Principles of Finance
Q1. Identify the key financial decisions facing the financial manager of any business firm and Explain the meaning of each decision? (1 mark)
Q2. What can happen if a firm is poorly managed? (1 mark)
Q3. If the expected inflation rate is 10 percent and the real rate of interest is 4 percent:
Compute the nominal rate of interest. (Hint: use equation 2.1) (0.5 mark)
Briefly differentiate between the nominal and the real rates of interest. (0.5 mark)
Q4. Nimitz Rental Company provided the following information to its auditors. For the year ended March 31, 2011, the company had revenues of $878,412, general and administrative expenses of $352,666, depreciation expenses of $131,455, leasing expenses of $108,195, and interest expenses equal to $78,122.
If the company’s tax rate was 34 percent, what is its net income after taxes? (1 mark)
Q5. Modern Appliances Corporation has reported its financial results for the year ended December 31, 2011.
Modern Appliances Corporation
Income Statement for the Fiscal
31-Dec-11
Sales
5,398,412,000
Cost of goods sold
3,432,925,255
Gross profit margin
1,965,486,745
Selling, general, and admin. expenses
1,036,311,231
Depreciation
299,928,155
Operating income
629,247,359
Interest expense
35,826,000
EBT
593,421,359
Income taxes
163,104,554
Net earnings
430,316,805
Consolidated Balance Sheet
Modern Appliances Corporation
Balance Sheet as of December 31, 2011
Assets
Liabilities and Stockholders’ Equity
Cash and cash equivalents
$ 514,412,159
Short-term borrowing
$ 117,109,865
Accounts receivable
1,046,612,233
Trade accounts payable
466,937,985
Inventories
981,870,990
Other current liabilities
994,289,383
Other current assets
313,621,610
Total current assets
$2,856,516,992
Total current liabilities
$1,578,337,233
Net fixed assets
754,660,275
Long-term debt
1,200,691,565
Total liabilities
$2,779,028,798
Goodwill
118,407,710
Common stock
397,407,352
Other assets
665,058,761
Retained earnings
1,218,207,588
Total equity
1,615,614,940
Total assets
$4,394,643,738
Total liabilities and stockholders’ equity
$4,394,643,738
Using the information from the financial statements, complete a comprehensive ratio analysis for Modern Appliances Corporation.
a. Calculate these liquidity ratios: current and quick ratios. (0.2 mark)
b. Calculate these efficiency ratios: inventory turnover, total asset turnover. (0.2 mark)
d. Calculate these leverage ratios: total debt ratio, debt-to-equity ratio, Equity multiplier. (0.2 mark)
e. Calculate these profitability ratios: gross profit margin, net profit margin, ROA, ROE. (0.2 mark)
f. Use the DuPont identity, and after calculating the component ratios, compute the ROE for this firm. (0.2 mark)
Sample Solution
Principles of Finance
The key aspects of financial decision-making relate to financing, investment, dividend and working capital management. Decision making helps to utilize the available resources for achieving the objectives of the organization, unless minimum financial performance levels are achieved, it is impossible for a business enterprise to survive over time. Therefore financial management basically provides a conceptual and analytical framework for financial decision making. There are four main financial decisions: capital budgeting or long term investment decision (application of funds); capital structure or financing decision (procurement of funds); dividend decision (distribution of funds); and working capital management decision.
