Fin. Mgt.
1
Problem set 1
[Max. points available: 50 marks × 15/50 = 15 points]
Your name:
Instructions for preparing and submitting your homework:
 Type all responses where possible.
 If necessary, mathematical calculations may be handwritten and scanned into the document.
Excel worksheets may be likewise inserted but must be adjusted to fit in the document.
 Upload one single Word file (docx) to the corresponding assignment submission point in Canvas.
**Submitting your work in Word file will greatly expedite the grading process (note that you can copy
images from a JPEG or PDF file and paste them in your Word document).
 A document for Microsoft Word editing tips is available in the Canvas course shell.
Part i #1. Introduction to corp. finance
Question 1
[5 marks]
Evaluate each of the following statements (True or False).
a) Austin Power Corp., a corporation incorporated in Delaware, has gone bankrupt recently thus
failing to pay its suppliers and creditors. The shareholders of Austin Power should be
responsible for these unpaid bills.
Answer:
b) According to the Fisher’s separation principle, a firm’s investment decision does not have to
take into account its owners’ different consumption preferences, provided that the assumption
of the perfect capital market holds.
Answer:
c) Microsoft Corp. issued a 10-year bond in 2018. Because the company already had other bonds
outstanding issued in the past, prior to 2018, its new bond offering in 2018 is considered a
secondary market transaction.
Answer:
d) Because a corporation is not a human being, it cannot enter into contracts or borrow on its
name.
Answer:
Fin. Mgt.
Question 2
2
[5 marks]
The current price per share of ABC Inc. is $25. A hostile takeover artist Shark Capital approached
ABC Inc. and its shareholders to offer $35 per share for their shares. David, the manager of ABC
Inc., is reviewing the takeover bid to decide what to do.
Which of the following is correct? Choose only one.
a) Even if David believes that the shares of ABC Inc. are currently undervalued and that other
bidders can pay more than $35 per share to acquire the firm, accepting the Shark Capital’s offer
works in the best interest of the shareholders.
b) Fighting off any takeover bid always works in the best interest of shareholders.
c) David believes that the management team of ABC Inc. can enhance the value of the firm so that
the share price will exceed $35. If his analysis proves to be correct, rejecting the Shark Capital’s
offer on that ground is in the best interest of the shareholders.
d) NONE of the above
Answer:
Question 3
[5 marks]
When a region is hit by a natural disaster (e.g., New Orleans during Hurricane Katrina in 2005),
some companies reportedly increase the price of bottled water by a significant magnitude (e.g., five
to ten times more) for the local consumers who already suffer from the disaster. Whether this can
be justified and on what ground are debatable. The managers of those firms often argue that the
increased price is justified because the prices of goods are governed by the supply and demand, as
well as the costs (e.g., transportation), which increase in the impacted area.
Each of the following statements a) through d) provides the rationales for the firms’ decision to (or
not to) charge a higher price. Evaluate each of these justifications (True or False), not the decision
itself.
a) Nay to charging a higher price. Rationale: Charging a higher price can damage the firm’s
future customer base and reputation, thereby causing a negative effect on the shareholder
value in the long run.
Answer:
b) Aye to charging a higher price. Rationale: Corporate managers should focus their efforts on
maximizing the value of the firms’ accounting profits under any circumstances.
Answer:
Fin. Mgt.
3
c) Nay to charging a higher price. Rationale: The shareholder value maximization principle does
not mean that a firm is allowed to engage in unethical or illegal actions that benefit its
shareholders at the expense of other members of society.
Answer:
d) Nay to charging a higher price.
Rationale: The primary objective of a corporation is to
maximize the value of stakeholders, not that of shareholders.
Answer:
Fin. Mgt.
4
Part i #2. Financial statements
Question 4
[5 marks]
Consider the following information concerning a firm’s income statement for fiscal year (FY) 2050:
Sales revenues
$865,000
Cost of goods sold
$435,000
Total expenses
$250,000
*The “Total expenses” include depreciation expenses and various others (e.g., SG&A, R&D, etc.).
In addition, assume that the applicable corporate income tax rate is 20% and that the firm pays no
tax when its taxable income falls below zero (ignore any tax loss carryforward in case it bothers
you). The firm has no debt interest expenses.
Answer questions a) and b) below.
a) Determine the firm’s net income for FY 2050.
Answer (show the steps/calculation toward your results):
b) Suppose that the firm had underestimated its total expenses by omitting depreciation expenses
of $150,000, it turns out. That is, its total expenses, including depreciation, should have been
$400,000. Recall that depreciation expense is a noncash expense (i.e., no cash outflow involved).
Requited: Recalculate (i) net income with the corrected amount of expenses. In addition,
determine ii) how this correction would affect the firm’s cash available at the end of FY 2050
(i.e., whether it would increase or decrease the firms’ cash position. No calculation needed).
Answer (show the steps/calculation toward your results):
Fin. Mgt.
Question 5
5
[5 marks]
The table below summarizes the information obtained from a firm’s balance sheets for the fiscal
year end (FYE) 2050 and FYE 2051:
2050 (in $mln)
2051 (in $mln)
Current assets
1,327
1,438
Noncurrent assets
5,470
6,587
Assets:
Liabilities & equity:
Current liabilities
Long-term debt
537
598
2,890
3,077
Answer questions a) and b) below.
a) Calculate the change in net working capital during FY 2051.
Answer (show the steps/calculation toward your results):
b) Determine the change in shareholders’ equity during FY 2051.
Answer (show the steps/calculation toward your results):
Fin. Mgt.
Question 6
6
[5 marks]
𝐶𝐴
Suppose that a firm’s current ratio is 1.2, i.e., 𝐶𝐿 = 1.2. Determine what effect each of the following
actions would have on its current ratio.
a) Inventory is purchased with cash.
Answer:
b) Short-term loan is repaid with cash.
Answer:
c) Long-term debt (with the maturity > 1 year) is repaid with cash.
Answer:
d) A customer has paid off a credit account.
Answer:
e) The firm has paid its supplier.
Answer:
Fin. Mgt.
Question 7
7
[5 marks]
The table below summarizes the information concerning a firm’s fiscal year end 2030 and 2031:
FYE 2030 (in $mln)
1,825
FYE 2031 (in $mln)
1,400
Accounts receivable
2,300
2,590
Short-term debt
1,100
1,380
Accounts payable
1,530
1,200
Inventories
Required:
i) Classify changes in each item as a source or use of cash and
ii) determine by how much the firm’s cash would have changed from FYE 2030 to FYE 2031.
Answer (show the steps/calculation toward your results):
Fin. Mgt.
8
For Questions 8 through 10, use the information provided below concerning Allied Business
Solutions, Inc. (“ABS”) in fiscal year (FY) 2050 and FY 2051.
ABS Inc., balance sheets:
FYE 2051
FYE 2050
Current assets:
Cash
17,631
14,588
Accounts receivable
41,019
35,258
Inventory
71,505
65,567
Net plant and equipment
498,421
477,413
$628,576
$592,826
Accounts payable
63,073
55,653
Notes payable
25,324
21,895
Long-term debt
62,000
58,000
60,000
60,000
Accumulated retained earnings
418,179
397,278
Total liabilities and owners’ equity
628,576
$592,826
Total assets
Current liabilities:
Common stock and paid-in surplus
ABS Inc., incomes statement:
FY 2051
Sales revenues
730,200
Cost of goods sold
495,000
SG&A
EBIT
85,000
150,200
Interest expenses
42,000
Net income
86,560
ABS Inc., the share information at the end of fiscal year (FYE) 2051:
The number of shares outstanding: 200,000 shares
Price per share: $10
Fin. Mgt.
Question 8
9
[5 marks]
Determine the following financial ratios for ABS Inc. in FY 2051:
i) total debt to assets ratio, ii) debt-to-equity ratio, and iii) interest coverage ratio (based on
EBIT), rounded to four decimal places (e.g., 0.78715= 0.7872).
*Follow the definitions introduced in the class (do NOT use your own definitions).
Answer (show the steps/calculation toward your results):
Question 9
[5 marks]
For FY 2051, (i) calculate ABS Inc.’s return on equity (ROE). Additionally, (ii) decompose ROE into
three pieces of information (i.e., DuPont analysis). Provide all numbers in four decimal places (e.g.,
0.78715= 0.7872).
*Follow the definitions introduced in the class (do NOT use your own definitions).
Answer (show the steps/calculation toward your results):
Fin. Mgt.
10
Question 10 [5 marks]
Which of the following statements is correct? Choose only one.
a) Relative to market to book ratio, Tobin’s Q is more difficult to construct because it requires the
estimate of the historical costs of the firm’s assets.
b) ABS Inc.’s inventory turnover ratio for FY 2051 (based on FYE balance, not FY average) is
71,505
495,000
= 0.144.
c) ABS Inc.’s price to earnings (P/E) at FYE 2051 is
0.4328
10
= 0.04328.
d) The DuPont analysis suggests that compared with its ROA, ABS Inc.’s ROE is lowered by its
financial leverage.
e) None of the above
Answer:
[Max. points available: 50 marks × 15/50 = 15 points]