Managerial Finance
Assignment 1
Name: Eslam Mohamed Kamal
Group: 2G
ID: 24224102
Grade
Model 1
Model 2
Model 3
Model 4
Model 5
Total
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Model 1
Finance and financial invironment
True or False
T/F
1
One disadvantage of operating a business as a sole proprietorship is
that the firm is subject to double taxation, at both the firm level and
the owner level.
F
2
One advantage of forming a corporation is that equity investors are
usually exposed to less liability than in a regular partnership.
T
3
Corporations generally find it relatively difficult to raise large amounts
of capital.
F
4
Corporate shareholders escape liability for the firm's debts, but this
factor may be offset by the tax disadvantages of the corporate form of
organization.
T
5
An example of a primary market transaction would be your uncle
transferring 100 shares of Wal-Mart stock to you as a birthday gift.
F
6
While the two frequently perform similar functions, investment banks
generally specialize in lending money, whereas commercial banks
generally help companies raise large blocks of capital from investors.
F
7
8
9
10
Limited liability of its stockholders is an advantage of the corporate
form of organization, but corporations have more trouble raising
money in financial markets because of the complexity of this form of
organization.
Partnerships have more difficulty attracting large amounts of capital
than corporations because of such factors as unlimited liability, the
need to reorganize when a partner dies, and the illiquidity (difficulty
buying and selling) of partnership interests.
In a limited partnership, the limited partners have voting control, while
the general partner has operating control over the business. Also, the
limited partners are individually responsible, on a pro rata basis, for
the firm’s debts in the event of bankruptcy.
Publicly owned companies have shares owned by investors who are
not associated with management, and public companies must register
with and report to a regulatory agency such as the SEC.
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F
T
F
T
Multi-part:
Calculate the following ratios
Ratio
current ratio?
quick ratio?
total assets turnover?
TIE?
debt ratio?
ROA?
ROE?
BEP?
profit margin?
dividends per share?
EPS?
P/E ratio?
book value per share?
market-to-book ratio?
Results
1,32 Times
0,6 Times
1,39 Times
2,5 Times
70%
3%
9%
7%
2%
2,9$
6,5$ per share
13,70
71,8$
1,23
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Model 3
WACC
Eslam Mohamed Kamal
Name:
Grade
Case
1
The following is LIMO's capital strucute and its related costs. What is LIMO's WACC?
Data
Capital Structure
Cost
Debt
35%
7,50%
Preferred
10%
7,00%
Common
55%
12,25%
Answer Model
Tax rate
40%
Components
Weights
AT Costs
Tax Shield
Weighted Cost
Debt
35%
7,50%
60,00%
1,58%
Preferred
10%
7,00%
0,70%
Common
55%
12,25%
6,74%
WACC
9,01%
Case
2
The following is DOSO's Inc. data to estimate its cost of common equity. What is the cost of equity raised by selling new common stock?
Data
D1
$2,75
g
6,00%
P0
$72,50
F
4,00%
Answer Model
re = D1/(P0 × (1 − F)) + g
((2,75)/(72,50*(1-4%)))+6%
9,95%
Case
3
The following is Hero's perpetual preferred stock. What is the company's cost of preferred stock for use in calculating the WACC?
Data
Preferred stock price
$67,50
Pp
Preferred dividend
$7,00
Dp
Flotation cost
3,00%
F
Answer Model
rp = Dp/(Pp(1 − F))
10,69%
(7)/(67,5*(1-3%))
Case
4
The following is MORA's. Based on the CAPM approach, what is the cost of common from retained earnings?
Data
rRF
4,10%
RPM
5,25%
b
1,3
Answer Model
rs = rRF + (RPM × b)
Case
5
4,10%+(1,3*5,25%)
10,93%
True or False
1
A firm’s cost of retained earnings is the rate of return stockholders require on a firm’s common stock.
True
2
There is an “opportunity cost” associated with using retained earnings, hence they are not “free.”
True
3
WACC calculations should be based on the before-tax costs of all the individual capital components.
False
4
If a company’s tax rate increases, then, all else equal, its weighted average cost of capital will decline.
True
5
An increase in the risk-free rate will normally lower the marginal costs of both debt and equity financing.
False
6
Retained earnings that were generated in the past and are reported on the firm’s balance sheet are
available to finance the firm’s capital budget during the coming year.
True
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Model 4
CCC
Eslam Mohamed Kamal
Name:
Grade
Model
1
The following is Transporter's working capital structure and its related balances. as it follows a moderate current asset CA investment policy, but it is now considering a
change, perhaps to a restricted or maybe to a relaxed policy. Show the difference in the projected ROEs between the restricted and relaxed policies by completing the
balance sheet and income statement as it shone below?
Data
Annual sales
Fixed assets
EBIT
Interest rate
Tax rate
Capital Structure
$500 000
$120 000
$45 000
15%
30%
Capital structure
Debt
40%
Equity
60%
CA Policy
% of sales
Restricted
20%
Relaxed
30%
Answer Model
Balance sheet
Restricted
Relaxed
Income Statement
Restricted
CA
$100 000
$150 000
Relaxed
EBIT
$45 000
$45 000
FA
120 000
120 000
Interest
13 200
16 200
Total assets
$220 000
$270 000
EBT
$31 800
$28 800
Taxes
9 540
8 640
Debt
$88 000
$108 000
NI
$22 260
$20 160
Equity
132 000
162 000
ROE
16,86%
12,44%
Total D&E
$220 000
$270 000
January
$45 000
February
$52 500
March
$52 500
$13 500
Model
3
The following is Retaliation's Corporation. what is the firm's cash conversion cycle?
Data
Annual sales
Annual COGS
$900 000
$472 500
Answer Model
CCC Components
Pay 3rd month
40%
March
$13 500
$18 000
$15 750
$15 750
$13 500
$29 250
$49 500
Inventory
$60 000
Acc receivable
$80 000
Acc payable
$36 000
Inventory
$
Transactions
Total Year
Pay 2nd month
30%
$15 750
Total collections for month:
Average
4,42%
Difference in ROE =
Model
2
The following is Gladiator's Inc. data for preparing its cash budget. what are the expected cash receipts for each month?
Data
Expected Sales
Credit Policy
January
$45 000
Cash
February
$52 500
30%
March
$52 500
Answer Model
Collections
Month
Sales for Mos.
January
February
Receivables
60 000
$
472 500
$
COGS
$
Payables
80 000
$
900 000
$
Sales
36 000
COGS
472 500
# Days Per Year
365
365
365
# Days Per Item
64.35
32.44
27.81
51
Cash Conversion Cycle
Model
4
# Days per Year
365
True or False
1
If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash
conversion cycle (CCC).
False
2
Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion
cycle (CCC).
False
3
Cash is often referred to as a "non-earning" asset. Thus, one goal of cash management is to minimize the amount of cash
necessary for conducting a firm’s normal business activities.
True
4
Changes in a firm's collection policy can affect sales, working capital, and profits.
True
5
One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.
True
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Model 5
Solution
31-déc
2014
Statement of Cash Flows
Cash flows from operating activities
Net income
Adjustments:
Depreciation expense
Change in inventory
Change in accounts payable
Change in accounts receivable
Net cash provided by operating activities
$
405 000
$
$
$
$
$
72 000
27 000
(39 000)
(27 000)
438 000
Cash flows from investing activities
Sale of equipment
Purchase of investments
Net cash used by investing activities
$
$
$
(150 000)
75 000
(75 000)
Cash flows from financing activities
Issuance of common stock
Retirement of bonds
Payment of dividends
Net cash used by financing activities
$
$
$
$
150 000
(150 000)
(210 000)
(210 000)
Net increase in cash
$
153 000
Cash at beginning of period
Cash at end of period
$
$
66 000
219 000
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