Question 1 [Theory]: Understanding Financial Statements [Chapter 3 Study Questions 3.1, 3.2, 3.3, 3.4]

  Develop your responses by reviewing peer-reviewed articles, professional publications and/or credible texts.
Part 1 Describe the content and the importance of the balance sheet and the income statement.
Part 2 From the firm’s perspective, how are dividends different from interest payments?
Part 3 What is a firm’s net working capital, and what does it tell you about the liquidity of a firm?


Question 2 [Calculation-based]: The Income Statement [Chapter 3 Study Questions 3.2 and Study Problems 3.1, 3.2, 3.3]

(Refer to Example on page 46 of Textbook)

  Construct an Income Statement. Use an Excel spreadsheet and/or tables to present your work. Show all workings.
Part 1 At the end of its third year of operations, the Sandifer Manufacturing Company had:

·         $4,500,000 in revenue;

·         $3,375,000 in cost of goods sold;

·         $450,000 in operating expenses, which included a depreciation expense of $150,000;

·         a tax liability equal to 30% of the firm’s taxable income.

a.    Construct an Income Statement with the above data.

b.    What is the net profit of the firm for the year?

c.    Explain how net profit differs from gross profit and operating profit?

d.    Analyse the data and outcome. What information can we derive from Sandifer’s Income Statement?

Part 2 Continued from Part 1: Sandifer Manufacturing Company (from the previous problem) plans to reinvest $50,000 of its earnings back in the firm.

How much profit is left for the payment of a cash dividend to Sandifer’s shareholders?



Question 3: [Calculation-based] Financial Analysis [Chapter 4 Study Questions 4.4 and 4.10; Study Problems 4.5 and 4.8]

  Use an Excel spreadsheet and/or tables to present your calculations. Show all workings.
Part 1 Liquidity Analysis Calculation: The King Carpet Company has $3, 000, 000 in cash and a total of $12,000,000 in current assets. The firm’s current liabilities equal $6,000,000 such that the firm’s current ratio equals 2. The company’s managers want to reduce the firm’s cash holdings to $1,000,000 by paying $500,000 in cash to expand the firm’s truck fleet, and using $1,500,000 in cash to retire a short-term note. Central to the decisions is the issue of liquidity.

a.    What does the term liquidity mean in the context of the firm’s financial condition?

b.    What financial ratios can you use to analyse and assess liquidity?

c.    If they carry this plan through, demonstrate the effect on the firm’s current ratio?

d.    How we can we determine whether The King Carpet Company is more or less liquid than other firms?


Part 2 Profitability Analysis Calculation: The Allen Corporation had sales in 2015 of $65 million, total assets of $42 million and total liabilities of $20 million. The annual interest rate on the company’s debt is 6%, and its tax rate is 30%. The operating profit margin is 12%.

a.    Compute the firm’s 2015 operating profit and net profit.

b.    How would you determine if the frim was achieving reasonable profit margins?

c.    Calculate the firm’s return on assets and return on equity (hint: you can assume that interest must be paid on all of the firm’s liabilities) and describe what aspect of the firm’s performance you are measuring.


Question 4: [Calculation-based] Time Value of Money [Chapter 5 Study Problems 5.3 and 4.8]

  Use an Excel spreadsheet and/or tables to present your calculations. Show all workings.
Part 1 Future Value Calculation: ‘Saving for your first house’ – You are hoping to buy a house in the future and recently received an inheritance of $50,000. You intend to use your inheritance as a deposit on your house.

a.    If you put your inheritance in an account that earns 7% interest compounded annually, how many years will it be before your inheritance grows to $75 000?

b.    If you let your money grow for 10.25 years at 7% compounded annually, how much will you have?

c.    How long will it take your money to grow to $75 000 if you move it into an account that pays 3% compounded annually?

d.    How long will it take your money to grow to $75 000 if you move it into an account that pays 11% compounded annually?

e.    What does all this tell you about the relationship among interest rates, time and future sums?


Part 2 Present Value: Sarah Wiggum would like to make a single investment and have $2 million at the time of her retirement in 35 years. She has found a managed fund that will earn 4% annually.

a.    How much will Sarah have to invest today?

b.    What if Sarah has a finance degree and learned how to earn a 14% annual return? How soon could she then retire?




Question 5: [Calculation-Based] Risk and Return [Chapter 7 Study Questions 7.2, 7.3 and 7.6; Study Problems 7.1 and 7.2 ]

  Use an Excel spreadsheet and/or tables to present your calculations. Show all workings.
Part 1 Calculating rates of return: On 12 December 2007, the ordinary shares of Qantas Airways Ltd (QAN) were trading for $5.75.

One year later, the shares sold for $2.24. During that period, Qantas paid dividends totalling $0.35.

a.    What rate of return would you have earned on your investment had you purchased the shares on 12 December 2007 and sold them on 12 December 2008?

b.    Describe, in your own words, the concept of a realised of return.

c.    How do cash dividends affect the realised rate of return from investing in ordinary shares?

d.    Why is volatility in an investment’s rate of return a reasonable indication of the risk of an investment?

Part 2 Calculating rates of return: The S&P/ASX 200 share price index represents a portfolio which comprises the 200 largest companies listed on the Australian Securities Exchange. On 12 December 2007, the index had a value of 6615.2 and on 12 December 2008 the index had a value of 3510.4.3. If the average dividend paid on the shares in the index is approximately 4% of the value of the index at the beginning of the year, what is the rate of return earned on the S&P/ASX 200 index?

What is your assessment of the relative riskiness of the Qantas Airways investment (analysed in the previous problem) compared to investing in the S&P/ASX 200 index (recall from Chapter 2 that you can purchase managed funds that mimic the returns on the index)?


Question 6: [Theory] Risk and Return [Chapter 8 Study Questions 8.3, 8.5, 8.6 and 8.7]

  Unpack the question and develop your responses by reviewing journal articles, professional publications and/or credible texts.

Part 1
Describe the relationship between the expected rate of return for an individual investment and the expected rate of return for a portfolio of several investments.
Part 2 Portfolio diversification is affected by the volatility of the returns of the individual investments in the portfolio as well as the correlation among the returns. Explain this statement.



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