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:

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.

The main goal of the financial manager is ____________________.

When the risk of an investment in high, the rate of return required by the investor will be ________.

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	Increase/Decrease/ No effect	Value of effect
Revenues		$
Earnings		$
Receivables		$
Inventory		$
Cash		$

(10 points; 1 each)

Bogus Goods Corp. has additions to retained earnings for the year just ended of $550,000. The firm paid out $260,000 in cash dividends, and it has ended total equity of $3.1 million. If the company currently has 510,000 shares of common stock outstanding:

What are earnings per share? (2 points)

Dividends per share? (2 points)

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)

Prepare a 2015 income statement for Nike Inc. based on the following information: Nike had sales of $840,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $680,000 $115,000 and $165,000 respectively. In addition, the company had an interest expense of $80,000 and a tax rate of 30 percent. (Ignore any tax loss carryback or carry forward provisions.)

What is Nike?s net income for 2015? (5 points)

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

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

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. (6 points)

(Options are provided when attempting question)

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	800	350	400	120	50
Firm B	80	35	60	8	10

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)

Firm A is most likely to default on its debt

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.

Predator Punks Inc. has current assets of $14,000, net fixed assets of $32,500, current liabilities of $13,400, and long-term debt of $16,800.

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

How much is net working capital? (3 points)

XYZ Company Ltd. has EBIT of $2.5 million and a 17% tax rate. It had $350,000 in depreciation expenses with a $150,000 increase in working capital. It had another $120,000 in capital expenditures. What is its free cash flow? (3 points)

$2,155,000

$2,800,000

$2,850,000

$1,950,000

Select all that is true about the Cash flow of the firm. (3 points)

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.

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.

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

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

Positive operating free cash flows are equal to the cash flows distributed to the firm?s investors (both debt and equity).

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.

Which of the following are considered as sources of cash from operating activities.

Select three that apply. (2 points)

Increase in accounts payable

Increase in accounts receivable

Depreciation and amortization

Increase in accrued income taxes

Increase in inventories

Which of the following are considered sources of cash from financing activities. Select three that apply. (2 points)

Increase in notes payable

Increase in long-term debt

Purchase of treasury bonds

Payment of dividends

Increase in share capital

1 M MGMT 2023 Financial Management 1 - Tutorial Sheet # 1 Due October 1, 2016, 11:55 PM ECT. To be posted to Moodle using the Quiz Activity Resource. 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. 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. The main goal of the financial manager is ____________________. h. When the risk of an investment in high, the rate of return required by the investor will be ________. 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 $ 1 M $ Receivables Inventory $ Cash $ (10 points; 1 each) 3. Bogus Goods Corp. has additions to retained earnings for the year just ended of $550,000. The firm paid out $260,000 in cash dividends, and it has ended total equity of $3.1 million. If the company currently has 510,000 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-tobook ratio? (2 points) v. The price-earnings ratio? (2 points) 4. Prepare a 2015 income statement for Nike Inc. based on the following information: Nike had sales of $840,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $680,000 $115,000 and $165,000 respectively. In addition, the company had an interest expense of $80,000 and a tax rate of 30 percent. (Ignore any tax loss carryback or carry forward provisions.) a) What is Nike's net income for 2015? (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. (6 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) Book Equity Debt Market Equity Operating Income Interest Expense Firm A 800 350 400 120 50 Firm B 80 35 60 8 10 1 M 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. 7. Predator Punks Inc. has current assets of $14,000, net fixed assets of $32,500, current liabilities of $13,400, and long-term debt of $16,800. 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 $2.5 million and a 17% tax rate. It had $350,000 in depreciation expenses with a $150,000 increase in working capital. It had another $120,000 in capital expenditures. What is its free cash flow? (3 points) a) b) c) d) $2,155,000 $2,800,000 $2,850,000 $1,950,000 9. Select all that is true about the Cash flow of the firm. (3 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 10. Which of the following are considered as sources of cash from operating a) b) c) d) e) activities. Select three that apply. (2 points) Increase in accounts payable Increase in accounts receivable Depreciation and amortization Increase in accrued income taxes Increase in inventories 11. Which of the following are considered sources of cash from financing activities. Select three that apply. (2 points) a) b) c) d) e) Increase in notes payable Increase in long-term debt Purchase of treasury bonds Payment of dividends Increase in share capital Debt Book Equity Market Equity Operating Income Interest Expense Firm A 800 350 400 120 50 Firm B 80 35 60 8 10 a) What is the market debt-to-equity ratio of each firm? ( Answer to 2 decimal places) (2 points) Firm A Firm B 2.00 1.33 b) What is the book debt-to-equity ratio of each firm? Firm A Firm B 2.29 2.29 c) What is the interest cover ratio of each firm? Firm A Firm B 2.40 0.80 d) Based on your calculations above, which of the following statement is most correct about firms A and B? Firm B is most likely to default on its debt Lenders are more likely to favor Firm A 4. Prepare a 2015 income statement for Nike Inc. based on the following information: Nike had sales of $840,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $680,000 $115,000 and $165,000 respectively. In addition, the company had an interest expense of $80,000 and a tax rate of 30 percent. (Ignore any tax loss carryback or carry forward provisions.) a) What is Nike's net income for 2015? (5 points) b) What is Nike's operating cash flow? c) What could be the reason for the difference in (a) and (b). (2 points) Income Statement Sales Cost Of Goods Sold Gross Profit administrative and selling expenses Depreciation EBIT Interest Expense Net Loss 840000 680000 160000 115000 165000 -120000 80000 -200000 b) What is Nike's operating cash flow? -35000 What could be the reason for the difference in (a) and (b) Depreciation may want to evaluate the chances of being repaid money they may have lent to the organization may want to determine credit worthiness to compare performance overtime to decided whether or not to grant credit to a company to assess organizational or industry financial health and performance Lenders credit-rating agencies Investors Suppliers Investors