Thursday, March 9, 2017

Financial Management SBS MBA

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Financial Management





Name (in Full) __________________________________________________________

Total Marks: _______ / 90

Answer all the questions, each question 15 carries

Question: 1
a.      Sandersen, Inc., sells minicomputers. The firm's taxable income is $1,225,000. Calculate the corporation's tax liability.

Corporate Tax Rates
$ 0–$50,000
$ 50,001–$75,000
over $10,000,000
Additional surtax:
       •5% on income between $100,000 and $335,000.
       •3% on income between $15,000,000 and $18,333,333.

Answer –

         Calculating Corporation’s Tax Liability =

b.      “Originally, the sole objective of the federal government in taxing income was to generate financing for government expenditures. Although this purpose continues to be important, social and economic objectives have been added.” Substantiate the statement with enough explanations.                                                                                                                        (15 marks)

Answer –

Originally, the sole objective of the federal government in taxing income was to generate financing for government expenditures. Although this purpose continues to be important, social and economic objectives have been added. For instance, a company may receive possible reductions in taxes if –
        i.            It undertakes certain

Question: 2                                                                                                                        
a.      Friedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration. Which investment is better, based on risk (as measured by the standard deviation) and return?

Common Stock A
Common Stock B


Answer –

Expected Rate of Return of A =

   0.20 x 12 = 2.4
+ 0.50 x 18 = 9
+ 0.

b.      “More can be said about risk, especially as to its nature, when we own more than one asset in our investment portfolio.” Define risk and explain how risk is affected if we diversify our investment by holding a variety of securities?
                                                                                                                                                                                                                                                                   (15 marks)
Answer –

Risk involves the chance an investment's actual return will differ from the expected return. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are usually measured by calculating the standard deviation of the historical returns or average returns of a specific investment.

Risk implies future uncertainty about deviation from expected earnings or expected outcome. Risk measures the uncertainty that an investor is willing to take to realize a gain from an investment.
Risks are of different types and originate from different situations. We have liquidity risk, sovereign risk, insurance risk, business risk, default risk, etc. Various risks originate due to the uncertainty arising out of various factors that influence an investment or a situation.

Diversification is a technique that reduces risk by allocating investments among various financial instruments, industries and other categories. It aims to maximize return by investing in different areas that would each react differently to the same event.

Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. Here, we look at why this is true and how to accomplish diversification in your portfolio.

Investors confront two main types of risk when investing:

Undiversifiable - Also known as "systematic" or "market risk," undiversifiable risk is associated with every company. Causes are things like inflation rates, exchange rates, political instability, war and interest rates. This type of risk is not specific to a particular company or industry, and it cannot be eliminated or reduced through diversification; it is just a risk that investors must accept.

Diversifiable - This risk is also known as "unsystematic risk," and it is specific to a company, industry, market, economy or country; it can be reduced through diversification. The most common sources of unsystematic risk are business risk and financial risk. Thus, the aim is to invest in various assets so that they will not all be affected the same way by market events.

Why We Should Diversify

Let's say we have a portfolio of only airline stocks. If it is publicly announced that airline pilots are going on an indefinite strike,and that all flights are canceled, share prices of airline stocks will drop. Your portfolio will experience a noticeable drop in value.

If, however, we counterbalanced the airline industry stocks with a couple of railway stocks, only part of your portfolio would be affected. In fact, there is a good chance that the railway stock prices would climb, as passengers turn to trains as an alternative form of transportation.

But, we could diversify even further because there are many risks that affect both rail and air because each is involved in transportation. An event that reduces any form of travel hurts both types of companies - statisticians would say that rail and air stocks have a strong correlation.

Therefore, to achieve superior diversification, we would want to diversify across the board, not only different types of companies but also different types of industries. The more uncorrelated our stocks are, the better.

It's also important that we diversify among different asset classes. Different assets - such as bonds and stocks - will not react in the same way to adverse events. A combination of asset classes will reduce our portfolio's sensitivity to market swings. Generally, the bond and equity markets move in opposite directions, so, if our portfolio is diversified across both areas, unpleasant movements in one will be offset by positive results in another.

There are additional types of diversification, and many synthetic investment products have been created to accommodate investors' risk tolerance levels. However, these products can be very complicated and are not meant to be created by beginner or small investors. For those who have less investment experience, and do not have the financial backing to enter into hedging activities, bonds are the most popular way to diversify against the stock market.

Unfortunately, even the best analysis of a company and its financial statements cannot guarantee that it won't be a losing investment. Diversification won't prevent a loss, but it can reduce the impact of fraud and bad information on your portfolio.

Question 3:                                                                                               
a.      J and S Corporation is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm's operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.

Last year J and S Corp. had $15 million in sales with net income of $1.5 million. The firm anticipates that next year's sales will reach $18 million with net income rising to $3 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.

The firm's balance sheet for the year just ended is found below:

J and S Corporation
Balance Sheet

% of Sales
Current assets
Net fixed assets
Liabilities and Owners' Equity
Accounts payable
Long-term debt
   Total liabilities

Common stock
Paid-in capital
Retained earnings

Common equity


aNot applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year's forecast of financing requirements.

Estimate J and S corp. total financing requirements (i.e., total assets) for 2001 and its net funding requirements (DFN).   

Answer –

Percentage of Sales =  =  = 40%

Forecast (This Year Data x 1.4)

CA                              $ 8400000
NFA                           $ 12600000
AP                               $ 5250000
LTD                     +     $ 5950000

b.      Give a brief summary of forecasting to determine additional (discretionary) funding (financing) needed.                                                                                                        (15 marks)

Question 4:
The balance sheet and income statement for the McDonald's are as follows.

McDonald's Corporation 2016 Income Statement ($ Millions)

Cost of goods sold

Gross profits

$ 4,971
Marketing expenses and general

    and administrative expenses
$ 1,832

Depreciation expense

Total operating expenses

$ 2,177
Operating profits

$ 2,794
Interest expenses

Earnings before taxes

$ 2,407
Income taxes

Net income before preferred stock dividends

$ 1,642
Preferred stock dividends

Net income available to common stockholders

$ 1,617


McDonald's Corporation December 31, 2016 Balance Sheet ($ Millions) Assets
$ 341
Accounts receivables 
Prepaid expenses 
   Total current assets 
$ 1,143
Gross fixed assets 
Accumulated depreciation 
   Net fixed assets 
Other assets
   Total assets
Liabilities and Equity

Liabilities (debt):

   Short-term notes payable
$ 1,629
   Accounts payable
   Taxes payable
   Accrued expenses
       Total current liabilities
$ 2,985
   Long-term debt
       Total liabilities
$ 9,310

   Preferred stock
$ 80
   Common stock:

   Par value and paid in capital
$ 708
   Retained earnings
   Treasury stock
   Total common equity
$ 8,852
       Total equity
$ 8,932
       Total liabilities (debt) and equity

a.      Calculate the following ratios:

Current ratio
Inventory turnover
Average collection period
6.5 days
Debt ratio
Total asset turnover
Fixed asset turnover
Operating profit margin
Return on common equity

Answer –

Ratios   ->
Current Ratio = = = 0.3829

Inventory Turnover =  =  = 92.07

Average Collection Period =  =  = 0.04 x 365 = 14.4

Debt Ratio =  =  = 1.042

Total Asset Turnover =  = = 0.6308

Fixed Asset Turnover = =  = 0.77

Operating Profit Margin =  =  = 0.24

Return on Equity (ROE) =    =  = 0.269
b.      Calculate the future sum of $5,000 given that it will be held in the bank 5 years at an annual interest rate of 6 percent.

Answer –
Principal = 5000
Time = 5 years

c.       Knutson Products, Inc., is involved in the production of airplane parts and has the following inventory, carrying, and storage costs:
    • Orders must be placed in round lots of 250,000 units.
    • The carrying cost for 1 unit of inventory is $ 10
    • The ordering cost is $100 per order.
                                                        i.            Determine the optimal EOQ level.
                                                      ii.            Determine the average inventory when the safety stock is 2000 units.
(15 marks)

Answer –
i. Optimum EOQ =
Where, D = Annual Demand

Question 5:

“Some of the financial techniques and strategies are necessary for the efficient operation of an international business. Problems inherent to these firms include multiple currencies, differing legal and political environments, differing economic and capital markets, and internal control problems. The difficulties arising from multiple currencies are stressed here, including the dimensions of foreign exchange risk and strategies for reducing this risk.” Elucidate.                              (15 marks)


International business includes any type of business activity that crosses nationalborders. Though a number of definitions in the business literature can be foundbut no simple or universally accepted definition exists for the term internationalbusiness. At one end of the definitional spectrum, international business isdefined as organization that buys and/or sells goods and services across two or more national boundaries, even if management is located in a single country. Atthe other end of the spectrum,

Question 6:

Explain the financial Axioms(15 marks)
  1. Risk - return trade-off

Answer- The risk-return tradeoff is the principle that potential return rises with an increase in risk. Low levels of uncertainty or risk are associated with low potential returns, whereas high levels of uncertainty or risk are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits

Dear students get fully solved assignments
Send your semester & Specialization name to our mail id :
call us at : 08263069601