Exercise 1 Consider the balance sheet of Wikileaks Industries as shown below. Because Wikileaks has $900,000 of retained earnings, do you think that the company would be able to pay cash to buy an asset with a cost of $300,000? Why or why not? Give logical arguments to support your answer. Cash $ $ 100,000 50,000 Accounts payable 200,000 Accruals Inventory 100,000 Accounts receivable 250,000 Total CL $ 200,000 100,000 Total CA $ 500,000 Debt Net fixed assets $ 900,000 Common stock 200,000 Retained earnings 900,000 Total assets $1,400,000 Total L & E $1,400,000 Exercise 3 Following information is given of ABC Ltd. Cash Outflow $150,000 Annual Cash inflow First 4 years $25,000 Next 6 years $10,000 Estimated life 10 years Required: Calculate Payback period Exercise 6 Connolly Co.'s expected year-end dividend is Di = $2.60, its required return is rs = 12.00%, its dividend yield is 8.00%, and its growth rate is expected to be constant in the future. What is Connolly's expected stock price in 2 years? What could be the possible causes of rise in stock price? Discuss. 7 / 9 109% 2.3 Exercise 5 Use the following information to answer the questions that follow: M & M Foods Sales COGS Interest Depreciation Cash Accounts receivables Current liabilities Inventory Long-term debt Net fixed assets Common stock Taxes 2010 2011 $5,831 $6,423 3,670 4,109 291 280 125 122 250 313 1,092 1,162 717 1,051 1,495 1,521 2,400 1,100 4,006 4,123 1,900 2,100 590 670 Required: a. What is the cash flow from assets for 2011? b. Based on your answer in part (a) above, evaluate the cash management. Exercise 4 The Kay Company has the following Capital structure as at 31' March, 2019. Based on Book Value Based on Market Value % Costs Debentures 300,000 330,000 7 Preference 100,000 110,000 9 Equity 1,500,000 1,700,000 15 Debt 200,000 180,000 10 Required: Determine the Weighted Average cost of capital using: a) Book Value weights b) Market Value weights c) What are the factors affecting Cost of Capital? 11. Companies Heidee and Leaudy have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company Heidee has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? Rationalize your selection. a. Company Heidee has more net income. b. Company Heidee pays less in taxes. c. Company Heidee has a lower equity multiplier. d. Company Heidee has a higher ROA. e. Company Heidee has a higher times interest earned (TIE) ratio. 10. Lofland's has $20 million in current assets and $10 million in current liabilities, while Smaland's current assets are $10 million versus $20 million of current liabilities. Both firms would like to "window dress" their end-of-year financial statements, and to do so each plans to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions? Justify your choice with logical arguments. a. The transaction would improve both firms' financial strength as measured by their current ratios. b. The transactions would raise Lofland's financial strength as measured by its current ratio but lower Smaland's current ratio. c. The transactions would lower Lofland's financial strength as measured by its current ratio but raise Smaland's current ratio. d. The transaction would have no effect on the firm' financial strength as measured by their current ratios. e. The transaction would lower both firm' financial strength as measured by their current ratios. 4. If you plan to invest $7000 annually for 5 years and the discount rate is 10%. Required: i) Calculate what is the future value? ii) Briefly explain the time value of money. 5. Read the following case and answer the question that follows