Assignment

Financial Management
SBS MBA/MSC

STUDENT ID

UNIT TITLE UNIT CODE

Name (in Full)

__________________________________________________________

Total Marks: _______ / 100

 Answer all the questions,

Question: 1
a. Sandersen, Inc., sells minicomputers. The firm's taxable income is $1,225,000. Calculate the
corporation's tax liability.

Corporate Tax Rates

15% $ 0–$50,000

25% $ 50,001–$75,000

34% $75,001–$10,000,000

35% over $10,000,000

Additional surtax:
•5% on income between $100,000 and $335,000.
•3% on income between $15,000,000 and $18,333,333.

b. “Originally, the sole objective of the federal government in taxing income was to generate
financing for government expenditures. Although this purpose continues to be important,
social and economic objectives have been added.” Substantiate the statement with enough
explanations.

Question: 2
a. Friedman Manufacturing, Inc. has prepared the following information regarding two
investments under consideration. 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

.20 12% .10 4%

.50 18% .30 6%

1
.30 27% .40 10%

.20 15%
 b. “ More can be said about risk, especially as to its nature, when we own more than one asset
in our investment portfolio.” Define risk and explain how risk is affected if we diversify our
investment by holding a variety of securities?

Question 3:
a. J and S Corporation is evaluating its financing requirements for the coming year. The firm
has only been in business for 1 year, but its CFO predicts that the firm's operating expenses,
current assets, net fixed assets, and current liabilities will remain at their current proportion
of sales.

Last year J and S Corp. had $15 million in sales with net income of $1.5 million. The firm
anticipates that next year's sales will reach $18 million with net income rising to $3 million.
Given its present high rate of growth, the firm retains all its earnings to help defray the cost
of new investments.

The firm's balance sheet for the year just ended is found below:
J and S Corporation
Balance Sheet
12/31/2000 % of Sales
Current assets $6,000,000 40%
Net fixed assets 9,000,000 60%
Total $15,000,000
Liabilities and Owners' Equity
Accounts payable $3,750,000 25%
Long-term debt 4,250,000 NAa
Total liabilities $8,000,000
Common stock 2,000,000 NA
Paid-in capital 2,800,000 NA
Retained earnings 2,200,000
Common equity 7,000,000
Total $15,000,000
a
Not applicable. This figure does not vary directly with sales and is assumed to remain
constant for purposes of making next year's forecast of financing requirements.
2

Estimate J and S corp. total financing requirements (i.e., total assets) for 2001 and its net
funding requirements (DFN).
 b. Give a brief summary of forecasting to determine additional (discretionary) funding
(financing) needed.

Question 4:

The balance sheet and income statement for the McDonald's are as follows.

McDonald's Corporation 2016 Income Statement ($

Millions)

Sales $11,508

Cost of goods sold 6,537

Gross profits $ 4,971

Marketing expenses and general

and administrative expenses $ 1,832

Depreciation expense 345

Total operating expenses $ 2,177

Operating profits $ 2,794

Interest expenses 387

Earnings before taxes $ 2,407

Income taxes 765

Net income before preferred stock dividends $ 1,642

Preferred stock dividends 25

Net income available to common stockholders 3 $ 1,617

 McDonald's Corporation December 31, 2016 Balance Sheet
($ Millions) Assets

Cash $ 341

Accounts receivables 484

Inventories 71

Prepaid expenses 247

Total current assets $ 1,143

Gross fixed assets $20,088

Accumulated depreciation 5,127

Net fixed assets $14,961

Investments 702

Other assets 1,436

Total assets $18,242

Liabilities and Equity

Liabilities (debt):

Short-term notes payable $ 1,629

Accounts payable 651

Taxes payable 53

Accrued expenses 652

Total current liabilities 4 $ 2,985

Long-term debt 6,325

 Total liabilities $ 9,310

Equity:

Preferred stock $ 80

Common stock:

Par value and paid in capital $ 708

Retained earnings 11,927

Treasury stock (3,783)

Total common equity $ 8,852

Total equity $ 8,932

Total liabilities (debt) and equity $18,242

a. Calculate the following ratios:

RATIO INDUSTRY NORM

Current ratio 0.70

Inventory turnover 90

Average collection period 6.5 days

Debt ratio 50%

Total asset turnover 1.5

Fixed asset turnover 2

Operating profit margin 21%

Return on common equity 5 15%

 b. Calculate the future sum of $5,000 given that it will be held in the bank 5 years at an annual
interest rate of 6 percent.

c. Knutson Products, Inc., is involved in the production of airplane parts and has the following
inventory, carrying, and storage costs:

 Orders must be placed in round lots of 250,000 units.

 The carrying cost for 1 unit of inventory is $ 10
 The ordering cost is $100 per order.

i. Determine the optimal EOQ level.

ii. Determine the average inventory when the safety stock is 2000 units.

Question 5:

“Some of the financial techniques and strategies are necessary for the efficient operation of an
international business. Problems inherent to these firms include multiple currencies, differing legal
and political environments, differing economic and capital markets, and internal control problems.
The difficulties arising from multiple currencies are stressed here, including the dimensions of
foreign exchange risk and strategies for reducing this risk.” Elucidate.

Question 6:

Explain the financial Axioms

1. Risk - return trade-off
2. Time value of money
3. Cash is king
4. Incremental cash flows
5. The agency problem
6. Taxes bias business decisions
7. All risk is not equal
8. Ethical dilemmas are everywhere in finance
9. The Curse of Competitive Markets
10. Efficient Capital Markets