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.
A.
B.
The expected return on a security typically increases as ________.
default risk decreases
marketability increases
ACF 103 HAUT 2014 Tutorial 1 Solns
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* 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:
Cost
Depreciation in year:
Equipment
$28,000.00
Machine
$53,000.00
1 9,332.40
2 12,446.00
3 4,146.80
4 2,074.80
5
6
$28,000.00
10,600.00
16,960.00
10,176.00
6,105.60
6,105.60
3,052.80
$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 savingssurplus 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:
ACF 103 HAUT 2014 Tutorial 1 Solns
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a.
b.
c.
d.
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.
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.
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.
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
Cash and Equivalents
Short-Term Investments
Accounts Receivable
Inventories
Other Current Assets
Total Current Assets
Current Liabilities
Accounts Payable
Short-Term Debt
Other Current Liabilities
Total Current Liabilities
a.
b.
c.
2012
$3,122
$2,104
$7,232
$3,632
$ 1,414
$17,504
2011
$3,600
$6,020
$6,258
$3,086
$ 1,202
$20,166
Change
-$ 478
-$3,916
$ 974
$ 546
$ 212
-$2,662
$10,346
$ 576
$2,802
$13,724
$10,222
$ 554
$2,196
$12,972
$
248
$ 22
$ 606
$ 752
What is the Net Working Capital for
(i)
2012?
(ii)
2011?
What is the Change in Net Working Capital (NWC)?
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.
ACF 103 HAUT 2014 Tutorial 1 Solns
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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
Accumulated Depreciation
$8,468
Accounts Payable
$5,800
Accounts Receivable
$6,320
Cash
$2,420
Common Stock
$9,556
Inventory
$8,694
Long-Term Debt
$7,200
Plant, Property & Equipment
$17,350
Retained Earnings
$3,760
Balance 2014/12/31
$9,732
$6,420
$7,288
$2,980
$14,556
$10,332
$4,860
$19,680
$4,712
Answer:
a. The Balance Sheets for the two years are:
Assets:
2013
Current Assets
Cash
$2,420
Accounts Receivable
$6,320
Inventory
$8,694
Total Current Assets
$17,434
Long-Term Assets
Plant, Prop. & Equip
$17,350
Minus Acc. Depreciation
($8,468)
Net P P & E
$8,882
TOTAL Assets
$26,316
Liabilities
Current Liabilities
Accounts Payable
$5,800
Long-Term Liabilities
Long-term Debt
$7,200
Total Liabilities
$13,000
Owner’s Equity
Common Stock
$9,556
Retained Earnings
$3,760
Total Owner’s Equity
$13,316
TOTAL Liab. & O.E.
$26,316
2014
$2,980
$7,288
$10,332
$20,600
$19,680
($9,732)
$9,948
$30,548
$6,420
$4,860
$11,280
$14,556
$4,712
$19,268
$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.
ACF 103 HAUT 2014 Tutorial 1 Solns
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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.
b.
Income Statement
Revenue
Cost of Goods Sold
SG&A Expenses
Depreciation
EBIT
Interest Expense
Taxable Income
Taxes
Net Income
$29,840
$14,190
$ 4,540
$ 2,580
$ 8,530
$ 2,880
$ 5,650
$ 3,180
$ 2,470
Operating Cash Flow
OCF = EBIT – Taxes + Depreciation
OCF = $8,530 - $3,180 + $2,580 = $7,930
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