PRINCIPLES OF FINANCE - FIN-101

ASSIGNMENT- 1

Last Date for Submission 25th March 2017

Total Marks: 15

Each Question carries three marks each.

1. Case Study:

You own a cement company, and deal with most the local contractors for cement, sand, etc. You have a reputation of high quality products, and for good customer service with your customers. Your foreman has just run the standard quality control tests you have performed regularly on your products.

When the test results are ready, you discover that the new batch of product is 9% less durable than your usual material. It is still well above all industry standards and meets all building codes and requirements for the purposes for which it is intended, but it is, nevertheless, not up to your usual standards. Throwing it away would cost your company many thousands of dollars.

You decide to sell the cement anyway and increase the net sale and earn more profit.

Support your answer with logic and reasons.

Answer may vary from student to students.

Questions:

1-Should you tell your customers about the cement and quality?

2-Should you discount the price to increase more sale and earn more profit? Is it ethical profitable business?

3-Would you use this cement on foundations for your own house?

2. Given below are comparative balance sheets and an income statement for the Copper Corporation:

(Look to attached picture)

All sales were made on account. Cash dividends declared during the year totaled $29,300.

Compute and interpret the following:

a Average accounts receivable turnover

b Book value per share at the end of the current year

c Earnings per share

d Return on assets

e Return on ordinary shareholders equity

3. Saudi Electricity Company management has just completed an assessment of the companys assets and liabilities as on 31-12-2016 and has obtained the following information.

a) 1-The firm has total current assets worth $625,000 at book value and $519,000 at market value.

b) Its long-term assets include plant and equipment valued at market for $695,000, While their book value is $940,000.

c) The Companys total current liabilities are valued at market for $543,000, while their book value is $495,000. Both the book value and the market value of long-term debt is $350,000.

d) If the companys total assets are equal to a market value of $1,214,000 (book value of $1,565,000),

From the above information:

What are the book value and market value of its stockholders equity?

4. Critical thinking

Your friend, Khaled, believes that since capital markets are efficient, he doesn't need to read the financial press or be involved in stock research before purchasing stocks for his portfolio. He simply throws darts at the stock pages and buys the stocks the darts hit. Is stock research and analysis important when buying and selling stocks in an efficient market?

5. Give an example of how a conflict of interest may arise between Bondholders and Stockholders?

Copper Corporation Copper Corporation Balance Sheets Current Year Income Statement for the Jan. 1 Current Year Dec. 31 Cash 31,600 26,900 sales $936,000 A c c o u n t s 252 ooo 216.000 receivable Cost of goods sold Gross profit on Inventory 173,000 178,000 $421,000 sales Equipment (net) 1129.000 152.000 O p e r a t i n g expenses (332.000) $585.60 $572.900 Operating income 89,000 Interest expense A c c o u n t s $135,00 $147,000 payable income taxes 139.000) D i v i d e n d s 18,000 14,000 payable Profit Share capital, $9 90,000 90,000 par earnings i n e d 342.600 321.900 ss12aca All sales were made on account. Cash dividends declared during the year totaled $29,300