Description
Problem Set # 1 – Questions from Chapters 1 and 3
MSFI Corporate Finance Problem
Question # 1:
Which of the following statements is CORRECT?
| a. | One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt. |
| b. | Sole proprietorships are subject to more regulations than corporations. |
| c. | In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner. |
| d. | Sole proprietorships and partnerships generally have a tax advantage over many corporations. |
| e. | Corporations of all types are subject to the corporate income tax. |
Question # 2:
Which of the following statements is CORRECT?
| a. | If Apple issues additional shares of common stock through an investment banker, this would be a secondary market transaction. | ||||||||||
| b. | If you purchased 100 shares of Apple stock from your sister-in-law, this would be an example of a primary market transaction. | ||||||||||
| c. | The IPO market is an example of a primary market. | ||||||||||
| d. | None of the above.
Question # 3: 27. Which of the following statements is CORRECT?
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Question # 4: Identity and briefly compare the two major stock exchanges in the US today.
Question # 5:
You are a financial manager in Gama Corporation. You have the task of getting the company back into a sound financial position. Gama Corporation’s 2017 and 2018 balance sheets and income statements, together with projections for 2019, are shown in the following tables. The tables also show the 2017 and 2018 financial ratios, along with the industry average data. Your assignment is to answer the following questions. Provide clear explanations, not yes or no answers. Show your work for the calculations.
| Balance Sheets | |||||
| Assets | 2017 | 2018 | 2019 (Projected) | ||
| Cash | $ 9,000 | $ 7,282 | $ 14,000 | ||
| Short-Term Investments. | 48,600 | 20,000 | 71,632 | ||
| Accounts Receivable | 351,200 | 632,160 | 878,000 | ||
| Inventories | 715,200 | 1,287,360 | 1,716,480 | ||
| Total Current Assets | $ 1,124,000 | $ 1,946,802 | $ 2,680,112 | ||
| Gross Fixed Assets | 491,000 | 1,202,950 | 1,220,000 | ||
| Less: Accumulated Depreciation | 146,200 | 263,160 | 383,160 | ||
| Net Fixed Assets | $ 344,800 | $ 939,790 | $ 836,840 | ||
| Total Assets | $ 1,468,800 | $ 2,886,592 | $ 3,516,952 | ||
| Liabilities And Equity | 2017 | 2018 | 2019 (Projected) | ||
| Accounts Payable | $ 145,600 | $ 324,000 | $ 359,800 | ||
| Notes Payable | 200,000 | 720,000 | 300,000 | ||
| Accruals | 136,000 | 284,960 | 380,000 | ||
| Total Current Liabilities | $ 481,600 | $ 1,328,960 | $ 1,039,800 | ||
| Long-Term Debt | 323,432 | 1,000,000 | 500,000 | ||
| Common Stock (100,000 Shares) | 460,000 | 460,000 | 1,680,936 | ||
| Retained Earnings | 203,768 | 97,632 | 296,216 | ||
| Total Equity | $ 663,768 | $ 557,632 | $ 1,977,152 | ||
| Total Liabilities And Equity | $ 1,468,800 | $ 2,886,592 | $ 3,516,952 | ||
MSFI Corporate Finance Problem
| Income Statements | |||||
| 2017 | 2018 | 2019(Projected) | |||
| Sales | $ 3,432,000 | $ 5,834,400 | $ 7,035,600 | ||
| COGS except depr. | 2,864,000 | 4,980,000 | 5,800,000 | ||
| Depreciation | 18,900 | 116,960 | 120,000 | ||
| Other Expenses | 340,000 | 720,000 | 612,960 | ||
| Total Operating Costs | $ 3,222,900 | $ 5,816,960 | $ 6,532,960 | ||
| EBIT | $ 209,100 | $ 17,440 | $ 502,640 | ||
| Interest Expense | 62,500 | 176,000 | 80,000 | ||
| EBT | $ 146,600 | $ (158,560) | $ 422,640 | ||
| Taxes (40%) | 58,640 | (63,424) | 169,056 | ||
| Net Income | $ 87,960 | $ (95,136) | $ 253,584 | ||
| Other Data | 2017 | 2018 | 2019(Projected) | ||
| Stock Price | $ 8.50 | $ 6.00 | $ 12.17 | ||
| Shares Outstanding | 100,000 | 100,000 | 250,000 | ||
| EPS (Earnings per share) | $ 0.880 | $ (0.951) | $ 1.014 | ||
| DPS (Dividend per share) | $ 0.220 | $ 0.110 | $ 0.220 | ||
| Tax Rate | 40% | 40% | 40% | ||
| Book Value Per Share | $ 6.638 | $ 5.576 | $ 7.909 | ||
| Ratio Analysis | 2017 | 2018 | 2019(Projected) | Industry Average | ||
| Current | 2.3 | 1.5 | ? | 2.7 | ||
| Quick | 0.8 | 0.5 | ? | 1.0 | ||
| Fixed Assets Turnover | 10.0 | 6.2 | ? | 7.0 | ||
| Total Assets Turnover | 2.3 | 2.0 | ? | 2.5 | ||
| Debt to Asset Ratio | 35.6% | 59.6% | ? | 32.0% | ||
| TIE | 3.3 | 0.1 | ? | 6.2 | ||
| Profit Margin | 2.6% | -1.6% | ? | 3.6% | ||
| Basic Earning Power | 14.2% | 0.6% | ? | 17.8% | ||
| ROA | 6.0% | -3.3% | ? | 9.0% | ||
| ROE | 13.3% | -17.1% | ? | 17.9% | ||
| Price/Earnings (P/E) | 9.7 | -6.3 | ? | 16.2 | ||
| Market/Book | 1.3 | 1.1 | ? | 2.9 |
- Why are ratios useful?
- Calculate the 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2017, 2018, and as projected for 2019?
- We often think of ratios as being useful (1) to managers to help run the business, (2) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?
- Calculate the 2019 fixed assets turnover, and total assets turnover. How does the firm’s utilization of assets stack up against other firms in its industry?
- Calculate the 2019 debt to asset ratio and times-interest-earned. How does the firm compare with the industry with respect to financial leverage? What can you conclude from these ratios?
- Calculate the 2019 profit margin, basic earning power (BEP), return on assets (ROA), and return on equity (ROE). What can you say about these ratios?
- Calculate the 2019 price/earnings ratio and market/book ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company?
MSFI Corporate Finance Problem
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