1. Complete the following sentences with the most appropriate term or phrase:

a. Firms raise capital by selling newly issued securities in the ___________markets, while existing,

already outstanding securities are traded in the ______________markets.

b. Markets for short-term debt securities are called _______________markets, while markets for

long-term debt and equity are called __________markets.

c. ______________ _______________ bring together people and organizations wanting to borrow

money with those having surplus funds.

d. Financial markets function both primary and secondary markets for corporate securities and can

be organized as either ________________ or ____________ markets.

e. The primary disadvantage of the corporate form of organization is ____________________.

f. New York Stock exchange is an example of a ____________________ market.

g. An IPO is a ____________________ market transaction.

h. The ____________ or the securities traded differentiates the money market from the capital

market.

i. The financial controller of a company is typically responsible for ___________________.

j. In a dealer market, the buyer and seller are not brought together directly but instead have their

orders executed on the _________________.

(10 points)

2. Your company received a $7 million order on the last day of the year. You filled the order with

$3 million worth of inventory. The customer picks up the order the same day and pays $2

million up front in cash; you also issue a bill for the customer to pay the remaining balance of $5

million within 40 days. Suppose your firm?s tax rate is 0% (ignore taxes). Determine the

consequences of this transaction for each of the following:

Account Increase/Decrease/

No effect

Value of

effect

Revenues

Earnings

Receivables

Inventory

Cash

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(10 points; 1 each)

3. Bogus Goods Corp. has additions to retained earnings for the year just ended of $350,000. The

firm paid out $160,000 in cash dividends, and it has ended total equity of $4.1 million. If the

company currently has 210,000 shares of common stock outstanding:

i. What are earnings per share? (2 points)

ii. Dividends per share? (2 points)

iii. Book value per share? (2 points)

iv. If the stock currently sells for $58 per share what is the market-to-book ratio? (2 points)

v. The price-earnings ratio? (2 points)

4. Prepare a 2016 income statement for Nike Inc. based on the following information: Nike had

sales of $620,000. Cost of goods sold, administrative and selling expenses, and depreciation

expenses were $380,000 $195,000 and $65,000 respectively. In addition, the company had an

interest expense of $40,000 and a tax rate of 20 percent. (Ignore any tax loss carryback or carry

forward provisions.)

a) What is Nike?s net income for 2016? (5 points)

b) What is Nike?s operating cash flow? (3 points)

c) What could be the reason for the difference in (a) and (b). (2 points)

5. Financial Analysis is not just a tool for financial mangers within the firm. Match the following

groups of users to how they may use financial ratio analysis. (4 points)

(Options are provided when attempting question)

6. You are analyzing the leverage of two firms and you noted the following (all values in millions of

dollars)

Debt

Book

Equity

Market

Equity

Operating

Income

Interest

Expense

Firm A 65 75 80 45 12

Firm B 60 40 50 22 10

a) What is the market debt-to-equity ratio of each firm? (2 points)

b) What is the book debt-to-equity ratio of each firm? (2 points)

c) What is the interest cover ratio of each firm? (2 points)

d) Based on your calculations above, which of the following statement is most correct

about firms A and B? (2 points)

i. Firm A is most likely to default on its debt

ii. Firm B is most likely to default on its debt.

iii. Lenders are more likely to favor Firm B.

iv. Lenders are more likely to favor Firm A.

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7. MCI Electronics Inc. has current assets of $178,000, net fixed assets of $65,500, current liabilities

of $78,400, and long-term debt of $25,800.

a. What is the value of the shareholder?s equity account for this firm? (3 points)

b. How much is net working capital? (3 points)

8. XYZ Company Ltd. has EBIT of $3.5 million and a 15% tax rate. It had $650,000 in depreciation

expenses with a $750,000 increase in working capital. It had another $120,000 in capital

expenditures. What is its free cash flow? (5 points)

9. Tiles limited had the following balance sheet at the end of operation for 2015 and 2016

respectively.

For the period ending 2016, Net income, Interest and taxes were $42,000, $10,000 and

$25,000 respectively. Depreciation Expense was $18,000. Determine Tiles Ltd?s FCF for

2016. (5 points)

10. Select all that is true about the Cash flow of the firm. (2 points)

a) While an income statement measures a company?s profits, profits are not the same as

cash flows; profits are calculated on a cash basis rather than an accrual basis.

b) In measuring free cash flows we are more interested in considering cash flows from an

accounting perspective rather than the perspective of the firm?s shareholders and

investors.

c) Net cash flow does not include after-tax interest expense.

d) Free cash flow from an operating perspective must equal free cash flow from a financing

perspective.

e) Positive operating free cash flows are equal to the cash flows distributed to the firm?s

investors (both debt and equity).

f) FCF may be defined as net operating profit after taxes (NOPAT) minus the amount of net

investment in operating working capital and fixed assets necessary to sustain the

business.

1 M MGMT 2023 Financial Management 1 - Tutorial Sheet # 1 Due February 11, 2017, 11:55 PM ECT. To be posted to Moodle using the Quiz Activity Resource/format. This paper will be out of a total of 70 points and will contribute up to 4% of your course work marks. Two attempts are allowed in Moodle and the higher of the two attempts will be entered in the grade book. All the best. 1. Complete the following sentences with the most appropriate term or phrase: a. b. c. d. e. f. g. h. i. j. Firms raise capital by selling newly issued securities in the ___________markets, while existing, already outstanding securities are traded in the ______________markets. Markets for short-term debt securities are called _______________markets, while markets for long-term debt and equity are called __________markets. ______________ _______________ bring together people and organizations wanting to borrow money with those having surplus funds. Financial markets function both primary and secondary markets for corporate securities and can be organized as either ________________ or ____________ markets. The primary disadvantage of the corporate form of organization is ____________________. New York Stock exchange is an example of a ____________________ market. An IPO is a ____________________ market transaction. The ____________ or the securities traded differentiates the money market from the capital market. The financial controller of a company is typically responsible for ___________________. In a dealer market, the buyer and seller are not brought together directly but instead have their orders executed on the _________________. (10 points) 2. Your company received a $7 million order on the last day of the year. You filled the order with $3 million worth of inventory. The customer picks up the order the same day and pays $2 million up front in cash; you also issue a bill for the customer to pay the remaining balance of $5 million within 40 days. Suppose your firm's tax rate is 0% (ignore taxes). Determine the consequences of this transaction for each of the following: Account Revenues Earnings Receivables Inventory Cash Increase/Decrease/ Value of No effect effect 2 M (10 points; 1 each) 3. Bogus Goods Corp. has additions to retained earnings for the year just ended of $350,000. The firm paid out $160,000 in cash dividends, and it has ended total equity of $4.1 million. If the company currently has 210,000 shares of common stock outstanding: i. What are earnings per share? (2 points) ii. Dividends per share? (2 points) iii. Book value per share? (2 points) iv. If the stock currently sells for $58 per share what is the market-to-book ratio? (2 points) v. The price-earnings ratio? (2 points) 4. Prepare a 2016 income statement for Nike Inc. based on the following information: Nike had sales of $620,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $380,000 $195,000 and $65,000 respectively. In addition, the company had an interest expense of $40,000 and a tax rate of 20 percent. (Ignore any tax loss carryback or carry forward provisions.) a) What is Nike's net income for 2016? (5 points) b) What is Nike's operating cash flow? (3 points) c) What could be the reason for the difference in (a) and (b). (2 points) 5. Financial Analysis is not just a tool for financial mangers within the firm. Match the following groups of users to how they may use financial ratio analysis. (4 points) (Options are provided when attempting question) 6. You are analyzing the leverage of two firms and you noted the following (all values in millions of dollars) Debt Book Equity Market Equity Operating Income Interest Expense Firm A 65 75 80 45 12 Firm B 60 40 50 22 10 a) b) c) d) What is the market debt-to-equity ratio of each firm? (2 points) What is the book debt-to-equity ratio of each firm? (2 points) What is the interest cover ratio of each firm? (2 points) Based on your calculations above, which of the following statement is most correct about firms A and B? (2 points) i. Firm A is most likely to default on its debt ii. Firm B is most likely to default on its debt. iii. Lenders are more likely to favor Firm B. iv. Lenders are more likely to favor Firm A. 3 M 7. MCI Electronics Inc. has current assets of $178,000, net fixed assets of $65,500, current liabilities of $78,400, and long-term debt of $25,800. a. What is the value of the shareholder's equity account for this firm? (3 points) b. How much is net working capital? (3 points) 8. XYZ Company Ltd. has EBIT of $3.5 million and a 15% tax rate. It had $650,000 in depreciation expenses with a $750,000 increase in working capital. It had another $120,000 in capital expenditures. What is its free cash flow? (5 points) 9. Tiles limited had the following balance sheet at the end of operation for 2015 and 2016 respectively. Tiles Ltd. as at Dec. 2015 Cash Other current assets total current assets Investments Fixed assets (net) Land 24000 Current Liablilities 51000 LT- Notes Payable 75000 Bonds 40000 Common Stock 125000 Retained Earnings 62000 302000 as at Dec. 2016 30000 33000 40000 150000 49000 302000 Cash Other current assets total current assets Investments Fixed assets (net) Land 87000 Current Liablilities 51000 LT- Notes Payable 138000 Bonds 20000 Common Stock 107000 Retained Earnings 92000 357000 30000 39000 42000 170000 76000 357000 For the period ending 2016, Net income, Interest and taxes were $42,000, $10,000 and $25,000 respectively. Depreciation Expense was $18,000. Determine Tiles Ltd's FCF for 2016. (5 points) 10. Select all that is true about the Cash flow of the firm. (2 points) a) While an income statement measures a company's profits, profits are not the same as cash flows; profits are calculated on a cash basis rather than an accrual basis. b) In measuring free cash flows we are more interested in considering cash flows from an accounting perspective rather than the perspective of the firm's shareholders and investors. c) Net cash flow does not include after-tax interest expense. d) Free cash flow from an operating perspective must equal free cash flow from a financing perspective. e) Positive operating free cash flows are equal to the cash flows distributed to the firm's investors (both debt and equity). f) FCF may be defined as net operating profit after taxes (NOPAT) minus the amount of net investment in operating working capital and fixed assets necessary to sustain the business