GC UNIVERSITY FAISALABAD

DEPARTMENT OF COMMERCE
DISTANCE LEARNING PROGRAMME
M.Com (2 Years)

CORPORATE FINANCE
ASSIGNMENT NO.1
TOTAL MARKS
100
NOTE: Attempt all questions, each question carry equal marks.
Last date for submission of Assignment NO.1 is 10-Jan-2015.
Late submission of assignments will not considered in any case or by any means
Q.1:
a) What is Corporate Finance? What is the goal of the financial management? What is the
capital budgeting decision?
(05)
b) What is an agency relationship? What are agency problems and how they do come about?
What are agency costs? What incentives do mangers in large corporations have to
maximize the share value?
(05)
Q.2: Prepare a multi-step income statement for Freida, Incorporated (a furniture retailer) for the
year ending December 31, 2013 given the information below:
(04+02+04 = 10)
Interest expense
Beginning inventory
Depreciation expense
Management salaries
Advertising expenditures
Ending inventory
Gross Sales
Taxes
Returns and allowances
Lease payments
Materials purchases
R&D expenditures
Repairs and maintenance costs

17,090
63,210
12,510
17,950
12,930
68,390
462,720
3,270
10,210
39,270
228,580
4,890
2,910

a) What is Friedas gross profit, operating profit, earnings before taxes, and net income?
b) What is Friedas net profit margin?
c) Assuming that on Frieda December 31, 2012 Balance Sheet, Accumulated depreciation
was $212,820 and that during 2013 Frieda did not sell any fixed assets, what would
Friedas Accumulated depreciation value be on December 31, 2013?

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Q.3:

(06+04= 10)

a) Use the following information for the London Prime Company to prepare a statement of
sources and uses of cash for the year ended December 31, 2013:
LONDON PRIME COMPANY
Balance Sheets, December 31
2013
2012
Cash
2,00,000
1,80,000
Accounts Receivable
5,80,000
5,10,000
Inventory
1,020,000
9,70,000
Prepaid expenses
50,000
70,000
Property, Plant, & Equipment
30,000,000
25,000,000
Less Accumulated
Depreciation
(15,000,000) (12,000,000)
Goodwill (net)
9,000,000
10,000,000
Total Assets
25,850,000
24,730,000
Accounts Payable
3,00,000
3,40,000
Income Tax Payable
4,50,000
2,90,000
Long-Term Debt
9,000,000
10,000,000
Common Stock
8,000,000
8,000,000
Retained Earnings
8,100,000
6,100,000
Total Liabilities and Owners Equity
25,850,000
24,730,000
b) What is a source of cash? Give three examples. What is a use, or application, of cash?
Give three examples.
Q.4: Why corporations need financial markets and institutions?

(10)

Q.5: Here are simplified financial statements of MedPhone Corporation from a recent year,
complete the tasks assigned below:
(07 + 03= 10)
INCOME STATEMENT
(Figures in millions of Euros)
Net Sales
Cost of Goods Sold
Other Expenses
Depreciation
Earnings Before Interest and Taxes (EBIT)
Interest Expenses
Income Before Tax
Taxes
Net Income
Dividends

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16,277
4,994
4,980
3,097
3,156
843
2,313
701
1,612
1,175

BALANCE SHEET
(Figures in Millions of Euros)
End of Year
Assets
Cash and marketable securities
Receivables
Inventories
Other Current Assets
Total Current Assets
Net Property, Plant, & Equipment
Other Long-Term Assets
Total Assets

1)

2)

Start of Year

109
2,930
231
1,066
4,366
24,567
5,185
34,088

194
3,063
293
1,146
4,696
24,495
4,637
33,828

Liabilities and Shareholders Equity

Payables
3,154
3,739
Short-Term Debt
1,745
1,935
Other Current Liabilities
998
968
Total Current Liabilities
5,897
6,642
Long-Term Debt & Leases
8.632
8,405
Other Long-Term Liabilities
7,599
7,563
Shareholders Equity
11,960
11,218
Total Liabilities & Shareholders Equity
34,088
33,828
Calculate the following financial ratios:
1. Long-term Debt ratio
8. Inventory turnover
2. Total debt ratio
9. Days in inventory
3. Times Interest earned
10. Average collection period
4. Cash coverage ratio
11. Return on equity
5. Current ratio
12. Return on assets
6. Quick ratio
13. Net profit margin
7. Operating profit margin
14. Equity Multiplier
Prepare a common-size balance sheet for MedPhone using its balance sheet of both years.

Q.6: Mullineaux Corporation has a target capital structure of 50 percent common stock, 5
percent preferred stock, and 45 percent debt. Its cost of equity is 15 percent, the cost of preferred
stock is 6 percent, and the cost of debt is 8 percent. The relevant tax rate is 35 percent.
a) What is Mullineauxs WACC?
b) The company president has approached you about Mullineauxs capital structure. He wants
to know why the company doesnt use more preferred stock financing because it costs less
than debt. What would you tell the president?
Q.7: A General Motors bond carries a coupon rate of 8 percent, has 9 years until maturity,
and sells at yield to maturity of 7 percent.
(02+04+04 = 10)
a. What interest payments do bondholders receive each year?
b. At what price does the bond sell? (Assume annual interest payments)
c. What will happen to the bond price if the yield to maturity falls to 6 percent?

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Q.8: Solve the following:

(05*02 = 10)

a) Battles Fried Chicken Company has a debtequity ratio of 0.80. Return on assets is 9.2
percent, and total equity is $520,000. What is the equity multiplier? Return on equity?
Net income?
b) If Roten Rooters, Inc., has an equity multiplier of 1.35, total asset turnover of 1.30, and a
prot margin of 8.5 percent, what is its ROE?
c) A firm has long-term debt equity ratio of 4. Shareholders equity is Rs.1 million. Current
Assets are Rs. 2,00,000, and the current ratio is 2.0. The only current liabilities are notes
payable. What is the Total debt ratio?
d) Star Lakes, Inc., has a total debt ratio of .29. What is its debtequity ratio? What is its
equity multiplier?
e) Braam Fire Prevention Corp. has a prot margin of 8.70 percent, total asset turnover of
1.45, and ROE of 18.67 percent. What is this rms debtequity ratio?
Q.9: Eastern Electric currently pays a dividend of about $1.64 per share and sells for $27 a
share.
(05+05 = 10)
a. If investors believe the growth rate of dividends is 3 percent per year, what rate of return
do they expect to earn on this stock?
b. If investors required rate of return is 10 percent, what must be the growth rate they
expect of the firm?
Q.10: If Gentleman Gym just paid its annual dividend of $3 per share, and it is widely
expected that dividend will increase by 5 percent per year indefinitely. (04*2.5 = 10)
a. What price should the stock sell at? The discount rate is 15 percent.
b. How would your answer change if the discount rate were only 12 percent? Why does the
answer change?
c. What is market equilibrium? When a stock market will be considered in equilibrium?
d. What is efficient market? What are different stages of efficient markets? Explain briefly.

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