Reference no: EM132238617

Part A

Answer any six (6) out of seven (7) questions.

Essay questions

1. A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below.

Asset	Year 1	Year 2	Year 3
Asset 1	$21,000	$15,000	$6,000
Asset 2	9,000	15,000	21,000
Asset 3	3,000	20,000	19,000
Asset 4	4000	12,000	12,000

Based on the wealth maximization goal, the financial manager would choose ________.
A) Asset 1
B) Asset 2
C) Asset 3
D) Asset 4

2. How the individual and institutional investors differ from each other? Explain.

3. Give an example of a liquid and an illiquid investment. Discuss why you consider each of them to be liquid or illiquid.

4.What are the key reasons for using fundamental analysis?

5. CFO of Graham Del plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. What affect it can have on the company's financial statements. Discuss.

6. Is ratio analysis technique of financial statement analysis always successful? Why or Why not? Justify with logical arguments.

7. Compare and contrast various methods of capital budgeting. Which method do you think is the most appropriate and why? Rationalize your standing.

Part B

Exercise 1

1. Rojert Corporation provides the following balance sheet and income statement for the year of 2016.
ROJERT CORPORATION
BALANCE SHEET
AS OF 31 DECEMBER, 2016

ASSETS	"$"
Current Assets:
Cash in hand	100,000
Inventory	90,000
Debtors	145,000
Total current assets	3,35,000
Non-Current Assets:
Building	1,290,000
Plant & Machinery	770,000
Vehicles	470,000
Total non-current assets	2,530,000
Total Assets	2,865,000
LIABILITIES
Current Liabilities:
Creditors	410,000
Tax Payables	20,000
Salary Payables	92,000
Total Current liabilities	5,22,000
Non-Current Liabilities:
Long term loan	10,00,000
Total Liabilities	15,22,000
OWNER'S EQUITY:
Paid up capital	740,000
Retained Earning	543,000
Share premium	60,000
Total	1,343,000
Total Liabilities & Equity	2,865,000

ROJERT CORPORATION
INCOME STATEMENT
FOR THE YEAR ENDED 31 DECEMBER, 2016

Net Sales	$ 900,000
Cost of goods sold	(550,000)
Gross profit	350,000
Operating Expenses	(90,000)
Earnings before interest and tax (EBIT)	260,000
Interest expense	(60,000)
Earning before tax	200,000
Tax (35%)	(70,000)
Earning after tax	130,000

Required:
a. Calculate the following ratios:
(i) Average payment period.
(ii) Average collection period.
(iii) Inventory turnover ratio.
(iv) Fixed assets turnover.
(v) Total assets turnover ratio.
(vi) Quick ratio.
(vii) Return on Equity
(viii) Interest coverage ratio
Note: Assume 360 days in a year.

b. Assuming that the industrial average for collection and payment period is 110 and 150 days respectively and fixed asset turnover is 40%, evaluate the performance of the Rojert Corporation based on your answer in part (a) above.

Exercise 2

ZeroxCorporation is financed only with common equity. Its total assets are $590,000. The new CFO wants to employ enough debt to bring the debt/assets ratio to 30%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? Show all calculations.

Exercise 3Major Manuscripts, Inc.
2012 Income Statement

Net sales	$17,100
Cost of goods sold	11,200
Depreciation	1,650
Earnings before interest and taxes	4,250
Interest paid	350
Taxable income	$3,900
Taxes
Net income	$2600
Dividends	$950

Major Manuscripts, Inc.
2012 Balance Sheet

	2012		2212
Cash	$1.040	Accounts payable	$3350
Accounts rec.	700	Long-term debt	2,780
Inventory	7.500	Common stock	10,000
Total	9.240	Retained earnings	4.510
Net fixed assets	11,400
Total assets	$20,640	Total liabilities & equity	$20,640

Required:

a. If Major Manuscripts, Inc. decides to maintain a constant debt-equity ratio, what rate of growth can it maintain assuming that no additional external equity financing is available?

b. How sustainable growth contributes towards the growth of a corporation? Discuss.

Exercise 4

Following information is extracted from the books of GMN Limited:

a. Current Accounts
• 2016: CA = 22,900; CL = 15,300
• 2015: CA = 17,600; CL = 12,400
b. Fixed Assets and Depreciation
• 2016: NFA = 98,100; 2015: NFA = 75,700
• Depreciation Expense = 2700
c. Long-term Debt and Equity (R.E. not given)
• 2016: LTD = 47,000; Common stock & APIC = 1,400
• 2015: LTD = 35,850; Common stock & APIC = 1,400
d. Income Statement
• EBIT = 22,000; Taxes = 1400
• Interest Expense = 2,840; Dividends = 2,700

Required:
i. Compute the cash flow from asset for GMN Limited:
ii. Comment on usefulness of cash flow from asset in financial decision making.

Exercise 5

What are the most common types of stock options available to the corporations? How those options are utilized? Is stock better than debt as a source of financing? Why or why not? Appraise your views.