MAF605 Accounting & Finance Assignment For Managers


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  1. Suppose you purchase a house for $200,000.00 by getting a mortgage for $180,000.00 and paying a $20,000.00 down payment.


(i). If you get a 30-year mortgage with a 7% interest rate p.a. compounded quarterly, what are the quarterly payments? (5 marks)


(ii). What would the loan balance be at the end of the first year? (5 marks)


(iii).  You inherited an annuity from a rich uncle of $12,500 every 2.5 years beginning 17 weeks from today for a total of 8 payments. Assume a rate of 8% compounded quarterly. What is the equivalent value of the annuity today? (Hint: 1 year = 52 weeks)  (10 marks)





A). The Erickson Toy Corporation currently uses an injection moulding machine that was purchased 2 years ago. This machine is being depreciated on a straight-line basis toward a $500 salvage value, and it has 6 years of remaining life. Its current book value is $2,600, and it can be sold for $3,000 at this time. Assume, for ease of calculation, that the annual depreciation expense is $350 per year. The firm is offered a replacement machine which has a cost of $8,000 an estimated useful life of 6 years, and an estimated salvage value of $800.


This machine falls into the MACRS 5-year class (20%, 32%, 19%, 12%, 12%, 5%). The replacement machine would permit an output expansion, so sales would rise by $1,000 per year; even so, the new machine much greater efficiency would still cause operating expenses to decline by $1,500 per year. The machine would require that inventories be increased by $2,000 but accounts payable would simultaneously increase by $500. The firm’s marginal federal-plus-state tax rate is 40 percent, and its cost of capital is 15 percent. Should it replace the old machine? (In your calculations use zero decimal spaces/round to the whole numbers).

(20 marks)


B).  Discuss the potential sources of long-term finance available to a large company.

(10 marks)






You have been asked by your CEO to evaluate, analyse and calculate commonly used ratios relating to a company’s profitability, liquidity, solvency and management efficiency.




a).  Complete the balance sheet and sales data (fill in the blanks), using the following financial data:


Debt/net worth                                                        60%

Acid test ratio                                                            1.2

Asset turnover                                                           1.5 times

Day sales outstanding in accounts receivable     40 days

Gross profit margin                                                   30%

Inventory turnover                                                    6 times



Balance sheet


Cash                               ________                       Accounts payable     ________

Accounts receivable   ________                        Common stock         RM15,000

Inventories                   ________                        Retained earnings    RM22,000

Plant & equipment     ________


Total assets                  ________                        Total liabilities          ________

                                                                                   & capital

Sales                              ________

Cost of goods sold      ________

(20 marks)


b).  Explain how do analysts use ratios to analyse a firm’s leverage? Which ratios convey more important information to a credit analyst those revolving around the levels of indebtedness or those measuring the ability to service debt?  What is the relationship between a firm’s level of indebtedness and risk?  What must happen in order for an increase in leverage to be successful? Discuss and illustrate all your answer.

                                                                                                                                                                                (20 marks)






Zhen Yi Computers has an outstanding issue of bond with a par value of $1,000, paying 12 percent coupon rate semi-annually. The bond was issued 25 years ago and has 5 years to maturity.



a).  What is the value of the bond assuming 14 percent rate of interest?  (4 marks)


b).  What is the current yield?  (2 marks)


c).  O’Brien Ltd.’s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal annual, not semiannual yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $1,075.  What is the bond’s nominal coupon interest rate?  (4 marks)




PART B: ANSWER ALL QUESTIONS (100%) – 30% of Total Assessment




A.  Zippy Pasta Corporation (ZPC) has a constant growth rate of 7 percent. The company retains 30 percent of its earnings to fund future growth. ZPC’s expected EPS (EPS1) and ks for various capital structures are given below.


Debt/Total Assets (%)                      Expected EPS (RM)                   ks (%)

20%                                                          $2.50                                  15.0%

30                                                             3.00                                  15.5

40                                                               3.25                                  16.0

50                                                               3.75                                  17.0

70                                                               4.00                                  18.0




What is the optimal capital structure for ZPC? Show all of your working and explain your answer.  (Hints: Capital structure is at the optimum level when WACC is at the lowest; hence ZPC stock price is at the highest – to apply DCF method here)

(10 marks)


B.  Gagah Motors Enterprise., a producer of turbine generators, is in this situation: EBIT = RM4 million, tax rate = T = 35%, debt outstanding = D = RM2 million, rd = 10%, rs = 15%, shares of stock outstanding = No = 600,000, and book value per share = RM10. Because Gagah’s product market is stable and the company expects no growth, all earnings are paid out as dividends. The debt consists of perpetual bonds.



(i). What are Gagah’s earning per share (EPS) and its price per share (P0)?   (5 marks)


(ii). What is Gagah’s weighted average cost of capital (WACC)?  (5 marks)







Tong Foong Co. Ltd. has decided that its capital budget during the coming year will be $20 million.  Its optimal capital structure is 60 percent equity and 40 percent debt.  Its earnings before interest and taxes (EBIT) are projected to be $34.667 million for the year. The company has $200 million of assets; its average interest rate on outstanding debt is 10 percent; and its tax rate is 40 percent.


(i). How much debt is outstanding (in dollars) and what is the cost of the debt (in dollars) for the period? (6 marks)


(ii). Compute the Earnings After Tax (Net Income)?  (6 marks)


(iii). How much equity is required for the coming year capital budget?  (2 marks)


(iv).  If the company follows the residual dividend policy and maintains the same capital structure, what will its dividend payout (in $) and the dividend payout ratio (in %)?  (6 marks)






A). Assume you are the financial officer of a major firm. The president of the firm has just stated that she wishes to reduce the firm’s investment in current assets since those assets provide little, if any, return to the firm. How would you respond to this statement?  (8 marks)


B). As long as a firm maintains a positive cash balance, why is it essential to review the firm’s cash flows? (7 marks)





Sam Holdings is planning to open a new wholesaling operation. The target operating profit margin is 25%. The unit contribution margin will be 40% of sales. Average annual sales are forecast to be $4,250,000. The firm’s total asset is $8,750,000 with debt-asset ratio of 40%. The firm pays 12% interest on the debt and has 100,000 common stocks. The firm is subjected to corporate tax rate of 28%.


a).  How much is the fixed cost for the operation (assuming 25% target operating profit margin is achieved).

(6 marks)

b).  What is the breakeven point in dollars for the firm?

(6 marks)

c).  What is the degree of operating leverage (DOL)?

(6 marks)

d).  What is the degree of combined/total leverage (DCL/DTL)?

(6 marks)

e).  What will be its earnings per share if average annual sales drop by 20%?

(6 marks)






a).  Discuss the uses and advantages of budget.  (10 marks)


b). Explain the concept of control and budgetary control.  (5marks)