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business
fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

Genesis Ltd was incorporated three years ago and has grown rapidly since then. The rapid rate of growth has created problems for the business, which the directors have found difficult to deal with.
Threads Limited manufactures nuts and bolts, which are sold to industrial users. The abbreviated financial statements for 2013 and 2014 are as follows:Income statements for the year ended 30 June
The directors of Helena Beauty Products Ltd have been presented with the following abridged financial statements:Income statement for the year ended 30 September 2013 2014£000 £000 £000 £000
Conday and Co. Ltd has been in operation for three years and produces antique reproduction furniture for the export market. The most recent set of financial statements for the business is set out as
Amsterdam Ltd and Berlin Ltd are both engaged in wholesaling, but they seem to take a different approach to it according to the following information:Ratio Amsterdam Ltd Berlin Ltd Return on capital
Set out below are ratios relating to three different businesses. Each business operates within a different industrial sector.Ratio A plc B plc C plc Operating profit margin 3.6% 9.7% 6.8%Sales to
Identify and discuss three reasons why the P/E ratio of two businesses operating in the same industry may differ.
Some businesses operate on a low operating profit margin (an example might be a supermarket chain). Does this mean that the return on capital employed from the business will also be low?
Why might the directors of a business engage in creative accounting?
Assume that a business has internally generated goodwill that was created in earlier years. If this resource were introduced as a non-current asset with an indefinite life in the current statement of
What do you deduce from the investment ratios set out above? Can you explain why the share price has not fallen as much as it might have done, bearing in mind the much poorer trading performance in
Calculate the P/E ratio of Alexis plc as at 31 March 2014.
Calculate the earnings per share of Alexis plc for the year ended 31 March 2014.
Calculate the dividend yield for Alexis plc for the year ended 31 March 2014.
Calculate the dividend payout ratio of Alexis plc for the year ended 31 March 2014.
Calculate the interest cover ratio of Alexis plc for the year ended 31 March 2014.
Calculate the gearing ratio of Alexis plc as at 31 March 2014.
Calculate the acid test ratio for Alexis plc as at 31 March 2014.
Calculate the current ratio for Alexis plc as at 31 March 2014.
Show how the ROCE ratio for Alexis plc can be analysed into the two elements for each of the years 2013 and 2014. What conclusions can you draw from your figures?
Calculate the sales revenue per employee for Alexis plc for the year ended 31 March 2014.
Calculate the sales revenue to capital employed ratio for Alexis plc for the year ended 31 March 2014.
Calculate the average settlement period for trade payables for Alexis plc for the year ended 31 March 2014.
Calculate the average settlement period for Alexis plc’s trade receivables for the year ended 31 March 2014.
Calculate the average inventories turnover period for Alexis plc for the year ended 31 March 2014.
Calculate the gross profit margin for Alexis plc for the year to 31 March 2014.
Calculate the operating profit margin for Alexis plc for the year to 31 March 2014.
Calculate the ROCE for Alexis plc for the year to 31 March 2014.
Calculate the ROSF for Alexis plc for the year to 31 March 2014.
Can you think of any bases that could be used to compare a ratio you have calculated from the financial statements of a business for a particular period?Hint: There are three main possibilities.
Calculate key ratios for assessing the financial performance and position of a business and explain their significance.
Identify the major categories of ratios that can be used for analysing financial statements.
There was a time when the "made in Japan" label brought a predictable smirk of superiority to the face of most Americans. The quality of most Japanese products usually was as low as their price. In
9-11B. (M1RR calculation) Artie's Soccer Stuff is considering building a new plant. This plant would require an initial cash outlay of $8 million and will generate annual free cash inflows of$2
9-1OB. (NPV with v01ying required rates ofreturn) Bert's, makers of gourmet corn dogs, is considering the purchase of a new corn dog "molding" machine. This invesnnent requires an initial outlay
9-8B. (NPV with varying required rates ofreturn) Mo-Lee's Sportswear is considering building a new factory to produce soccer equipment. This project would require an initial cash outlay of$10,000,000
9-5B. (Payback period, net present value, profitability index, and internal rate ofreturn calculations) You are considering a project with an initial cash outlay of $160,000 and expected free cash
9-4B. (NPV; PI, and IRR calculations) Gecewich, Inc., is considering a major expansion of its product line and has estimated the following cash flows associated with such an expansion. The initial
9-3B. (IRR calculation) Determine the internal rate of return to the nearest percent on the following projects:a. An initial outlay of $1 0,000 resulting in a cash flow of $3,000 at the end ofyear 1,
9-2B. (IRR calculation) Determine the internal rate of return on the following projects:a. An initial outlay of $10,000 resulting in a cash flow of$2,146 at the end of each year for the next 10
9-1B. (IRR calculation) Detennine the internal rate of return on the following projects:a. An initial outlay of $1 0,000 resulting in a single cash flow of $19,926 after 8 yearsb. An initial outlay
15. Determine the modified internal rate of return for each project. Should they be accepted? Do you feel it is a better evaluation technique than is the internal rate of return? Why or why not?
14. VYhat reinvestment rate assumptions are implicitly made by the net present value and internal rate of return methods? lNhich one is better?
13. How does a change in the required rate of return affect the project's internal rate of return?
12. Detennine the internal rate of return for each project. Should they be accepted?
11. VYhat would happen to the net present value and profitability index for each project if the required rate of return increased? If the required rate of return decreased?
10. Would you expect the net present value and profitability index methods to give consistent accept-reject decisions? Why or why not?
9. Determine the profitability index for each of these projects. Should they be accepted?
8. Describe the logic behind the net present value.
7. Determine the net present value for each of these projects. Should they be accepted?
6. VYhat are the drawbacks or deficiencies of the discounted payback period? Do you feel either the payback or discounted payback period should be used to determine whether or not these projects
5. VYhat is the discounted payback period for each of these projects? If Caledonia requires a three-year maximwn acceptable discounted payback period on new projects, which of these projects should
4. VYhat are the criticisms of the payback period?
3. VYhat is the payback period on each project? If Caledonia imposes a three-year maximum acceptable payback period, which of these projects should be accepted?
2. VYhy is it difficult to find exceptionally profitable projects?
1. VYhy is the capital-budgeting process so important?
9-11A. (MIRR calculation) Emily's Soccer Mania is considering building a new plant. This project would require an initial cash outlay of $1 0 million and will generate annual free cash inflows of $3
9-10A. (NPV with varying required rates ofretU171) Big Steve's, makers of swizzle sticks, is considering the purchase of a new plastic stamping machine. This investment requires an initial outlay of
9-8A. (NPV with vmying 1'ates ofreturn) Dowling Sportswear is considering building a new factory to produce aluminum baseball bats. This project would require an initial cash outlay of$5,000,000 and
9-5A. (Payback pr:riod, net present value, p1'ofitability index, an£! intr:rnal rate ofreturn calculations) You are considering a project with an initial cash outlay of$80,000 and expected free cash
9-4A. (l\TPv, PI, and IRR calculations) Fijisawa, Inc., is considering a major expansion of its product line and has estimated the following free cash flows associated with such an expansion. The
9-3A. (IRR calculation) Detennine the internal rate of return to the nearest percent on the following projects:a. An initial outlay of $10,000 resulting in a free cash flow of $2,000 at the end of
9-2A. (IRR calculation) Determine the internal rate of return on the following projects:a. An initial outlay of $1 0,000 resulting in a free cash flow of $1,993 at the end of each year for the next
9-1A. (lRR calculation) Determine the internal rate of return on the following projects:a. An initial outlay of $1 0,000 resulting in a single free cash flow of $17,182 after 8 yearsb. An initial
9-5. What is the advantage of using the MIRR as opposed to the IRR decision criteria?
9-4. Briefly compare and contrast the NPV; PI, and IRR criteria. What are the advantages and disadvantages of using each of these methods?
9-3. In some countries, expropriation of foreign investments is a common practice. If you were considering an investment in one of those countries, would the use of the payback period criterion seem
9-2. What are the criticisms of the use of the payback period as a capital-budgeting technique?What are its advantages? Why is it so frequently used?
9-1. Why is the capital-budgeting decision so important? Why are capital-budgeting errors so costly?
ST-3. This is a simple compound interest problem in which FV9 is eight times larger than PV Here again, three of the four variables are known: n =9 years, FV9 =8, and PV=1, and we are solving for i.
ST-2. This loan amortization problem is actually just a present-value-of-an-annuity problem in which we know the values of i, n, and pv, and are solving for PMT In this case, the value of i is 13
ST-I. This is a compound interest problem in which you must first find the future value of$25,000 growing at 8 percent compounded annually for three years and then allow that future value to grow for
5-41B. (Comprehensive present value) You have just inherited a large sum of money and you are trying to determine how much you should save for retirement and how much you can spend now. For
5-40B. (Solving for i in compound intel'est-financial calculator needed) In March 1963, issue number 39 of Tales ofSuspense was issued. The original price for that issue was 12 cents. By March of
5-39B. (Present value ofa future annuity) Determine the present value of an ordinary annuity of$1,000 per year for 10 years with the first cash flow from the annuity coming at the end of year 8(that
5-38B. (Present value ofan annuity) Determine the present value of an annuity due of $1 ,000 per year for 15 years discoW1ted back to the present at an annual rate of 12 percent. What would be the
5-37B. (Compounding an annuity due) Find the fuUlre value at the end of year 5 of an annuity due of $1,000 per year for five years compoW1ded annually at 5 percent. What would be the future value of
5-36B. (Present value) The state lottery's million-dollar payout provides for $1 million to be paid over 24 years in $40,000 amounts. The first $40,000 payment is made immediately with the 24
. 5-35B. (Loan amortization) To buy a new house, you must borrow $250,000. To do this, you take out a $250,000, 30-year, 9 percent mortgage. Your mortgage payments, which are made at the end of each
5-34B. (Loan amortization) On December 31, Eugene Chung borrowed $200,000, agreeing to repay this sum in 20 equal annual installments that include both the principal and 10 percent interest on the
5-HB. (Comprehensive present value) You are trying to plan for retirement in 10 years and currently you have $150,000 in a savings account and $250,000 in stocks. In addition, you plan to add to your
5-32B. (Complex present value) You would like to have $75,000 in 15 years. To accumulate this amount, you plan to deposit each year an equal sum in the bank, which will earn 8 percent interest
5-31B. (Compound annuity) You plan to buy some property in Florida five years from today. To do this, you estimate that you will need $30,000 at that time for the purchase. You would like to
5-30B. (Present value comparison) You are offered $1,000 today, $10,000 in 12 years, or $25,000 in 25 years. Assuming that you can earn 11 percent on your money, which should you choose?
5-29B. (Loan amortization) A firm borrows $30,000 from the bank at 13 percent compounded annually to purchase some new machinery. This loan is to be repaid in equal annual installments at the end of
5-28B. (Solving fOr i in compound interest) You lend a friend $15,000, for which your friend will repay you $37,313 at the end of five years. VVhat interest rate are you charging your "friend"?
5-27B. (Solvingfol'i in an annuity) You lend a friend $45,000, which your friend will repay in five equal annual payments of $9,000 with the first payment to be received one year from now. VVhat rate
5-26B. (Loan amortization) On December 31, Loren Billingsley bought a yacht for $60,000, paying$15,000 down and agreeing to pay the balance in 10 equal a.n.nual installments that include both the
5-25B. (Complex present value) I-low much do you have to deposit today so that beginning 11 years from now you can withdraw $10,000 a year for the next five years (periods 11 through 15), plus an
5-24B. (Present vallie ofan uneven stream ofpayments) You are given three invesnnent alternatives to analyze. The cash flows from these three investments are as follows:Investment END OF YEAR A B C 1
5-23B. (Solvingfor n with nonannual periods) About how many years would it take for your investment to grow sevenfold if it were invested at 10 percent compounded semiannually?
5-22B. (Present value ofan annuity due) What is the present value of a five-year annuity due of$1,000 annually given a 10 percent discount rate?
5-21B. (Perpetuities) \iVhat is the present value of the following?a. A $4D0 perpetuity discounted back to the present at 9 percentb. A $1,500 perpetuity discowlted back to the present at 13
5-20B. (Present value) The Shin Corporation is planning on issuing bonds that pay no interest but can be converted into $1,000 at maturity, eight years from their purchase. To price these bonds
5-18B. (Compound interej7with nonannualperiods) After examining the various personal loan rates available to you, you find that you can borrow funds from a finance company at 24 percent compounded
5-17B.(Compoundvalue) The Knutson Corporation needs to save $15 million to retire a$15 million mortgage that matures in 10 years. To retire this mortgage, the company plans to put a fixed amount into
5-16B. (Future value ofan annuity) In 10 years, you plan to retire and buy a house in Marco Island, Florida. The house you are looking at currently costs $125,000 and is expected to increase in value
5-15B. (Solving fOr i in compound interest) If you were offered $2,376.5010 years from now in return for an investment of $700 currently, what annual rate of interest would you earn if you took the
5-14B. (SolvingfOr PMT in an annuity) To pay for your child's education, you wish to have accumulated$25,000 at the end of 15 years. To do this, you plan to deposit an equal amoW1t into the bank at
5-13B. (Loan amortization) Stefani Moore purchased a new house for $150,000. She paid$30,000 down and agreed to pay the rest over the next 25 years in 25 equal annual payments that include principal

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