## MBA/MSC Financial Management Question and Answers

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Assignment Details:-

• Topic :: Financial Management
• NP – Critical task :  Words  6000 Approximately

Question 1 (15 marks)

The Analtoly Corporation is an electronics dealer and distributor. Sales for the last year were

\$4.5 million, and cost of goods sold was \$2 million and operating expenses totaled \$1.2 million. Analtoly also paid \$150,000 in interest expense, and depreciation expense totaled

\$50,000. In addition, the company sold securities for \$120,000 that it had purchased 4 years earlier at a price of \$40,000.

• Compute Taxable Income (5 marks)
• Compute the tax liability for Analtoly. (5 marks) Corporate Tax Rates

Taxable Income                                   Corporate Tax Rate

\$1 – \$50,000                                                    15%

\$50,001 – \$75,000                                            25%

\$75,001 – \$10 million                                      34%

over \$10 million                                              35% and

\$100,000 – \$335,000                                        5% surtax

\$15m – \$18.333 m                                           3% surtax Apply the usual important considerations.

•  Explain objectives of Corporate Financial Management. (500 words,5 marks)

Question 2 Attempt any 8. (8×3= 24 + 1 Bonus Point) (25 Marks)

1. (Inflation and Interest Rates) What would you expect the nominal rate of interest to be if the real rate is 4 percent and the expected inflation rate is 7 percent?

1. (Expected Rate of Return and Risk) Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and return?
 Common Stock A Common Stock B Probability Return Probability Return .30 11% .20 25% .40 15% .30 6% .30 19% .30 14% .20 22%

1. (Common Stock Valuation) Header Motor, Inc., paid a \$3.50 dividend last year. At a constant growth rate of 5 percent, what is the value of the common stock if the investors require a 20-percent rate of return?

1. (Preferred Stock Valuation) What is the value of a preferred stock where the dividend rate is 14 percent on a \$100 par value? The appropriate discount rate for a stock of this risk level is 12

1. (Cost of Trade Credit) Calculate the effective cost of the following trade credit terms where payment is made on the net due
• 2/10, net 30
• 3/15, net 30
1. (Trade Credit Discounts) Determine the effective annualized cost of forgoing the trade credit discount on the following terms:
• 1/10, net 20
• 2/10, net 30

1. A) Calculate Economic Ordering Quantity ( EOQ ) if cost of carrying 1 unit in inventory = \$24

total demand in units over planning period = 60,000 units ordering cost per order = \$800

B) Calculate average inventory to be maintained if Safety stock is 3,000 units.

1. Calculate Chim Inc. Weighted Cost of Capital based on following information of their capital sources and structure:

Source            Cost            Capital Structure

 Debt 5% 20% Preferred 8% 20% Common 14% 60%

1. Explain any 5 axioms of finance with real examples. (300 words)

1. “Finance managers spend up to 60 percent of their time in working capital management.” Explain the importance of working capital management. (300 words)

Question 3 (15 marks)

X construction is considering two projects to develop. The estimated net cash flow from each project is

as follows:

 Year Project X (\$) Project Y (\$) 1 110,000 75,000 2 65,000 150,000 3 100,000 60,000 4 115,000 55,000 5 35,000 60,000 Total 425,000 400,000

Each project requires an investment of \$ 200,000.

The cost of capital is 10%.

Require to

1. Calculate Net Present Value, Payback period, ARR and Profitability Index.
2. Which Project is to be recommended to develop based on NPV, Profitability Index, Payback period and ARR? Suggest

Question 4 (15 marks)

A).  (Leverage Analysis) You have developed the following analytical income statement for the Hugo Boss Corporation. It represents the most recent year’s operations, which ended

 Sales \$ 50,439,375 Variable costs (25,137,000) Revenue before fixed costs \$ 25,302,375 Fixed costs (10,143,000) EBIT \$ 15,159,375 Interest expense (1,488,375) Earnings before taxes \$ 13,671,000 Taxes at 50% (6,835,500) Net income \$ 6,835,500

Your supervisor in the controller’s office has just handed you a memorandum asking for written responses to the following questions: (10 marks)

• At this level of output, what is the degree of operating leverage?
• What is the degree of financial leverage?
• What is the degree of combined leverage?
• What is the firm’s break-even point in sales dollars?
• If sales should increase by 30 percent, by what percent would earnings before taxes (and net income) increase?

B).  “Understanding Operating, Financial and Combined leverage is important in business financial risk analysis.” Elaborate the statement. (Word limit: 500 words) (5 marks)

Question 5 (20 marks)

RPI, Inc. is a manufacturer and retailer of high-quality sports clothing and gear. The firm was started several years ago by a group of serious outdoor enthusiasts who felt there was a need for a firm that could provide quality products at reasonable prices. The result was RPI, Inc.

Since its inception, the firm has been profitable with sales that last year totaled \$700,000 and assets in excess of \$400,000. The firm now finds its growing sales outstrip its ability to finance its inventory needs. The firm now estimates that it will need a line of credit of \$100,000 during the coming year. To finance this funding requirement, the management plans to seek a line of credit with its bank.

The firm’s most recent financial statements were provided to its bank as support for the firm’s loan request. Joanne Peebie, a loan analyst trainee for the Morristown Bank and Trust, has been assigned the task of analyzing the firm’s loan request.

RPI, Inc. Balance Sheets for 12/31/18 and 12/31/19

Assets

 2018 2019 Cash \$16,000 \$17,000 Marketable securities 7,000 7,200 Accounts receivable 42,000 38,000 Inventory 50,000 93,000 Prepaid rent 1,200 1,100 Total current assets \$116,200 \$156,300 Net plant and equipment 286,000 290,000 Total assets \$402,200 \$446,300

Liabilities and Stockholders’ Equity

 2018 2019 Accounts payable \$48,000 \$55,000 Notes payable 16,000 13,000 Accruals 6,000 5,000 Total current liabilities \$70,000 \$73,000 Long-term debt \$160,000 \$150,000 Common stockholders’ equity \$172,200 \$223,300 Total liabilities and equity \$402,200 \$446,300

RPI, Inc. Income Statement For the Year Ended 12/31/2019

 Sales (all credit) \$700,000 Less: Cost of goods sold 500,000 Gross profits Less: Operating and interest expenses General and administrative                \$50,000 Depreciation                                         30,000 Total \$200,000     80,000 Profit before Interest and taxes (EBIT) \$120,000 Less: Interest 10,000 Profit before taxes \$110,000 Less: Taxes 27,100 Net income available to common stockholders Less: Cash dividends \$82,900 31,800 Change in retained earnings \$51,100

Calculate the financial ratios for 2019 corresponding to the industry norms provided below: (13 Marks)

 Ratio Norm Current ratio 1.80 Acid-test ratio 0.90 Debt ratio 0.50 Long-term debt to total capitalization 0.70 Times interest earned 10.00 Average collection period 20.00 Inventory turnover (based on COGS) 7.00 Return on total assets 8.40% Gross profit margin 25.0% Operating income return on investment 16.8% Operating profit margin 14.0% Total asset turnover 1.20 Fixed asset turnover 1.80

1. Which of the ratios reported above in the industry norms do you feel should be most crucial in determining whether the bank should extend the line of credit? Why? (4 Marks)
2. Use the information provided by the financial ratios to decide if you would support making the loan. (3 Marks)