Finance Principles – Homework #1

Dr. Choi

(Due: Wednesday, July 3)

All answers must be typed. Show all of your work for numerical problems.

** Homework must be done independently.**

“I attest that this is my own work and that I have abided by the Howard University Code of Student Conduct. I have neither given nor received any type of help, except as specifically permitted by the professor.”

Student’s Name/Signature

Date

1. Define or explain each of words and phrase listed below.

1) Net working capital

2) Capital budgeting

3) Capital structure

4) Marginal tax

5) Average tax

6) Double taxation

7) Liquidity

8) Time value of money

9) Secondary market

10) Primary market

11) Market value

12) Book value

13) NYSE

14) Nasdaq

15) IPO

2. Discuss the advantages and disadvantages of Partnership .

3. Define ‘Agency Problem’ and discuss the ways of handling it by corporations.

4. What goal should always motivate the actions of the firm’s financial manager?

5. What are the advantages and disadvantages of Corporation .

6. Based on the following information for XYZ Corporation, answer the each question (calculate for year 2018). Assume that price per share is $15.25 and number of shares is 350.

2017

2018

Income Statement

Sales

3,850

Cost of goods sold

2,150

Expenses

200

Depreciation

875

EBIT

Interest

250

Taxable Income

Taxes

?

Net Income

Dividends

225

Balance Sheet

Current assets

2,000

2,350

Net fixed assets

6,700

7,000

Total Assets (TA)

?

?

Current liabilities

950

1,200

Long-term debt

2,800

3,100

Total Liabilities (TD)

?

?

Common stock

3,000

3,077.5

Retained Earnings

1,950

1,972.5

Total Equity (TE)

?

?

a. What are the XYZ’s tax liabilities? Use a 34 percent tax rate throughout.

b. Calculate cash flow from assets, cash flow to creditors, and cash flow to stockholders. Check the CFFA identity.

c. (1) Calculate XYZ’s financial ratios for the following items and (2) briefly explain what the ratio is measuring. Then, (3) compare the ratios for XYZ to the industry average ratios. Indicate whether or not XYZ is in a better financial position.

1) Profit Margin (industry average = 0.09)

2) ROA (industry average = 0.04)

3) Current Ratio (industry average = 1.25)

4) Quick Ratio (assume inventory = $1,200) (industry average = 1.15)

5) Debt-to-Equity (industry average = 0.85)

6) Total Debt Ratio (industry average = 1.55)

7) Inventory Turnover (assume inventory = $1,200) (industry average = 9.8)

8) Total Asset Turnover (industry average = 0.62)

9) Times Interest Earned (industry average = 3.25)

10) Du Pont Identity

11) EPS

12) Price/Earning (P/E) Ratio (industry average = 5.50)

13) Market-to-Book Ratio (industry average = 2.25)

.

8. Assume you deposit $100,000 today in an account that pays 3.5 percent interest. How much will you have in 30 years?

9. You need $1,500,000 when you turn 65. Suppose you just turned to 22 today. If the discount rate is 8 percent, how much you need to deposit today.

10. You have been offered an investment that will double your money in 10 years. What rate of return are you being offered?

11. Given 12 percent interest rate, if you invest $500, how long until you have $5,000?

12. How much would you have to invest today at 9% compounded monthly to have $35,000 to buy a car in 6 years?

13. Your investment offers to pay you the following cash flows. If the discount rate is 5.5 percent, what is the (total) present values of these cash flows?

Year

1

2

3

4

Cash flows

$1,000

1,500

2,000

2,500

14. Your investment offers to pay you the following cash flows. If the discount rate is 10 percent, what is the (total) future values (in year 4) of these cash flows?

Year

1

2

3

4

Cash flows

$2,000

500

1,000

500

15. You deposit $5,000 at the end of each of the next 7 years into your bank. How much money will you have in7 years later, assuming your bank account pays 12 percent interest?

3

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