Session 1 Statement of Cash Flows

1. Define Statement of Cash Flows?

2. Define Cash Flows from Operating, Investing, and Financing Activities

3. How does an increase in Accounts receivable impact CFO?

4. How does an increase in Accounts payable impact CFO?

5. Net Income: 100,000 Depreciation: 10,000 Change in Operating Assets = 15,000 Change in Operating Liabilities = (5,000) PPE (net) on 1/1/15 = 40,000 PPE(net) on 12/31/15 = 80,000 Change in Long Term Liabilities = 20,000 Change in common stock = 15,000 Dividends paid = 6,000 a. Calculate CFO? b. Calculate CFI? c. Calculate CFF?

Financial Statements

1. A high-quality customer just purchased $500,000 worth of product from your company. The contract calls for immediate delivery of the product with a cash payment of $300,000 today and $200,000 to be paid 60 days. The expense associated with the product is $300,000, of which $100,000 has not been paid to your supplier. Under accrual based accounting system, how much revenue and expense will the company report?

2. A firm reported retained earnings of $500 in 12/31/20x2. For 12/31/20x3, the firm reports sales of $2,000, margin of 25% and dividend payout ratio of 50%. What is the retained earnings on 12/31/x3?

3. What financial statement is prepared at a point in time?

4. What financial statements are prepared for a period of time?

Time Value of Money

1. A stock will be worth $50 at the end of the year and will pay a dividend of $5. How much should an investor pay for the stock if the investor expects a rate of return of 15%?

2. An investor paid $45 for a stock today that will pay a dividend of $5 at the end of the year. How much should the stock be worth at the end of the year if the investor expects a rate of return of 15%?

3. An investor will receive $15,000 at the end of every year for the next 10 years from an investment. If the interest rate is 8%, what is the present value of the investment?

4. An investor expects $80,000 from an investment in 10 years. If the interest rate is 8% what is the present value of the investment.

5. A person wants to retire 15 years from today and would like to have an annual income of $250,000 per year for 10 years starting in 15 years. The discount rate is 6%. What is the present value? CAPM Model and Efficient market hypothesis a. Define efficient Frontier? b. Where would a risk averse investor fall on the efficient frontier? c. Where would a risk taking investor fall on the efficient frontier? d. What is Beta? e. Define efficient market hypothesis as it relates to a firm? f. What is the intrinsic value of a stock under efficient market hypothesis?

Equity and Valuation

1. An investor wishes to know what the value of a common stock is if it pays a dividend of $7.00 today. The companys dividend growth rate is 5.5% and the investor expects the stock to earn 7%. What is the value?

2. If a common stock is worth $80 and the dividend growth rate is 5% with a dividend expected to pay $2.00 in a years time, what is the expected rate of return?

3. An investor wishes to know what the value of preferred stock, when the dividend is $3.00 per share and the expected rate of return is 6.5%?

Debt and interest rates

1. A bond issued with a face value of $1,000 pays a 5% coupon rate and matures in seven years. If an investor wants a yield of 5%, what is the investor willing to pay for the bond?

2. An investor wants to know what the yield to maturity is for a $1,000 bond with a 4.5% coupon rate that matures in 5 years if the current market price is $955?

3. A $1,000 bond matures in six years. The coupon rate is 6% and interest is paid semi- annually. The current market price is 1,075. What is the yield?

Capital Budgeting

1. What is capital budgeting?

2. What information is needed for capital budgeting?

3. Define NPV?

4. A company plans to invests $10,000 in a project that will generate cash flows of 6,000, 5,000, and 4,000 during its three year useful life. If the discount rate is 8%, what is the NPV for the project?

5. A company plans to invests $10,000 in a project that will generate cash flows of 6,000, 5,000, and 4,000 during its three-year useful life. What is the IRR for the project?

6. A company reports the following as a result of a new project: Increase in revenues = 100,000 Increase in variable and fixed costs = 30,000 Depreciation = 10,000 Tax rate = 35% Increase in working capital = 10% of increase in revenue

What is the differential annual cash flow?

Firm Valuation

1. Define free cash flow? Cash flows from operating activities minus cash necessary for reinvestment in PPE

2. Financial data for Intel is given below for 2014 EBIT 800,000 Depreciation 30,000 Change in working capital (10,000) Net capital expenditures 15,000 Tax rate 35% What is the free cash flow?

3. What ratio is used to value a firm using the comparables method?

Cost of Capital

1. Define WACC?

2. If a company has a capital structure of $5 million common stock with a cost of 17%, $2 million bonds at 4%, $1 million of Short Term Debt with a cost of 7%, and $2 million preferred stock with a cost of 3%, what is the Weighted Average after tax Cost of Capital? The company has a 35% tax rate.

3. If a company has a capital structure of $5 million common stock with a cost of 17%, $2 million bonds at 4%, $1 million of Short Term Debt with a cost of 7%, and $2 million preferred stock with a cost of 3%, what is the Weighted Average after tax Cost of long term debt? The company has a 35% tax rate.

4. How does a rating downgrade/upgrade impact the cost of capital?

Financial Forecasting

1. What is the Sustainable Growth Rate given the following: Net income is 600,000 Total Assets are 3.0 million Equity is 2 million Dividend is 100,000

2. A firm reports projected sales of 200 million. A/R is expected to be 20% of sales, PPE is expected to be 50% of sales, and A/P is expected to be 10% of sales and proforma income is expected to be 20 million. The firm has 15 million in equity and 12 million in debt. What is the DFN?

3. APY also known as EAY If APR is 15% and interest is compounded monthly what is the APY?

Capital Structure

1. What is the Degree of Financial Leverage given Sales of 200,000. Variable Costs of 60,000, fixed costs of 20,000 and interest expense of 10,000?

2. What is the risk posed by excessive debt?

3. What is the Degree of Operating Leverage given Sales of 100,000. Variable Costs of 60,000 and EBIT of 10,000?

4. Based on the DOL above, what is the relationship between increases or decreases in sales revenue and increases or decreases in EBIT?

Working Capital Management

1. How do firms manage working capital?

2. What ratios are used to determine effective working capital management?

3. A/R = 15,000 Inventory = 25,000 Equipment = 100,000 Land = 60,000 A/P = 20,000 Long term debt = 50,000 Equity = 75,000 What is the current ratio?