provide the clearest, least-distorted view over the company’s
liabilities and revenue streams; it is also a firm basis for intrinsic valuation. The amount of cash
a company possesses at the end of each cycle can be seen in the balance sheet as well, however,
the exact reasons why the amount of cash has changed are specified in the cash flow statement.
A company could have undertaken major debt and inflated their cash, but that’s not
necessarily desirable.
3) If I buy new property plant and equipment (PP&E) for $10m ($5m cash and
$5m debt), what will happen to the balance sheet and cash flow?
The balance sheet would accommodate the newly acquired asset, therefore (long-term) assets
will be increased by $10m; on the other hand, $5m cash will be deducted from (current) assets
and another $5m would be added to liabilities, balancing everything out in the end.
The cash flow would reflect a -$5m change from holdings/investments and a +$5m change for
finances.
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