MSFI Corporate Finance Problem Set # 1 Answer

$5

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?

a. Capital market instruments include both long-term debt and common stocks.
b. An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.
c. The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.
d. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

 

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
  1. Why are ratios useful?
  2. 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?
  3. 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?
  4. 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?
  5. 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?
  6. 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?
  7. 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

Reviews

There are no reviews yet.

Be the first to review “MSFI Corporate Finance Problem Set # 1 Answer”

Your email address will not be published.