Financial Management

Chapter # 1,
An Introduction to Financial Management
Goal of the firm:

The goal of profit maximization is too simplistic in that it
assumes away the problems of uncertainty of retu rns and the
timing of returns. The shareholders react to poor investment or
dividend decisions by causing the total value of the firm's stock
to fall and react to good decisions by pushing the price of the
stock upward.
The major difference between the profit maximization goal
and the goal of shareholder wealth maximization is that the latter
goal deals with all the complexities of the operating environment,
while the profit maximization goal does not.
The goal of shareholder wealth maximization must be
looked at as a long -run goal. As such, the public image of the
firm may be of concern inasmuch as it may affect sales and
legislation
Almost all financial decisions involve some sort of risk return trade off. The more risk the firm is willing to acce pt, the
higher the expected return for the given course of action
A sole proprietorship:
A sole proprietorship is a business owned by a single
individual who maintains complete title to the assets, but who is
also personally liable for all indebtedness i ncurred.
The sole proprietor maintains title to the firm's assets, has
unlimited liability, is entitled to the profits from the business, but
must also absorb any losses realized. This form of business is
easily initiated. Termination of the business comes by the owner
discontinuing the business or upon his death.
A partnership:
A partnership is an association of two or more individuals
coming together as co -owners for the purpose of operating a
business for profits. The partnership is equivalent to the sole
proprietorship, except that the partnership has multiple owners.
In a partnership, all general partners have unlimited
liability. Each partner is liable for the actions of the other
partners.
The partnership agreement dictates the basic
relationships among the partners within the firm. As with the

sole proprietorship, the partnership is terminated upon the
desires of any partner within the organization, or upon a
partner's death. Under certain conditions a partner's liability
may be restricted to the amount of capital invested in the
partnership. However, at least one general partner must remain
in the association for whom the privilege of limited liability does
not apply.
A corporation:
A corporation is a legal entity functioning separate and
apart from its owners. It can individually sue and be sued,
purchase, sell, or own property, and be subject to criminal
punishment for crimes.
The corporation is legally separate from its owners.
Ownership of the corporation is determined by the number of
shares of common stock owned by an individual. Since the
shares are transferable, the ownership in a corporation may be
easily transferred. Investors' liability is limited to the amount of
their investment. The life of the corporation is not dependent
upon the status of the investors. The death or withdrawal of an
investor does not disrupt the corporate life. However, the cost of
forming a corporation is more expensive than a proprietorship or
partnership.
Corporation
Sole Proprietorship
Partnership
Private
Public
Member
01
02-20
20-50
3-unlimited
Life
limited
limited
unlimited
Resources
limited
limited
unlimited
obligation
unlimited
unlimited
limited
Legal
No Legal
No Legal
Legal Body
Status
Body
Body
Recommended Text Book: Financial Management; Principles and Applications:

10th Edition, By Arthur J. Keown, lohn D. Martin & J. William petty
Prepared by : E-mail: irfan.gujjar@yahoo.com ,
Cell # : 0334-7481122
Chapter # 2,
Understanding Financial Statem ent, Taxes & Clash Flow
Problem 2.1A, Book page # 53:

Belmond Inc.
Income Statement
For the year ended December 31, 2003
Sale:
Cost of Sales (-):
Gross Profit (G.P):
Operating Expenses (-):
Gen & Admin Expenses (-):
Depreciation Expenses: (-):
EBIT:
Interest Expenses (-):
EBT:
Tax (-):
EA Tax:
$ 12,800
($ 5,750)
$ 7,050
($ 1,350)
($ 850)
($ 500)
($ 2,700)
$ 4,350
($ 900)
$ 3,450
($ 1,440)
$ 2,010
Belmond Inc.
Balance Sheet
On December 31, 2003
Assets
C.A:
Cash
Account Receivable
Inventory
Total (C.A)
F.A:
Building & Equipment
Acc. Depreciation
Total(F.A)
$ 16,550
$ 9,600
$ 6,500
$ 32,650
$ 122,000
($ 34,000)
$ 88,000
Total(CA + F.A)
$ 120,650
Liabilities & Equity

Notes payable
$ 600
Accounts payable
$ 4,800
long Term Debits:
Total Liabilities:
$ 55,000
$ 60,400
Shareholder Equity:
Common Stock,
Retain earning (?)
$ 45,000
$ 15,250
Total(CL + Equity)
$ 120,650

Cell # : 0334-7481122

Sharpe Mfg. Co.
Income Statement
Sale:
$ 800,000
($ 500,000)
$ 300,000
($ 280,000)
$ 20,000
Cost of Sales (-):

Gross Profit (G.P):
($ 280,000)
EBIT:
Note:
It is declared in the question that we have to ignore tax and
Interest expenses
Sharpe Mfg. Co.
Balance Sheet
Assets
C.A:
Cash
Account Receivable
Inventory
Total (C.A)
F.A:
Machinery & Equipment
Acc. Depreciation
Total(F.A)
$ 96,000
$ 120,000
$ 110,000
$ 326,000

Notes payable
$ 100,000
Accounts payable
$ 90,000
Long Term Debts

Total Liabilities:
$ 700,000 Shareholder Equity:
($236,000)
$ 464,000
Common Stock,
Retain Earning Prior year (?)
Retain Earning Current year (?)
Total(CA + F.A)
$ 790,000 Total(CL + Equity)
Common Stock,
Shareholder Equity:
$ 160,000
$ 350,000
$ 320,000
$ 100,000
$ 20,000
$ 790,000
$ 320,000
$ 100,000
$ 20,000
$ 440,000

Cell # : 0334-7481122

Delaney. Inc
Income Statement
For the year ended
Sale:
Cost of Sales (-):
Gross Profit (G.P):
EBIT:
EBT:
($ 400,000)
($ 100,000)
$ 4,000,000
($ 2,000,000)
$ 2,000,000
($ 500,000)
$ 1,500,000
($ 150,000)
$ 1,350,000
Computation of Tax
Income Level
Amount
$ 0 - $ 50,000
$ 50,000
$ 50,001 - $ 75,000
$ 25,000
$ 75,001 - $ 100,000
$ 25,000
$ 100,001 - $ 335,000
$ 235,000
$ 335,001 - $ 1,350,000 $ 1,015,000
Total Income Tax
Rate
15%
25%
34%
39%
34%
Income Tax
$ 7,500
$ 6,250
$ 8,500
$ 91,650
$ 345,100
$ 459,000
The tax Liability Is = $ 459,900

Note:
The Dividend will be paid after the deduction of Tax from net Income
that is :
EBT:
Tax (-):
EA Tax:
Dividend(-):
Retain Earning
$ 1,350,000
($ 459,000)
$ 891,000
($ 25,000)
$ 866,000

Cell # : 0334-7481122

Rose, Inc.
Income Statement
For the year ended
Sale:
Cost of Sales (-):
Gross Profit (G.P):
($ 2,600,000)
EBIT:
EBT:
Tax (-):
EA Tax:
$ 6,000,000
($ 3,000,000)
$ 3,000,000
($ 2,600,000)
$ 400,000
($ 30,000)
$ 370,000
($ 125,800)
$ 244,200
Computation of Tax
Income Level
Amount
$ 0 - $ 50,000
$ 50,000
$ 50,001 - $ 75,000
$ 25,000
$ 75,001 - $ 100,000
$ 25,000
$ 100,001 - $ 335,000
$ 235,000
$ 335,001 - $ 370,000
$ 35,000
Total Income Tax
Rate
15%
25%
34%
39%
34%
Income Tax
$ 7,500
$ 6,250
$ 8,500
$ 91,650
$ 11,900
$ 125,800

Cell # : 0334-7481122

Pamplin Inc.
Statement of Free Cash Flow
From Asset Prospective
From Finance prospective
1. EBIT
$ 360,000
Depriciation
$ 200,000
EBIT &DA
$ 560,000
Tax payment ($ 120,000)
After Tax cash $ 440,000
$ 440,000
Flow
2. Change In working Capital
C.A
cash
($ 50,000)
A/C Receivable ($ 25,000)
Inventory
$ 75,000
Change In Current Asset
C.L
A/C payable
($ 50,000)
$ 00
Payment of Interest ($ 60,000)

Payment of Dividend ($ 80,000)
Increase/Decrease
in Note Payable
$ 150,000
Increase / Decrease
in Long term Debts
$ 00
Increase in Stocks
Finance Free Cash
Flow
$ 00
$ 10,000
($ 50,000)
3. Change In Fixed Asset

Plant & equipment
($ 400,000)
Free Cash Flow from Asset Prospective ($ 10,000)

Cell # : 0334-7481122

TP Jarmon Company.
1. EBIT
$ 80,000
Depriciation
$ 30,000
EBIT &DA
$ 110,000
$ 82,900
Flow
C.A
cash
($ 1,000)
Payment of Interest
($ 10,000)
Payment of Dividend
($ 31,800)
Increase/Decrease in
Note Payable
($ 2,000)
Increase / Decrease
in Long term Debts
($ 10,000)
A/C Receivable
Inventory
Prepaid Rent
($ 9,000)
$ 33,000
Increase in Stocks
Finance Free Cash Flow
($ 100)
Market able Securities $ 200
Change In Current Asset ($ 23,100)
C.L
A/C payable
$ 9,000
Accruals
($ 1,000)
$ 8,000
Plant & equipment
($ 14,000)
Free Cash Flow from Asset Prospective $ 53,800

Cell # : 0334-7481122
$ 00
($ 53,800)

Abrams Manufacturing Company.
1. EBIT
$ 54,000
Depreciation $ 26,000
EBIT &DA
$ 80,000
$ 64,000
Flow
C.A
cash
$ 11,000
A/C Receivable
Inventory
Prepaid Expense
$ 6,000
($ 12,000)
$ 00
Payment of Interest
($ 4,000)

Increase/Decrease
in Note Payable
$ 00
Increase / Decrease ($ 70,000)

in Long term Debts
Increase in Stocks
Finance Free Cash
Flow
$120,000
$ 14,000

($ 5,000)
C.L
A/C payable
$ 5,000
Accrued Liabilities ($ 5,000)
$ 00
Plant & equipment
($ 73,000)
Free Cash Flow from Asset Prospective
($ 14,000)

Cell # : 0334-7481122
Problem 2.1B, Book page # 60:

Warner Company.
Income Statement
Sale:
Cost of Sales (-):
Gross Profit (G.P):
Gen & Admin Expenses (-):
EBIT:
EBT:
Tax (-):
EA Tax:
$ 573,000
($ 297,000)
$ 276,000
($ 79,000)
($ 66,000)
($ 145,000)
$ 131,000
($ 4,750)
$ 126,250
($ 50,500)
$ 75,750
Warner Company.
Balance Sheet
Assets

Notes payable
$ 75,000
Accounts payable
$ 102,000
Accrued Expense
$ 7,900
Tax payable
$ 53,000
Long Term Debts
$ 334,000
Total Liabilities:
$ 571,900
C.A:
Cash
$ 225,000
Account Receivable
$ 153,000
Inventory
$ 99,300
Prepaid Expense
$ 14,500
Total (C.A)
$ 491,800
F.A:
Building & Equipment $ 895,000
Acc. Depreciation
($ 263,000) Shareholder Equity:
Total(F.A)
$ 632,000
Common Stock,
Retain earning (?)
Total(CA + F.A)
$ 1,123,800 Total(CL + Equity)
$ 289,000
$ 262,900
$ 1,123,800

Cell # : 0334-7481122
10

Sabine Mfg. Co.
Income Statement
Sale:
$ 900,000
($ 550,000)
$ 350,000
($ 280,000)
$ 70,000
Cost of Sales (-):

Gross Profit (G.P):
($ 280,000)
EBIT:
Note:
It is declared in the question that we have to ignore tax and
Interest expenses
Sabine Mfg. Co.
Balance Sheet
Assets
C.A:
Cash
Account Receivable
Inventory
Total (C.A)
F.A:
Machinery & Equipment
Acc. Depreciation
Total(F.A)
$ 90,000
$ 150,000
$ 110,000
$ 350,000

Notes payable
$ 90,000
Accounts payable
$ 90,000
Long Term Debts

Total Liabilities:
$ 700,000 Shareholder Equity:
($236,000)
$ 464,000
Common Stock,
Total(CA + F.A)
$ 814,000 Total(CL + Equity)
Common Stock,
Shareholder Equity:
$ 160,000
$ 340,000
$ 320,000
$ 84,000
$ 70,000
$ 814,000
$ 320,000
$ 84,000
$ 70,000
$ 474,000

Cell # : 0334-7481122
11

Cook Inc.
Income Statement
For the year ended
Sale:
Cost of Sales (-):
Gross Profit (G.P):
EBIT:
EBT:
($ 500,000)
($ 100,000)
$ 3,500,000
($ 2,000,000)
$ 1,500,000
($ 600,000)
$ 900,000
($ 165,000)
$ 735,000
Computation of Tax
Income Level
Amount
$ 0 - $ 50,000
$ 50,000
$ 50,001 - $ 75,000
$ 25,000
$ 75,001 - $ 100,000
$ 25,000
$ 100,001 - $ 335,000
$ 235,000
$ 335,001 - $ 735,000
$ 400,000
Total Income Tax
Rate
15%
25%
34%
39%
34%
Income Tax
$ 7,500
$ 6,250
$ 8,500
$ 91,650
$ 136,000
$ 249,900

Note:
The Dividend will be paid after the deduction of Tax from net Income
that is :
EBT:
Tax (-):
EA Tax:
Dividend(-):
Retain Earning
$ 735,000
($ 249,900)
$ 485,100
($ 25,000)
$ 460,100

Cell # : 0334-7481122
12

Rose, Inc.
Income Statement
For the year ended
Sale:
Cost of Sales (-):
Gross Profit (G.P):
($ 2,600,000)
EBIT:
EBT:
Tax (-):
EA Tax:
$ 7,000,000
($ 4,000,000)
$ 3,000,000
($ 2,600,000)
$ 400,000
($ 40,000)
$ 360,000
($122,400)
$ 237,600
Computation of Tax
Income Level
Amount
$ 0 - $ 50,000
$ 50,000
$ 50,001 - $ 75,000
$ 25,000
$ 75,001 - $ 100,000
$ 25,000
$ 100,001 - $ 335,000
$ 235,000
$ 335,001 - $ 360,000
$ 25,000
Total Income Tax
Rate
15%
25%
34%
39%
34%
Income Tax
$ 7,500
$ 6,250
$ 8,500
$ 91,650
$ 8,500
$ 122,400
The tax Liability is = $ 122,400

Cell # : 0334-7481122
13

J.B Chavez Corporation.
4. EBIT
$ 330,000
EBIT &DA
$ 530,000
$ 422,000
Flow
C.A
cash
($ 50,000)
A/C Receivable ($ 20,000)
Inventory
$ 50,000
C.L
A/C payable
$ 20,000

Increase/Decrease
in Note Payable
$ 115,000
Increase / Decrease
in Long term Debts
$ 00
Increase in Stocks
$ 00
Finance Free Cash

Flow
($ 7,000)
($ 135,000) ($ 135,000)

Plant & equipment
($ 300,000)

Cell # : 0334-7481122
14

RPI Inc.
4. EBIT
$ 120,000
EBIT &DA
$ 150,000
$ 122,900
Flow
C.A
cash
$ 1,000
A/C Receivable
Inventory
Marketable
securities
Prepaid Rent
($ 4,000)
$ 43,000
$ 200
($ 100)

Increase/Decrease
in Note Payable
($ 3,000)

in Long term Debts
Increase in Stocks
$ 00
Finance Free Cash

Flow
($ 54,800)

($ 40,100)
C.L
A/C payable
$ 7,000
Accruals
($ 1,000)
$ 6,000
Plant & equipment
($ 34,000)

Cell # : 0334-7481122
15

Camron Company.
4. EBIT
$ 77,000
EBIT &DA
$ 103,000
$ 73,000
Flow
C.A
cash
($ 19,000)
A/C Receivable
$ 6,000
Inventory
($ 22,000)
Prepaid Expense $ 00
$ 35,000
C.L
A/C payable
($ 5,000)
Accrued Liabilities ($ 5,000) ($ 10,000)
Plant & equipment
($ 63,000)
Free Cash Flow from Asset Prospective
$ 35,000
Payment of Interest
($ 5,000)

Increase/Decrease
in Note Payable
$ 00

in Long term Debts
Increase in Stocks
Finance Free Cash
Flow

Cell # : 0334-7481122
$70,000
($35,000)
16
Chapter # 3,
Evaluating a Firm s Financial Perform ance
Formulas:
1
Current Ratio
Current Asset
Current Liabilities
Asset test Ratio
Debt ratio
Time interest earned
Average Collection
Period
Inventory Turnover
Fixed Asset Turnover
=
=
Total Asset turnover
Gross profit margin
=
=
10
Operating Profit Margin
11
Return On equity
Current Asset Inventories

Current Liabilities
Total Debt
Total Asset
EBIT
Interest Expense
Av. Receivable 360
credit sale
Cost of goods sold
AV. Inventory
Sales
Fixed Asset
Sales
Total Asset
Gross Profit
Sales
Operating Profit (EBIT)
Sales
Net Income
Equity
=
=

Cell # : 0334-7481122
17

Assets
C.A:
Cash
Account Receivable
Inventory
Total (C.A)
Net Fixed Assets
Total(CA + F.A)

Accounts payable
$ 100,000
Long Term Debts
$ 320,000
Total Liabilities
$ 420,000
Common Equity
$ 1,680,000
$ 201,875
$ 175,000
$ 223,125
$ 600,000
$ 1,500,000
$ 2,100,000
Following Data Required for Complete the above Balance Sheet
1 Debt ratio
Total Debt
Total Debt
Total Debt
=
=
=
=
Total Debt
Total Asset
Total Asset Debt ratio
$ 2,100,000 20%
$ 420,000
Now we will calculate inventory and for this we have to calculate

total Sales so.
Total Asset
turnover
Sales
Sales
Sales
=
=
=
=
Sales
Total Asset
Total turnover Total Asset
W e Know Gross Profit
$ 2,100,000 1
$ 2,100,000
15%
Then,
CGS will be 85 % of Total Sale = $ 2,100,000 85% = $ 1,785,000
Cost of goods sold
inventory Turnover =
AV. Inventory
Cost of goods sold
=
AV. Inventory
inventory Turnover
$ 1,785,000
=
AV. Inventory
8
AV. Inventory
$ 223,125
=
Cell # : 0334-7481122
18
Average Collection
Period
Av. Receivable
Av. Receivable
Av. Receivable
Av. Receivable 360

credit sale
Average Collection Period credit sale
360
30 $ 2,100,000
360
$ 175,000

=
Current Asset
Current Liabilities
2.5
Current Ratio
2.5
Current Liabilities
2.5
Current Liabilities
2.5
Current Ratio
1
million
2.5
2.5
Suppose X is the required short term Finance
1
million
Current Ratio
Current Liabilities
Current Ratio
Current Asset
Current Liabilities
Current Asset + X
Current Liabilities + X
2.5 + X
1+X
2.5 + X = 2 + 2 X
=
=
X = 0.5
By putting the value of x

2.5 + X
1+X
2.5 + 0.5
1 + 0.5
3 1.5
3 1.5

Cell # : 0334-7481122
19

1
Current Ratio
Debt ratio
Current Asset
Current Liabilities
$ 3,500
$ 2,000
Total Debt
Total Asset
C.L + L.L
$ 8,000
$ 2,000 + $ 2,000
$ 8,000
EBIT
Interest Expense
$ 1,700
$ 367
Av. Receivable 360
credit sale
$ 2,000 360
$ 8,000
Cost of goods sold
AV. Inventory
$ 3,300
$ 1,000
Sales
Fixed Asset
$ 8,000
$ 4,500
Sales
Total Asset
$ 8,000
$ 8,000
Gross Profit
Sales
$ 4,700
$ 8,000
Sales
$ 1,700
$ 8,000
Net Income
Equity
$ 800
$ 4,000
=
=
Time interest
earned
=
=
=
Average
Collection Period
=
=
Inventory
Turnover
=
=
Fixed Asset
Turnover
Total Asset
turnover
=
=
Gross profit
margin
=
=
=
10
Operating Profit
Margin
Return On equity
=
=
=
$ 1 . 75
0.5, (50%)
$ 4 . 63
90 Days
3.3 T imes
1.778
0.58, (58%)
0.2125 %
0.2, (20%)

Cell # : 0334-7481122
20
Operating Income return

on investment
11
Net Income
Sale
$ 800
$ 8,000
0.1

Given:
Sale =10 million, Assets =5 million &operating profit margin=10%
A:
Total Asset Turnover
Sales
Total Asset
$ 10
$5
$2
million
B:
$ 3.5
Sales
Total Asset
Sales
$5
Sales
=
=
$ 3.5 $ 5
$ 17.5
How Much Rise

Current
Previous
Increase
In Percentage(7.5 10 100)
$ 17.5
($ 10)
$ 7.5
75%
C:
Return On Investment
Operating profit m argin :
Last year operating profit margin=10%
Total Asset Turnover = 2
Current Year Total Asset Turnover = 3 . 5
Last Year
Current Year
0.1 2 = 0.2
0 . 1 3 . 5 = 0. 35
20 %
35 %

Cell # : 0334-7481122
21

Given Data:
1
2
3
4
5
6
Gross Profit Margin

Sales
Credit Sale
Current asset
Current Liabilities
Marketable securities
30% of Sale
9 million
75% of total sale
1.5 million
$ 300,000
$ 100,000
A:
Average Collection
Average Collection
Period
Av. Receivable 360

credit sale
Credit sale
9,000,000 75%
6,750,000
Average Collection
Period
562,500 360
6,750,000
30 days
Average Collection
Period
Av. Receivable
Av. Receivable 360

credit sale
6,750,000 20
360
375,000
Cost of Goods sold

AV. Inventory
Cost of Goods sold
Inventory Turnover
6,300,000
9
700,000
B:
C:
Inventory Turnover
AV. Inventory
AV. Inventory
Calculation of Cost of Goods Sold

Gross Profit Margin
Then Cost of Goods Sold
30% of Sale
70%of Sale
9,000,000 70% = 6,300,000

Cell # : 0334-7481122
22

Assets
C.A:
Cash
Account Receivable
Inventory
Total (C.A)
Net Fixed Assets
Total(CA + F.A)

Accounts payable
$ 100,000
Long Term Debts
$ 290,000
Total Liabilities
$ 390,000
Common Equity
$ 910,000
$ 173,250
$ 81,250
$ 45,500
$ 300,000
$ 1,000,000
$ 1,300,000
Following Data Required for Complete the above Balance Sheet
1 Debt ratio
Total Debt
Total Debt
Total Debt
=
=
=
=
Total Debt
Total Asset
Total Asset Debt ratio
$ 1,300,000 30%
$ 390,000
Now we will calculate inventory and for this we have to calculate

total Sales so.
Total Asset
turnover
Sales
Sales
Sales
=
=
=
=
Sales
Total Asset
Total Asset Total Asset turnover
$ 1,300,000 0.5
$ 650,000
W e Know Gross Profit = 30 %

Then,
CGS will be 70 % of Total Sale = $ 650,000 70% = $ 455,000
Cost of goods sold
inventory Turnover =
AV. Inventory
Cost of goods sold
=
AV. Inventory
inventory Turnover
$ 455,000
=
AV. Inventory
10
AV. Inventory
$ 45,500
=
Cell # : 0334-7481122
23
Average Collection
Period
Av. Receivable
Av. Receivable
Av. Receivable
Av. Receivable 360

credit sale
Average Collection Period credit sale
360
45 $ 650,000
360
$ 81,250
Problem 3.2 B, Book page # 100:

1
Current Ratio
Current Ratio
Current Asset
Current Liabilities
3
Current Liabilities
2.75
3
2.75
Suppose X is the required short term Finance
Current Ratio
1.09
million
Current Liabilities
Current Asset
Current Liabilities
Current Asset + X
Current Liabilities + X
3+X
1.09 + X
3 + X = 2.18 + 2 X
X = 0 .81
=
=
By putting the value of x

3+X
1.09 + X
3 + 0.81
1 . 09 + 0.81
3 . 81 1 . 9
3 . 81 1 .9

Cell # : 0334-7481122
24

1
Current Ratio
Debt ratio
Current Asset
Current Liabilities
$ 3,500
$ 1,800
Total Debt
Total Asset
C.L + L.L
$ 8,000
$ 1,800 + $ 2,100
$ 8,000
EBIT
Interest Expense
$ 1,500
$ 367
Av. Receivable 360
credit sale
$ 1,500 360
$ 7,500
Cost of goods sold
AV. Inventory
$ 3,000
$ 1,000
Sales
Fixed Asset
$ 7,500
$ 4,500
Sales
Total Asset
$ 7,500
$ 8,000
Gross Profit
Sales
$ 4,500
$ 7,500
Sales
$ 1,500
$ 7,500
Net Income
Equity
$ 6,80
$ 4,100
=
=
Time interest
earned
=
=
=
Average
Collection Period
=
=
Inventory
Turnover
=
=
Fixed Asset
Turnover
Total Asset
turnover
=
=
Gross profit
margin
=
=
=
10
Operating Profit
Margin
Return On equity
=
=
=
$ 1 . 94
0.48, (48%)
$ 4 . 08
72 Days
3 T imes
1.667
0.937
0.6, (60%)
0.2 %
0.16, (16%)

Cell # : 0334-7481122
25
Operating Income return

on investment
11
Net Income
Sale
$ 800
$ 8,000
0.1

Given:
Sale=11million, Assets=06 million & Operating profit margin=6%
A:
Total Asset
Turnover
Total Asset
Turnover
Total Asset
Turnover
Total Target
Turnover
Sales
Sales
Total Asset
$ 11
$6
1.83
million
2.5
million
$ 15
million
B:
=
Sales
Total Asset
Sales
$6
$ 2.5 $ 6
How Much Rise

Current
Previous
Increase
In Percentage(4 11 100)
$ 15 million
($ 11) million
$4
36.3%
C:
Return On Investment
Operating profit m argin :
Last year operating profit margin= 6%
Total Asset Turnover = 1.83
Current Year Total Asset Turnover = 3 . 5
Last Year
Current Year
0 . 6 0 . 1098 = 0 .183
0 . 6 2 . 5 = 0. 15
10 . 98 %
15 %

Cell # : 0334-7481122
26

Given Data:
1
2
3
4
5
6
Gross Profit Margin

Sales
Credit Sale
Current asset
Current Liabilities
Marketable securities
25% of Sale
9.75 million
75% of total sale
1.550,000
$ 300,000
$ 150,000
A:
Average Collection
Average Collection
Period
Av. Receivable 360

credit sale
Credit sale
9,750,000 75%
7,312,500
Average Collection
Period
562,500 360
7,312,500
28 days
Average Collection
Period
Av. Receivable
Av. Receivable 360

credit sale
7,312,500 20
360
406,250
Cost of Goods sold

AV. Inventory
Cost of Goods sold
Inventory Turnover
7,800,000
8
914,062 . 5
B:
C:
Inventory Turnover
AV. Inventory
AV. Inventory
Calculation of Cost of Goods Sold

Gross Profit Margin
25% of Sale
75%of Sale
9,750,000 75% = 7,312,500

Cell # : 0334-7481122
27
CH#4
(Financial Forecasting Planning and Budgeting)

Zapatera Enterprise
DFN For the Year 2004
2003
12,000,000
1,200,000
Sales
Net Income
% of Sales
2004
15,000,000
2,000,000
(Sale,2004 - Sale,2003 = 3,000,000 )
Balance Sheet,2003
Current Assets
Net fixed Assets
Total Assets
3,000,000
6,000,000
9,000,000
% of
Sales
25%
50%
Balance Sheet,2004
3,750,000
7,500,000
11,250,000
Liabilities & Equity:

Accounts Payable
Long-Term Debt
Total Liabilities
3,000,000
2,000,000
5,000,000
25%
NA
3,750,000
2,000,000
5,750,000
Common stock
Paid-in capital
Retained Earnings
Total Equity
1,000,000
1,800,000
1,200,000
4,000,000
NA
NA
1,000,000
1,800,000
3,200,000
6,000,000
Total L & Equity
9,000,000
11,750,000
Discretionary Financial Needed = (500,000)

Increases in assets
2,250,000
Increases in Debt (-)
(750,000)
Increases in Equity(-)
(2,000,000)
DFN
(500,000)
Note*: Retained Earnings, 2004= Retained Earnings, 2003+Net
Income, 2004 (R.E, 2004=1.2+2=3.2 million)
Cell # : 0334-7481122
28

Collection Schedule:
Current Month = 50%
1st Month = 25%
2nd Month = 25%
(A)
Cash Collection Schedule in April
Sale
Jan. 15,000
Feb. 20,000
March 30,000
April 40,000
Jan
7,500
-
(Amount In $)
Feb
March April
May
June
3,750
3,750
10,000 5,000
5,000
15,000 7,500 7,500
20,000 10,000 10,000
Total 32,500 17,500 10,000
Total(May + June)
27,500
(B)
Collections From:
April cash sales
February credit sales
March credit sales
Total
$ 20,000
$ 5,000
$ 7,500
$ 32,500

Cell # : 0334-7481122
29

Sambonoza Enterprise
Pro Forma Account Receivable
Assets
Current Asset
Fixed Asset
Total
$ 800,000
$ 1,000,000
$ 1,800,000
Calculation of Current Asset

that is 20percent of sales
Sales=$ 4,000,000
20% of sale= $ 800,000
Liabilities and Capital

Short term payable
Capital:
Equity
Retain Earning
DFN (?)
Total
$ 400,000
$ 800,000
$ 100,000
$ 500,000
$ 1,800,000
Calculation of Retain Earning

that is 5 percent of Sale
Sales=$ 4,000,000
5% of Earning = $ 200,000
Firm paid half of profit as a Dividend
Calculation of Current liabilities

That is 10 percent of total sale
Sales=$ 4,000,000
10% of sale= $ 400,000
Earning = $ 200,000 2
Retain Earning = $ 100,000

Cell # : 0334-7481122
30

Current Status
C.A
F.A
Total
Tulley Appliances, Inc.,

DFN For the Coming Year
Based 15 million Future Status
Based 20 million
5 million
C.A
6.6667 million
5 million
F.A
5.1000 million
10 million
Total
11.7667 million
C.A based on 20 million = (5 15 20 = 6.667)
(B)
Account Payable
Long Term Debt
Total Debt
1.5 million
2 million
3.5 million
Account Payable
Long Term Debt
Total Debt
2 million
2 million
4 million
Common Equity
Retain earning
Total
Total Debt + Capital
2.5 million
4.0 million
6.5 million
10 million
Common Equity
Retain earning
Total
Total Debt + Capital
2.5 million
4.5 million
07 million
11 million
Profit = sale 05 % = 20,000,000 0.05 = 1,000,000

Payment of Dividend (-) = (500,000)
Profit = 500,000
R.E based on 20 million = R.E based on 15 million + profit/net income
R.E based on 20 million = 4 + 0.5 = 4.5 million)
Financial Requirement
Available Liabilities & Equity (-)
Discretionary Financial Needed
11.7667 million
(11 million)
0.7667 million
Note*= Account Payable based on 20 million = (1.5 15 20 = 2 million)

Cell # : 0334-7481122
31

Hernandez Trucking Company
DFC For the Year 2004
2003
20,000,000
1,000,000
Sales
Net Income
% of Sales
2004
25,000,000
2,000,000
(Sale,2004 - Sale,2003 = 5,000,000 )

Balance Sheet,2003
Current Assets
Net fixed Assets
Total Assets
4,000,000
8,000,000
12,000,000
% of
Sales
20%
40%
Balance Sheet,2004
5,000,000
10,000,000
15,000,000
Liabilities & Equity:

Accounts Payable
Long-Term Debt
Total Liabilities
3,000,000
2,000,000
5,000,000
15%
NA
3,750,000
2,000,000
5,750,000
Common stock
Paid-in capital
Retained Earnings
Total Equity
1,000,000
1,800,000
4,200,000
7,000,000
NA
NA
1,000,000
1,800,000
6,200,000
9,000,000
Total L & Equity
12,000,000
14,750,000
Discretionary Financial Needed = 250,000

Increases in assets
3,000,000
Increases in Debt (-)
(750,000)
Increases in Equity(-)
(2,000,000)
DFN
250,000
Note*: Retained Earnings, 2004= Retained Earnings, 2003+Net
Income, 2004 (R.E, 2004= 4.2+2=6.2 million)

Cell # : 0334-7481122
32

Collection Schedule:
Current Month = 50%
1st Month = 25%
2nd Month = 25%
(A)
Cash Collection Schedule in April
(Amount In $)
Sale
Jan
Feb
March April
Jan. 100,000 50,000 25,000 25,000
Feb. 100,000
50,000 25,000 25,000
March 80,000
40,000 20,000
April 60,000
30,000
Total 75,000
Total(May + June)
May
-
June
-
20,000
15,000 15,000
35,000 15,000
50,000
(B)
Collections From:
April cash sales
February credit sales
March credit sales
Total
$ 30,000
$ 25,000
$ 20,000
$ 75,000

Cell # : 0334-7481122
33

Sampson Inc,
Pro Forma Account Receivable
Assets
Current Asset
Fixed Asset
Total
$ 750,000
$ 1,000,000
$ 1,750,000
Calculation of Current Asset

that is 15 percent of sales
Sales=$ 5,000,000
15 % of sale= $ 750,000
Liabilities and Capital

Short term payable
Capital:
Equity
Retain Earning
DNF (?)
Total
$ 550,000
$ 700,000
$ 150,000
$ 350,000
$ 1,750,000
For Calculation of Retain Earning

Profit = that is 6 percent of Sale
Sales=$ 5,000,000
6% of sale= $ 300,000
Firm paid half of profit as a Dividend
Calculation of Current liabilities

Retain Earning = Profit 2
That is 11 percent of total sale
Retain Earning = $ 300,000 2
Sales=$ 5,000,000
Retain Earning = $ 150,000
11% of sale= $ 550,000

Cell # : 0334-7481122
34

Current Status
C.A
F.A
Total
Carson Enterprises,
DFC For the Coming Year
Based 18 million Future Status
Based 25 million
7 million
C.A
9.7222 million
6 million
F.A
6.1000 million
13 million
Total
15.8222 million
C.A based on 20 million = (7 18 25 = 6.667)
(B)
Account Payable
1.5 million
Long Term Debt

Total Debt
2 million
3.5 million
Common Equity
Retain earning
Total
Total Debt+Capital
5.5 million
4.0 million
9.5 million
13 million
Account Payable
(1.51825)
Long Term Debt
Total Debt
2.08 million
2 million
4.08 million
Common Equity
5.5 million
Retain earning
4.650 million
Total
10.15 million
Total Debt+Capital 14.23 million
Profit = sale 5 % = 25,000,000 0.05 = 1,250,000

Payment of Dividend (-) = (600,000)
Profit = 650,000
Financial Requirement
Available Liabilities & Equity (-)
Discretionary Financial Needed
15.8222 million
(14.233 million)
1.5922 million

Cell # : 0334-7481122
35
Chapter # 9,
(Capital Budgeting Decision Criteria)
Problem 9.1A, Book page # 318

Determined the internal Rate of return on following projects
(A)
An Initial outlay
Single Free Cash flow
Period
PV
$ 10,000
$ 10,000
$ 17,182
08 years
FV (PVIF)
n=8
$ 17,182 (PVIF)
n=8
(PVIF)
$ 10,000 $ 17,182
n=8
(PVIF)
$ 0.5820
(see appendix C page A-13 in the column of "n" year 8)
u will find 0.5820 at 7%
internal Rate of return
= 7%
=
=
=
=
=
=
=
(B)
An Initial outlay
= $ 10,000
= $ 48,077
Period
= 10 years
PV
= FV (PVIF)
$ 10,000
= $ 48,077 (PVIF)n=10
$ 10,000 $ 48,077
= (PVIF)n=10
$ 0.2078
= (PVIF)n=10
= 17%

Cell # : 0334-7481122
36

(c)
An Initial outlay
= $ 10,000
= $ 114,943
Period
= 20 years
PV
= FV (PVIF)
$ 10,000
= $ 114,943 (PVIF)n=20
$ 10,000 $ 114,943
= (PVIF)n=20
$ 0.08699
= (PVIF)n=20
u will find 0.08699 at 13 %
= 13 %
(D)
An Initial outlay
= $ 10,000
= $ 13,680
Period
= 03 years
PV
= FV (PVIF)
$ 10,000
= $ 13,680 (PVIF)n=03
$ 10,000 $ 13,680
= (PVIF)n=03
$ 0.730
= (PVIF)n=03
(see appendix C page A-13 in the column of "n" years 3)
= 11%

Cell # : 0334-7481122
37

(A)
An Initial outlay
= $ 10,000
Free Cash flow at the end = $ 1,993
of each year
Period
= 10 years
PV
= FV (PVIF)
$ 10,000
= $ 1,993 (PVIF)n=10
n=10
$ 10,000 $ 1,993
= (PVIF)
n=10
$ 5.018
= (PVIF)
u will find $ 5.018 at 15 %
= 15 %
(B)
An Initial outlay
= $ 10,000
of each year
Period
= 20 years
PV
= FV (PVIF)
$ 10,000
= $ 114,943 (PVIF)n=20
$ 10,000 $ 2,054
= (PVIF)n=20
$ 4.87
= (PVIF)n=20
(see appendix E page A-17 in the column of "n" year 20)
= 20 %

Cell # : 0334-7481122
38

Determined the internal Rate of return on following project
(c)
An Initial outlay
= $ 10,000
of each year
Period
= 12 years
PV
= FV (PVIF)
$ 10,000
= $ 1,193 (PVIF)n=12
$ 10,000 $ 1,193
= (PVIF)n=12
$ 8.382
= (PVIF)n=12
(see appendix E page A-17 in the column of "n" years 12)
u will find $ 8.382 at 6 %
= 6%
(D)
An Initial outlay
= $ 10,000
of each year
Period
= 05 years
PV
= FV (PVIF)
$ 10,000
= $ 2,843 (PVIF)n=05
$ 10,000 $ 2,843
= (PVIF)n=05
3.517
= (PVIF)n=05
u will find $ 3.517 at 13%
= 13%

Cell # : 0334-7481122
39

(A)
Year
1
2
3
Cash Flow
2,000
5,000
8,000
11% D.F
0.9009 =
0.8116 =
0.731 =
Present Value
1,801
4,058
5,849
11,708
Note ** Formula (Press on calculator, 1 == 1.11= 0.9009, then =

0.8116, then =0.731)
NPV
Year
1
2
3
Cash Flow
2,000
5,000
8,000
11,708 - 10,000 = 1708
21% D.F
0.826 =
0.683 =
0.564 =
Present Value
1,652
3,415
4,515
9,582

0.683, then = 0.644)
IRR
IRR
IRR
IRR
IRR
=
=
=
=
=
11 + 1708 (11,708-9,582)
11 + 1708 2,126 (10)
11 + 0.803 (10)
11 + 8.03
19.03 %

Cell # : 0334-7481122
40
(B)
Year
1
2
3
Cash Flow
8,000
5,000
2,000
11% D.F
0.9009 =
0.8116 =
0.731 =
Present Value
7,207
4,058
1,462
12,727

0.8116, then = 0.731)
NPV
Year
1
2
3
Cash Flow
8,000
5,000
2,000
12,727- 10,000 = 2,727
35% D.F
0.74
=
0.548 =
0.406 =
Present Value
5,920
2,740
813
9,473
Note ** Formula (Press on calculator, 1 == 1.35= 0.74, then = 0.548,

then = answer will be 0.406)
IRR
IRR
IRR
IRR
IRR
=
=
=
=
=
11 + 2,727 (12,727 - 9,473)

11 + 2,727 3,254 (24)
11 + 0.838 (24)
11 + 20.11
31.11 %

Cell # : 0334-7481122
41
(C)
Year
1
2
3
4
5
6
Cash Flow
2,000
2,000
2,000
2,000
2,000
5,000
11% D.F
0.9009
0.8116
0.7311
0.6587
0.5934
0.5346
=
=
=
=
=
=
Present Value
8,108.8
1,623.2
1,462
1,317.4
1,186.8
2,673
10,064

0.8116, then = 0.731)
NPV
Year
1
2
3
4
5
6
Cash Flow
2,000
2,000
2,000
2,000
2,000
5,000
10,064- 10,000 = 64
21% D.F
0.826
0.683
0.5644
0.4665
0.3855
0.3186
=
=
=
=
=
=
Present Value
1,652
1,366
1,128.8
933
771
1,593
7,443

IRR
IRR
IRR
IRR
IRR
=
=
=
=
=
11 + 64 (10,064- 7,443)
11 + 64 2,621 (10)
11 + 0.0244 (10)
11 + 2.441
11.244 %

Cell # : 0334-7481122
42

(A)
Given Data
Cash Out flow =
Annuaty =
Rate of Return =
1,950,000
450,000
9%
(A) Net present value:

NPV
Cash out flow
Cash in flow
Cash in flow
Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=
PV of Cash in flow Less

PV of Cash out flow
1,950,000
n=6
Annuaty(FVIF)
(FVIF=1 0.09-1 0.09(1.09) )
450,000(4.486)
(4.486)
2,018,700
PV of Cash out flow
2,018,700
Less
1,950,000
68,6700
(B) Profitability Index:

Profitability Index
Profitability Index
Profitability Index
= PV of Cash inflow PV of Cash out flow

=
$ 2,018,664 $ 1,950,000
=
1.035
(C) Internal Rate of Return

For IRR
19 %
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=
We will add 10 % more with the existing Rate

n=6
(1 0.19 - 1 0.19(1.19) ) = 3.409
450,000(3.409) = 1,534,050
10
9 + 68,700 (2,018,700 -1,534, 050)
9 + 68,700 484,650 (10)
9 + 1.417
10.417
(D)
Yes, the project should be accepted

Cell # : 0334-7481122
43

Given Data
Cash Out flow =
Annuaty =
Rate of Return =
80,000
20,000
10 %
What are the Projects Payback & Discounted Payback periods?

Projects Payback
Projects Payback
= 80,000 20,000 = 04 Years
Duration
01 Years
02 Years
03 Years
04 Years
Payback
20,000
20,000
20,000
20,000
Accumulated
20,000
40,000
60,000
80,000
Discounted Payback periods

Duration
01 Year
02 Year
03 Year
04 Year
05 Year
06 Year
Free Cash Inflow

20,000
20,000
20,000
20,000
20,000
20,000
10% D.F Present Value Accumulated

0.909
18,180
18,180
0.826
16,520
34,700
0.751
15,020
49,720
0.683
13,660
63,380
0.621
12,420
75,800
0.564
11,280
Note ** Formula (Press on calculator, 1 == 1.1 = 0.909, then = 0.826,

then = 0.751, then = 0.683, then = 0.621, then = 0.564)
80,000 - 75,800
4,200
Discounted Payback period = 5 + (4,200 11,280)

Discounted Payback period = 5 + 0.37
Discounted Payback period = 5 .37 Years

Cell # : 0334-7481122
44
Net present value:

NPV
Cash out flow
Cash in flow
Cash in flow
Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=

PV of Cash out flow
80,000
n=6
Annuaty(FVIF)
(FVIF=1 0.1-1 0.1(1.1) )
20,000(4.3552)
(4.355)
87,105
PV of Cash out flow
87,105
Less
80,000
(71,05)
Note **: See appendix E Page A-17 in the column 10% of N years 6
You will find = 4.355
Profitability Index:
Profitability Index
Profitability Index
Profitability Index
Internal Rate of Return
For IRR
20 %
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=

=
$ 87,105 $ 80,000
=
1.089

n=6
(1 0.2 - 1 0.2 (1.2) ) = 3.3255
20,000 (3.3255) = 66,510
10
10 + 71,05 (87,105- 66,510)
10 + 71,05 20,595 (10)
10 + 3.449
13.4449
You will find = 3.3255 or 3.326

Cell # : 0334-7481122
45

Project (A)
Net present value:
NPV
Cash out flow
Cash in flow
Cash in flow
Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=

PV of Cash out flow
50,000
n=6
Annuaty(FVIF)
(FVIF=1 0.12 -1 0.12(1.12) )
12,000(4.111)
(4.111)
49,337
PV of Cash out flow
49,337
Less
50,000
(663)
Profitability Index
Profitability Index
Profitability Index
For IRR
2%
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=

= $ 49,337 $ 50,000
= 0.98
We will take 2 %
n=6
(1 0.02 - 1 0.02 (1.2) ) = 5.601
12,000 (5.601) = 67,217
10
2 + 17,217 (49,337 - 67,217)
2 + 17,217 17,880 (10)
2 + 9.629
11.629


Cell # : 0334-7481122
46
Project (B)
Net present value:
NPV
Cash out flow
Cash in flow
Cash in flow
Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=

PV of Cash out flow
70,000
n=6
Annuaty(FVIF)
(FVIF=1 0.12 -1 0.12(1.12) )
13,000(4.111)
(4.111)
53,443
PV of Cash out flow
53,443
Less
70,000
(16,557)
Profitability Index
Profitability Index
Profitability Index
For IRR
2%
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=

=
$ 53,443 $ 70,000
=
0.763
We will take 2 %
n=6
(1 0.02 - 1 0.02 (1.2) ) = 5.601
13,000 (5.601) = 72,818
10
2 + 2,818 (72,818 - 53,443)
2 + 2,818 19,375 (10)
2 + 1.4544
3.4544

Neither project should be accepted.

However project A is better

Cell # : 0334-7481122
47
Problem 9.1B, Book page # 321

(a)
An Initial outlay
= $ 10,000
= $ 19,926
Period
= 08 years
PV
= FV (PVIF)
$ 10,000
= $ 19,926 (PVIF)n=8
= (PVIF)n=8
$ 10,000 $ 19,926
= (PVIF)n=8
$ 0.501
= 9%
(B)
An Initial outlay
= $ 10,000
= $ 20,122
Period
= 12 years
PV
= FV (PVIF)
$ 10,000
= $ 20,122 (PVIF)n=12
$ 10,000 $ 20,122
= (PVIF)n=12
$ 0.4969
= (PVIF)n=12
u will find 0.4969at 6%
= 6%

Cell # : 0334-7481122
48
Problem 9.1 B, Book page # 321

(c)
An Initial outlay
= $ 10,000
= $ 121,000
Period
= 22 years
PV
= FV (PVIF)
$ 10,000
= $ 121,000 (PVIF)n=22
$ 10,000 $ 121,000
= (PVIF)n=22
$ 0.0826
= (PVIF)n=22
= 12 %
(D)
An Initial outlay
= $ 10,000
= $ 19,254
Period
= 05 years
PV
= FV (PVIF)
$ 10,000
= $ 19,254 (PVIF)n=05
$ 10,000 $ 19,254
= (PVIF)n=05
$ 0.5193
= (PVIF)n=05
(see appendix C page A-13 in the column of "n" years 5)
= 14%

Cell # : 0334-7481122
49

(A)
An Initial outlay
= $ 10,000
of each year
Period
= 10 years
PV
= FV (PVIF)
$ 10,000
= $ 2,146 (PVIF)n=10
n=10
$ 10,000 $ 2,146
= (PVIF)
n=10
$ 4.6598
= (PVIF)
= 17 %
(B)
An Initial outlay
= $ 10,000
of each year
Period
= 20 years
PV
= FV (PVIF)
$ 10,000
= $ 1,960 (PVIF)n=20
$ 10,000 $ 1,960
= (PVIF)n=20
$ 5.102
= (PVIF)n=20
= 19 %

Cell # : 0334-7481122
50

Determined the internal Rate of return on following project
(c)
An Initial outlay
= $ 10,000
of each year
Period
= 12 years
PV
= FV (PVIF)
$ 10,000
= $ 1,396 (PVIF)n=12
$ 10,000 $ 1,396
= (PVIF)n=12
$ 7.1633
= (PVIF)n=12
(see appendix E page A-17 in the column of "n" years 12)
= 9%
(D)
An Initial outlay
= $ 10,000
of each year
Period
= 05 years
PV
= FV (PVIF)
$ 10,000
= $ 3,197 (PVIF)n=05
$ 10,000 $ 3,197
= (PVIF)n=05
3.1279
= (PVIF)n=05
= 18%

Cell # : 0334-7481122
51

(A)
Year
1
2
3
Cash Flow
3,000
5,000
7,500
11% D.F
0.9009 =
0.8116 =
0.731 =
Present Value
2,702.7
4,058
5,482.5
12,243

0.8116, then =0.731)
NPV
Year
1
2
3
Cash Flow
3,000
5,000
7,500
12,243- 10,000 = 2,243
21% D.F
0.826 =
0.683 =
0.564 =
Present Value
2,478
3,415
4,230
10,123

0.683, then = 0.644)
IRR
IRR
IRR
IRR
IRR
=
=
=
=
=
11 + 2,243(12,243-10,123)
11 + 2,243 2,120 (10)
11 + 1.058 (10)
11 + 10.58
21.58 %

Cell # : 0334-7481122
52
(B)
Year
1
2
3
Cash Flow
9,000
6,000
2,000
11% D.F
0.9009 =
0.8116 =
0.731 =
Present Value
8,108
4,869
1,462
14,439

0.8116, then = 0.731)
NPV
Year
1
2
3
Cash Flow
9,000
6,000
2,000
14,439 - 12,000 = 2,439
35% D.F
0.74
=
0.548 =
0.406 =
Present Value
6,660
3,288
812
10,760

IRR
IRR
IRR
IRR
IRR
=
=
=
=
=
11 + 2,439 (14,439 - 10,760)

11 + 2,439 3,679 (24)
11 + 0.662 (24)
11 + 15.91
26.91 %

Cell # : 0334-7481122
53
(C)
Year
1
2
3
4
5
6
Cash Flow
2,000
2,000
2,000
2,000
2,000
2,000
11% D.F
0.9009
0.8116
0.7311
0.6587
0.5934
0.5346
=
=
=
=
=
=
Present Value
8,108.8
1,623.2
1,462
1,317.4
1,186.8
2,673
10,064

0.8116, then = 0.731)
NPV
Year
1
2
3
4
5
6
Cash Flow
2,000
2,000
2,000
2,000
2,000
2,000
10,064- 8,000 = 2,064
21% D.F
0.826
0.683
0.5644
0.4665
0.3855
0.3186
=
=
=
=
=
=
Present Value
1,652
1,366
1,128.8
933
771
1,593
7,443

IRR
IRR
IRR
IRR
IRR
=
=
=
=
=
11 + 2,064 (10,064- 7,443)

11 + 2,064 2,626 (10)
11 + 0.7859 (10)
11 + 7.859
18.85 %

Cell # : 0334-7481122
54

(A)
Given Data
Cash Out flow =
Annuaty =
Rate of Return =
2,500,000
750,000
11 %
(A) Net present value:

NPV
= PV of Cash in flow Less
PV of Cash out flow
Cash out flow = 2,500,000
n=6
Cash in flow = Annuaty(FVIF)
(FVIF=1 0.11-1 0.11(1.11) )
Cash in flow = 750,000 (4. 231)
(4.231)
Cash in flow =
3,173,250
NPV = PV of Cash in flow Less
PV of Cash out flow
NPV = 3,173,250
Less
2,500,000
NPV = 673,250
(B) Profitability Index:
Profitability Index
Profitability Index
=
$ 3,173,250 $ 2,500,000
Profitability Index
=
1.269
(C)Internal Rate of Return
For IRR
21 %
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=

n=6
(1 0.21 - 1 0.21(1.21) ) = 3.245
750,000 (3.245) = 2,433,750
10
11 + 673,250 (3,173,250 - 2,433,750)
11 + 673,250 739,500 (10)
11 + 9.104
20.104
(D)
Yes, the project should be accepted

Cell # : 0334-7481122
55

Given Data
Cash Out flow =
Annuaty =
Rate of Return =
160,000
40,000
10 %
What are the Projects Payback & Discounted Payback periods?

Projects Payback
Projects Payback = 160,000 40,000 =
Duration
01 Years
02 Years
03 Years
04 Years
Payback
40,000
40,000
40,000
40,000
04 Years
Accumulated
40,000
80,000
120,000
160,000
Discounted Payback periods

Duration
01 Year
02 Year
03 Year
04 Year
05 Year
06 Year
Free Cash Inflow

40,000
40,000
40,000
40,000
40,000
40,000
10% D.F Present Value Accumulated

0.909
36,360
36,360
0.826
33,040
69,400
0.751
30,040
99,440
0.683
27,320
126,760
0.621
24,840
151,600
0.564
22,560
Note ** Formula (Press on calculator, 1 == 1.1 = 0.909, then = 0.826,

then = 0.751, then = 0.683, then = 0.621, then = 0.564)
160,000 - 151, 600
8,400
Discounted Payback period = 5 + (8,400 22,560)

Discounted Payback period = 5 + 0.372
Discounted Payback period = 5 .372 Years

Cell # : 0334-7481122
56
Net present value:

NPV
Cash out flow
Cash in flow
Cash in flow
Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=

PV of Cash out flow
160,000
n=6
Annuaty(FVIF)
(FVIF=1 0.1-1 0.1(1.1) )
40,000(4.355)
(4.355)
174,200
PV of Cash out flow
174,200
Less
160,000
14,200
Profitability Index
Profitability Index
Profitability Index
For IRR
20 %
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=

=
$ 174,200 $ 160,000
=
1.089

n=6
(1 0.2 - 1 0.2 (1.2) ) = 3.3255
40,000 (3.3255) = 133,020
10
10 + 14,200 (174,200 - 133,020)
10 + 14,200 41,180 (10)
10 + 3.448
13.449
You will find = 3.3255 or 3.326

Cell # : 0334-7481122
57

Project (A)
Net present value:
NPV
Cash out flow
Cash in flow
Cash in flow
Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=

PV of Cash out flow
45,000
n=6
Annuaty(FVIF)
(FVIF=1 0.12 -1 0.12(1.12) )
12,000(4.111)
(4.111)
49,332
PV of Cash out flow
49,332
Less
45,000
4,332
Profitability Index
Profitability Index
Profitability Index
For IRR
2%
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=

=
$ 49,332 $ 45,000
=
1.0962
We will take 2 %
n=6
(1 0.02 - 1 0.02 (1.2) ) = 5.601
12,000 (5.601) = 67,212
10
2 + 22,217 (49,332 - 67,212)
2 + 22,217 17,880 (10)
2 + 12.425
14.425


Cell # : 0334-7481122
58
Project (B)
Net present value:
NPV
Cash out flow
Cash in flow
Cash in flow
Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=

PV of Cash out flow
70,000
n=6
Annuaty(FVIF)
(FVIF=1 0.12 -1 0.12(1.12) )
14,000(4.111)
(4.111)
57,554
PV of Cash out flow
57,554
Less
70,000
(12,446)
Note **: See appendix C Page A-17 in the column 12% of N years 6
Profitability Index
Profitability Index
Profitability Index
For IRR
2%
PVIF
IRR
IRR
IRR
IRR
=
=
=
=
=
=
=

=
$ 57,554 $ 70,000
=
0.822
We will take 2 %
n=6
(1 0.02 - 1 0.02 (1.2) ) = 5.601
14,000 (5.601) = 78,414
10
2 + 8,414 (57,554 - 78,414)
2 + 8,414 20,860 (10)
2 + 4.033
6.033 %

Neither project should be accepted.

However project A is better

Cell # : 0334-7481122
59
Chapter # 10,

(A)
Taxes Associated With This Sale
Cost
=
=
Depreciation(3,000 5 Year)
Book Value(Cost - Depreciation) =
=
Sale Price
=
Book Value
Gain (Sale - Book Value)
Taxes 34% of 20,000 (less)
30,000
(15,000)
15,000
35,000
(15,000)
20,000
(6,800)
13,200
Taxes liabilities = 6,800
(B)
If this M achine is sold on $25,000
Sale Price
Book Value
=
25,000
= (15,000)
=
10,000
=
(3,400)
=
6,800
(C)
Sale Price
=
Book Value
=
=
No gain No Loss
=
Taxes liabilities = 00
15,000
(15,000)
00
00)
(D)
Sale Price
=
Book Value
=
=
Loss (Sale - Book Value)
Tax savings 34% of 3,000
=
Tax savings = 1,020
12,000
(15,000)
(3,000)
1,020

Cell # : 0334-7481122
60

Sale = 25,000,000
Old Customer contribution 20% of total Sale = (5,000,000)
New Customer contribution 80% of total Sale = 20,000,000

Project Free Cash Flow
EBT
Tax (34% of EBT)
Earning After Tax
Add Depreciation
Earning After Tax & Depreciation
Changes in working Capital
Changing in working Capital
Account Receivable
Inventory
Account Payable
Without Project
45,000
65,000
70,000
Increases in Account Receivable(-)

Increases in Inventory (-)
Increases in Account payable
=
=
=
=
=
=
=
475,000
(161,500)
313,500
100,000
413,500
(9,000)
404,500
With Project Increases

63,000
18,000
80,000
15,000
94,000
24,000
=
=
=
(18,000)
(15,000)
24,000
(9,000)

Cell # : 0334-7481122
61

EBT
Tax (34% of EBT)
Earning After Tax
Add Depreciation
Account Receivable
Inventory
Account Payable
Without Project
55,000
55,000
90,000

=
=
=
=
=
=
=
900,000
(306,000)
594,000
300,000
894,000
(7,000)
887,000

63,000
8,000
70,000
15,000
106,000
16,000
=
=
=
(8,000)
(15,000)
16,000
(7,000)

Cell # : 0334-7481122
62

(A) Income Statement
Revenue
Expense (Variable cost)
Depreciation
EBT
Tax ( 34% of 1,000,000)
Earning After Tax
= 2,000,000
= (800,000)
= (200,000)
= 1,000,000
= (340,000)
= 660,000
(B) Profoma Approach

Change in EB1T
Tax ( 34% of 1,000,000)
Change in Earning after Tax
Depreciation
Free Cash Flow
= 1,000,000
= (340,000)
= 660,000
= 200,000
= 860,000
Three Alternatives
1. Add Back Depreciation
Earning after Tax
Add Depreciation
Free Cash Flow
=
=
660,000
200,000
860,000
2. Definition Approach
Change in Revenue
Change in Expense
Change in EB1T
Tax( 34% of 1,000,000)
Free Cash Flow
= 2,000,000
= (800,000)
= 1,200,000
= (340,000)
= 860,000
3. Depreciation Tax Shield Approch

Revenue
EBT
Tax ( 34% of 1,200,000)
Earning After Tax
Add 34% of Depreciation (200,000)
Free Cash Flow
= 2,000,000
= (800,000)
= 1,200,000
= (408,000)
= 792,000
= 68,000
= 860,000

Cell # : 0334-7481122
63

A. Income Statement
Revenue
Depreciation
EBT
Tax ( 34% of 1700,000)
Earning After Tax
= 3,000,000
= (900,000)
= (400,000)
= 1,700,000
= (578,000)
= 1,122,000
B. Profoma Approach
Change in EB1T
Tax ( 34% of 1,700,000)
Change in Earning after Tax
Add Depreciation
Free Cash Flow
= 1,700,000
= (578,000)
= 1,122,000
= 400,000
= 1,522,000
Three Alternatives
1. Add Back Depreciation
Earning after Tax
Add Depreciation
Free Cash Flow
= 1,122,000
= 400,000
= 1,522,000
2. Definition Approach
Change in Revenue
Change in Expense
Change in EB1T
Tax( 34% of 1,700,000)
Free Cash Flow
= 3,000,000
= (900,000)
= 2,100,000
= (578,000)
= 1,522,000
3. Depreciation Tax Shield Approch

Revenue
EBT
Tax ( 34% of 2,100,000)
Earning After Tax
Add 34% of Depreciation (400,000)
Free Cash Flow
= 3,000,000
= (900,000)
= 2,100,000
= (714,000)
= 1,386,000
= 136,000
= 1,522,000

Cell # : 0334-7481122
64

A. Initial Out Lay
Cost Of Equipment = 1,000,000
Add Working Capital =
50,000
Total = 1,050,000
B. Free Cash Flow (1-9 years )
Sales (10,000 100)
Variable Expenses (10,000 40)
Fixed Expenses
Depreciation Expense
EBIT
Tax ( 34% of 340,000)
Earning After Tax
Add Depreciation
Free Cash Flow (1-9 years )
C. Terminal cash Flow
=
=
=
=
1,000,000
(400,000)
(160,000)
(100,000)
= 340,000
= (115,600)
= 224,400
= 100,000
= 324,400
Annual (1-9 years )Free Cash Flow =

Add Working Capital
=
Terminal Free Cash Flow (Year 10) =
D. NET PROJECT VALUE
NPV
PV Cash out flow
PV Cash in flow
PV Cash in flow
PV Cash in flow
NPV
NPV
NPV
=
=
=
=
=
=
=
=
324,400
50,000
374,400

PV of Cash out flow
1,050,000
10%,
9th
324,400 (FVIF)
n
+ 374,400 (FVIF)10%, n 10th
324,400 (5.759) + 374,400(0.38554)
1,868,219.6 + 144,347
PV of Cash in flow
Less
PV of Cash out flow
2,012,574
Less
1,050,000
962,574
Note :*(FVIF=1 0.1 -1 0.1(1.1)n=9) See appendix E Page A-17 in

the column 10% of N years 9
= (5.759)
See appendix C Page A-13 in
You will find = 0.38554 or 0 .386

Cell # : 0334-7481122
65

(A)
Taxes Associated With This Sale
Cost
=
Depreciation(4,000 5 Year)
=
Book Value(Cost - Depreciation) =
=
Sale Price
=
Book Value
40,000
(20,000)
20,000
45,000
(20,000)
25,000
(8,500)
16,500
(B)
Sale Price
Book Value
=
=
=
=
=
40,000
(20,000)
20,000
(6,800)
13,200
(C)
Sale Price
=
Book Value
=
=
No gain No Loss
=
Taxes liabilities = 00
20,000
(20,000)
00
00)
(D)
Sale Price
=
Book Value
=
=
Loss (Sale - Book Value)
Tax savings 34% of 3,000
=
Tax savings = 1,020
17,000
(20,000)
(3,000)
1,020

Cell # : 0334-7481122
66

Sale = 100,000,000
Old Customer contribution 40% of total Sale = (40,000,000)
New Customer contribution 60% of total
= 60,000,000
Sale

EBIT
Tax (34% of EBIT)
Earning After Tax
Add Depreciation
Account Receivable
Inventory
Account Payable
Without Project
55,000
100,000
70,000

=
=
=
=
=
=
=
775,000
(263,500)
511,500
200,000
711,500
(64,000)
647,500

89,000
34,000
180,000
80,000
120,000
50,000
=
=
=
(34,000)
(80,000)
50,000
(64,000)

Cell # : 0334-7481122
67

EBIT
Tax (34% of EBIT)
Earning After Tax
Add Depreciation
Account Receivable
Inventory
Account Payable
Without Project
33,000
25,000
50,000

=
=
=
=
=
=
=
300,000
(102,000)
198,000
50,000
248,000
31,000
279,000

23,000
(10,000)
40,000
15,000
86,000
36,000
=
=
=
10,000
(15,000)
36,000
31,000

Cell # : 0334-7481122
68

E. Initial Out Lay
Purchase Cost =
Add Installation Fee
Add Increased Working Inventory =
Total =
F. Free Cash Flow (1-9 years )
EBIT =
Tax ( 34% of 70,000)
=
Earning After Tax
=
Add Depreciation(260,000 10 years) =
=
G. Terminal cash Flow
Add Working Capital (Inventory)
=
H. NET PROJECT VALUE
250,000
10,000
15,000
275,000
70,000
(23,800)
46,200
26,000
72,200
72,200
15,000
87,200
NPV
= PV of Cash in flow Less
PV of Cash out flow
PV Cash out flow = 275,000
15%,
9th
PV Cash in flow =
72,200 (FVIF)
n
+ 87,200 (FVIF)15%, n 10th
PV Cash in flow =
34,400 (4.772) + 87,200 (.247)
PV Cash in flow =
344,538.4 + 21,538.4
NPV = PV of Cash in flow
Less
PV of Cash out flow
NPV =
366,076.8
Less
275,000
NPV = 91,076.8
Yes, the NPV > 0.
Note :*(FVIF=1 0.15 -1
0.15(1.15)n=9)
= 4.772
See appendix E Page A-17 in


Cell # : 0334-7481122
69

A. Initial Out Lay
Purchase Cost
Training Session Fee
Add Increased Working Inventory
Total
=
=
=
=
1,000,000
50,000
100,000
150,000
= 1,300,000
EBIT =
Tax ( 34% of 400,000)
=
Earning After Tax
=
=
=
400,000
(136,000)
264,000
105,000
369,000
369,000
150,000
519,000
NPV
= PV of Cash in flow Less PV of Cash out flow
PV Cash out flow = 1,300,000
12%,
9th
PV Cash in flow = 369,000 (FVIF)
n
+ 519,000 (FVIF)12%, n 10th
PV Cash in flow =
369,000 (5.328) + 519,000 (.322)
PV Cash in flow =
1,966,032 + 167,118
Less
PV of Cash out flow
NPV =
2,133,150
Less
1,300,000
NPV = 833,150
Yes, the NPV > 0.
= 5.328
You will find = 0. .322

Cell # : 0334-7481122
70

A. Initial Out Lay
Purchase Cost
Training Session Fee
Add Increased Working Inventory
Total
=
=
=
=
100,000
5,000
5,000
25,000
135,000
EBIT =
Tax ( 34% of 25,000)
=
Earning After Tax
=
=
=
25,000
(8,500)
264,000
10,500
27,000
27,000
25,000
52,000
NPV
= PV of Cash in flow Less PV of Cash out flow
PV Cash out flow = 135,000
12%,
9th
PV Cash in flow = 27,000 (FVIF)
n
+ 52,000 (FVIF)12%, n 10th
PV Cash in flow =
27,000 (5.328) + 52,000 (.322)
PV Cash in flow =
143,856 + 16,744
Less
PV of Cash out flow
NPV =
160,600
Less
135,000
NPV = 25,600
Yes, the NPV > 0.
= 5.328
You will find = 0. .322

Cell # : 0334-7481122
71
Chapter # 18,
(Working Capital Management & Short-Term Financing)

(A)
Financial measures of firm liquidity
Net Working Capital
Current Ratio
Acid Test Ratio
CA - CL
CA CL
CA - Inventory CL
Firm A
100,000
1.25
0.5
Firm B
100,000
0.83
0.33
Firm B is obviously the more aggressive of the two firms.

What is the sage's monthly payable balance if no discount period is taken?
Total Purchase cost = 480,000

Purchases per day = 480,000 360 = 1333.33
(A) Purchases/day x 15 day discount period = 1333.33 15
= 19,999.95 = 20,000.00
(B) Purchases/day x 45 day Credit period = 1333.33 45
= 59,999.85 = 60,000.00
(C) Opportunity Cost
Cost of Credit not taking Discount % Discount 100 % Discount 360
Credit term Discount Term
4,800 (480,000 4,800) 360 (45
15)
4,800 475,200 360 30
0.01010 12
Cost of Credit not taking Discount
0.1212 = 12.12%

Cell # : 0334-7481122
72

(A)
The interest expense for the three month loan:
Interest =0 .12 x $ 100,000 x 3 12 = $ 3,000.
Amount of compensation Balance = $ 100,000 x .10 = $ 10,000
Total Deduction = $ 10,000 + 3,000 = $ 13,000
Net Proceed of loan = $ 100,000 + 13,000 = $ 87,000
Effective Interest Rate Or
Effective Cost of Credit
= 3000 87,000
= 0.03448 (For 3 month)
Effective Cost of Credit for Annual = 0.03448 x 4 = 0.1379

Annual Effective Interest Rate = 13.79 %

Interest expense for the commercial paper issue is calculated as follows:
Interest = 0.11 x $20 million x (270 360) = $1,650,000
Issuing Cost = $ 200,000
Total = $1,650,000 + 200,000 = $1,850,000
Net Proceed of = $ 20,000,000 - $1,850,000 = $ 18,150,000
Net Proceed = $ 18,150,000
Effective Cost of Credit = $1,850,000 $ 18,150,000 x (360 270)
Effective Cost of Credit = 0. 1359
Effective Cost of Credit = 13.59%

Cell # : 0334-7481122
73

(A) 2/10 , net 30
2 (100-2) x 360 (30-10) = 2 98 x 360 20
= 2 98 x 18 = 0.24 x 18
= 0.3637 = 36.73 %
(B) 3/15 , net 30

3 (100- 3) x 360 (30-15) = 3 97 x 360 15
= 3 97 x 24 = 0.0309 x 24
= 0.7416 = 74.16 %
(C) 3/15 , net 45

3 (100- 3) x 360 (45-15) = 3 97 x 360 30
= 3 97 x 12 = 0.0309 x 12
= 0.3711 = 37.11 %
(D) 2/15 , net 60

2 (100- 2) x 360 (60-15) = 2 98 x 360 45
= 2 98 x 8 = 0.0204 x 8
= 1.632 = 16.32 %

Cell # : 0334-7481122
74

(A) 2/10 , net 30
Formula = (1+ I m)
1
m
(1+ I m) 1
= (1+ 0.3637 18) 18 1
= (1+ 0.02038) 18 1 = (1.02038) 18 1
= 1.4381 1 = 0.4381 = 43.81 %
360 20 = 18
(B) 3/15 , net 30

Formula = (1+ I m)
1
m
(1+ I m) 1
= (1+ 0.7416 24) 24 1
= (1+ 0.03087) 24 1 = (1.03087) 24 1
= 2.0744 1 = 1.0744 = 107.44 %
360 15 = 24
(C) 3/15 , net 45

Formula = (1+ I m)
1
m
(1+ I m) 1
= (1+ 0.3711 12) 12 1
= (1+ 0.0309) 12 1 = (1.0309) 12 1
= 1.441062 1 = 0.4410 = 44.10 %
360 30 = 12
(D) 2/15 , net 60

Formula = (1+ I m)
1
m
(1+ I m) 1
= (1+ 1.632 8) 8 1
= (1+ 0.0204) 8 1 = (1.0204) 8 1
= 1.1753 1 = 0.1753 = 17.53 %
360 45 = 8

Cell # : 0334-7481122
75

(A)
Interest
= .14 x $100,000
= $14,000
Net Proceed of = $ 1 00,000 - $ 14,000 = $ 86,000

Effective Interest Rate = $14,000 $ 86,000
Effective Interest Rate = 0.1627
Effective Interest Rate = 16.27%
Dealer Financing Alternative (B)
Excess Amount pay
$ 16,300
Effective Interest Rate
= $16,300 $ 100,000
= 0.163
= 16.30%
Both are good

(B)
Compensation Balance =
$ 15,000
Interest Amount
=
$ 14,000
Total Amount
=
$ 29,000
Net Proceed of = $ 1 00,000 - $ 29,000 = $ 71,000
Effective Interest Rate = $14,000 $ 71,000

Cell # : 0334-7481122
76

(A)
Financial measures of firm liquidity
Net Working Capital
Current Ratio
Acid Test Ratio
CA - CL
CA CL
CA - Inventory CL
Firm A
200,000
1.25
0.5
Firm B
0
1
0.6
Firm B is obviously the more aggressive of the two firms.

What is the sage's monthly payable balance if no discount period is taken?
Total Purchase cost = 600,000

Purchases per day = 600,000 360 = 1666.66
(A) Purchases/day x 30 day discount period = 1666.66 30
= 50,000
(B) Purchases/day x 45 day Credit period = 1666.66 60
= 99,999.6 = 100,000.
(C) Opportunity Cost

Cost of Credit not taking Discount % Discount 100 % Discount 360
Credit term Discount Term
12,000 (600,000 12,000) 360 (60
30)
12,000 588,000 360 30
0.020408 12
Cost of Credit not taking Discount
0.2448 = 24.48%

Cell # : 0334-7481122
77

(A)
The interest expense for the three month loan:
Interest =0 .14 x $ 125,000 x 3 12 = $ 4,375
Amount of compensation Balance = $ 125,000 x .10 = $ 12,500
Total Deduction = $ 12,500+ 4,375 = $ 16,875
Net Proceed of loan = $ 125,000 - 16,875 = $ 108,125
Effective Interest Rate Or
Effective Cost of Credit
= 4,375 108,125
= 0.04046 (For 3 month)
Effective Cost of Credit for Annual = 0.04046 x 4 = 0.1618

Annual Effective Interest Rate = 16.18 %

Interest expense for the commercial paper issue is calculated as follows:
Interest = 0.12 x $15 million x (270 360) = $1,350,000
Issuing Cost = $ 150,000
Total = $1,350,000 + 150,000 = $1,500,000
Net Proceed of = $ 15,000,000 - $1,500,000 = $ 13,500,000
Net Proceed = $ 13,500,000
Effective Cost of Credit = $1,500,000 $ 13,500,000 x (360 270)
Effective Cost of Credit = 0. 1481
Effective Cost of Credit = 14.81%

Cell # : 0334-7481122
78

(A) 1/10 , net 30
1 (100-1) x 360 (30-10) = 1 99 x 360 20
= 1 99 x 18 = 0.010104 x 18
= 0.1818 = 18.18 %
(B) 2/15 , net 30

2 (100- 2) x 360 (30-15) = 2 98 x 360 15
= 2 98 x 24 = 0.0204 x 24
= 0.4897 = 48.97 %
(C) 2/15 , net 45

2 (100- 2) x 360 (45-15) = 2 98 x 360 30
= 2 98 x 12 = 0.0204 x 12
= 0.2478 = 24.48 %
(D) 3/15 , net 60

3 (100- 3) x 360 (60-15) = 3 97 x 360 45
= 3 97 x 8 = 0.0309 x 8
= 0.2474 = 24.74 %

Cell # : 0334-7481122
79

(A) 1/10 , net 30
Formula = (1+ I m)
1
m
(1+ I m) 1
= (1+ 0.1818 18) 18 1
= (1+ 0.0101) 18 1 = (1.0101) 18 1
= 1.1982 1 = 0.1982 = 19.82 %
360 20 = 18
(B) 2/15 , net 30

Formula = (1+ I m)
1
m
(1+ I m) 1
= (1+ 0.4897 24) 24 1
= (1+ 0.02040) 24 1 = (1.02040) 24 1
= 1.6238 1 = 0.6238 = 62.38 %
360 15 = 24
(C) 2/15 , net 45

Formula = (1+ I m)
1
m
(1+ I m) 1
= (1+ 0.2478 12) 12 1
= (1+ 0.02065) 12 1 = (1.02065) 12 1
= 1.27797 1 = 0.27797 = 27.79 %
360 30 = 12
(D) 3/15 , net 60

Formula = (1+ I m)
1
m
(1+ I m) 1
= (1+ 0.2474 8) 8 1
= (1+ 0.03092) 8 1 = (1.03092) 8 1
= 1.2758 1 = 0.2758 = 27.58 %
360 45 = 8

Cell # : 0334-7481122
80

(A)
Interest
= .15 x $150,000
= $ 22,500
Net Proceed of = $ 150,000 - $ 22,500= $ 127,500

Effective Interest Rate = $ 22,500 $ 127,500
Dealer Financing Alternative (B)
Excess Amount pay
$ 30,000
= $ 30,000 $ 150,000
= 0 .2
= 20%
In this case bank financing is preferred .
(B)
Compensation Balance =
Interest Amount
=
$ 24,000
$ 22,500
Total Amount
=
$ 46,500
Net Proceed of = $ 150,000 - $ 46,500 = $ 103,500
Effective Interest Rate = $ 22,500 $ 103,500
Thus, where the 16 percent compensating balance requirement is

binding on Vitra, the cost of the bank loan rises to 21.73 percent, and
dealer financing is preferred.

Cell # : 0334-7481122
81
CH # 20
(Account Receivable & Inventory Management)

2/10 , net 50
2 (100-2) x 360 (50-10) = 2 98 x 360 40
= 2 98 x 9 = 0.0204 x 9
= 0.1836 = 18.36 %
n
APR (Formula) = (1+ i m) 1

n
(1+ i m) 1
= (1+ 0.1836 9) 9 1
= (1+ 0.0204) 9 1 = (1.0204) 9 1
= 1.1993 1 = 0.1993 = 19.93 %
360 40 = 9

2/20 , net 30
2 (100-2) x 360 (30-20) = 2 98 x 360 10
= 2 98 x 36 = 0.0204 x 36
= 0.7344 = 73.44 %
n

n
(1+ i m) 1
= (1+ 0.7344 36) 36 1
= (1+ 0.0204) 36 1 = (1.0204) 36 1
= 2.0688 1 = 1.0688 = 106.88 %
360 10 = 36

Cell # : 0334-7481122
82

(A) 1/10 , net 20
1 (100-1) x 360 (20-10) = 1 99 x 360 10
= 1 99 x 36 = 0.0101 x 36
= 0.3636 = 36.36 %
n

n
(1+ i m) 1
= (1+ 0.3636 36) 36 1
= (1+ 0.01010) 36 1 = (1.01010) 36 1
= 1.4359 1 = 0.4359 = 43.59 %
360 10 = 36
(B) 2/10 , net 30

2 (100-2) x 360 (30-10) = 2 98 x 360 20
= 2 98 x 18 = 0.0204 x 18
= 0.3672 = 36.72 %
n

n
(1+ i m) 1
= (1+ 0.3672 18) 18 1
= (1+ 0.0204) 18 1 = (1.0204) 18 1
= 1.4383 1 = 0.4383 = 43.83 %
360 20 = 18

Cell # : 0334-7481122
83
(C) 3/10 , net 30

3 (100 - 3) x 360 (30-10) = 3 97 x 360 20
= 3 97 x 18 = 0.0309 x 18
= 0.5567 = 55.67 %
n

n
(1+ i m) 1
= (1+ 0.5567 18) 18 1
= (1+ 0.0309) 18 1 = (1.0309) 18 1
= 1.7302 1 = 0.7302 = 73.02 %
360 20 = 18
(D) 3/10 , net 60

3 (100 - 3) x 360 (60-10) = 3 97 x 360 50
= 3 97 x 7.2 = 0.0309 x 7.2
= 0.2226 = 22.26 %
n

n
(1+ i m) 1
= (1+ 0.2226 7.2) 7.2 1
= (1+ 0.0309) 7.2 1 = (1.0309) 7.2 1
= 1.2452 1 = 0.2452 = 24.52 %
360 50 = 7.2

Cell # : 0334-7481122
84
(E) 3/10 , net 90

3 (100 - 3) x 360 (90-10) = 3 97 x 360 80
= 3 97 x 4.5 = 0.0309 x 4.5
= 0.1392 = 13.92 %
n

n
(1+ i m) 1
= (1+ 0. 0.1392 4.5) 4.5 1
= (1+ 0.0309) 4.5 1 = (1.0309) 4.5 1
= 1.1469 1 = 0.1469 = 14.69 %
360 80 = 4.5
(F) 5/10 , net 60

5 (100 - 5) x 360 (60-10) = 5 95 x 360 50
= 5 95 x 7.2 = 0.0526 x 7.2
= 0.3789 = 37.89 %
n

n
(1+ i m) 1
= (1+ 0.3789 7.2) 7.2 1
= (1+ 0.05263) 7.2 1 = (1.05263) 7.2 1
= 1.4467 1 = 0.4467 = 44.67 %
360 50 = 7.2

Cell # : 0334-7481122
85

Applicant #1
Z = 3.3(0.2) + 1.0(0.2) + 0.6(1.2) + 1.4(0.3) + 1.2(0.5)
Z = 0.66 + 0.2 + 0.72 + 0.42 + 0.6
Z = 2.6 less than 2.7 thus, rejected
Applicant #2
Z = 3.3(0.2) + 1.0(0.8) + 0.6(1.0) + 1.4(0.3) + 1.2(0.8)
Z = 0.66 + 0.8 + 0.6 + 0.42 + 0.96
Z = 3.44 High than 2.7 thus, accepted
Applicant #3
Z = 3.3(0.2) + 1.0(0.7) + 0.6(0.6) + 1.4(0.3) + 1.2(0.4)
Z = 0.66 + 0.7 + 0.36 + 0.42 + 0.48
Applicant #4
Z = 3.3(0.1) + 1.0(0.4) + 0.6(1.2) + 1.4(0.4) + 1.2(0.4)
Z = 0.33 + 0.4 + 0.72 + 0.56 + 0.48
Applicant #5
Z = 3.3(0.3) + 1.0(0.7) + 0.6(0.5) + 1.4(0.4) + 1.2(0.7)
Z = 0.99 + 0.7 + 0.30 + 0.56 + 0.84
Z = 3.39 High than 2.7 thus, accepted
Applicant #6
Z = 3.3(0.2) + 1.0(0.5) + 0.6(0.5) + 1.4(0.4) + 1.2(0.4)
Z = 0.66 + 0.5 + 0.30 + 0.56 + 0.48

Cell # : 0334-7481122
86

(A)
Cost of goods sold
$540,000
Cost of goods sold

Average inventory
Inventory turnover ratio
$540,000
Average inventory
Average inventory
$90,000
360
Average Collection Period
(B)
Inventory turnover
360
40
9 times
Cost of goods sold

Average inventory
9 times
$480,000
Average inventory
9 times
Average inventory
$53,333
$1,150,000
Average inventory
Average inventory
$230,000
=
=
(0.86)($25,000,000)
$21,500,000 (CGS)
(C)
Cost of goods sold
Average inventory
(D)
(1 - Gross profit margin) (Sales)
Cost of Goods Sold
Inventory turnover ratio =

$21,500,000
Average inventory
Average inventory
360
45
= 8 times
8 times
$ 2,687,500

Cell # : 0334-7481122
87

Estimate the Change in Profit.
Additional Continuing Margin = ($1,000,000 x .20) = $ 200,000
Bad Debts Looses (-) = ($1,000,000 x .08)
= ($ 80,000)
Net Benefit =
$120,000
Increased investment Cost:
Current level of receivable =
Accounts receivable = Cash Collection Period 360
Accounts receivable = $5,000,000 60 360 = $833,333
Proposed Level of Accounts receivable =$6,000,000 x 90 360
Proposed Level of Accounts receivable = $1,500,000
Increases in Accounts receivable = $1,500,000 - $833,333
Increases in Accounts receivable =
$666,667
Investment in Inventory = $50,000
Increases in accounts receivable & inventory = ($ 666,667 + $ 50,000)
Increases in accounts receivable & inventory = 716,667
Operating Cost of Investment = 716,667 15 % = $107,500
Step 3:
Estimate the change in the cost of the cash discount

=
$0 (no change)
Step 4: Compare incremental revenues with incremental costs.

=
=
=
Step 1 - (Step 2 + Step 3)

$120,000 - $107,500
$12,500
The policy should be adopted.

Cell # : 0334-7481122
88

= ($ 135,000)
Net Benefit =
$165,000
Accounts receivable = $11,000,000 30 360 = $916,666.6
Proposed Level of Accounts receivable =$ 12,500,000 x 45 360
Increases in Accounts receivable = $1,562,500 - $ 916,667
$ 645,833
Investment in Inventory = $75,000
Increases in accounts receivable & inventory = ($ 645,833+ $ 75,000)
Increases in accounts receivable & inventory = 720,833
Operating Cost of Investment = 720,833 15 % = $108,124.95
Step 3:

=
$0 (no change)

=
=
=

$165,000 - $108,125
$56,875

Cell # : 0334-7481122
89

(A)
EOQ =
2(3000)10
0.10
EOQ = 600,000
EOQ =775 units
(B)
Number of orders:
Order Cost= 10
Average Inventory(30002)
Carrying Cost(.1)
Total
1
10
1500
150
160
4
40
375
37.5
77.5
5
50
300
30
80
10
100
150
15
115
15
150
100
10
160
(C)
(1) Constant or uniform demand
(2) Constant unit price
(3) Constant carrying costs
(4) Constant ordering costs
(5) Instantaneous delivery
(6)
Independent orders

Cell # : 0334-7481122
90

(A)
EOQ =
2 Sale orderingCost
CayrringCost
2(20,000)50
0.25
EOQ =
EOQ =
2828 boxes
(B)
It assumes among other things that the rolls are not perishable.
Other assumptions include:
(6) Independent orders

(A)
EOQ =
2 Sale orderingCost
CayrringCost
2 50,000 500
75
EOQ =
EOQ =
816.4 boxes
(B)
Carrying Cost = EOQ 2 75 = 30,165
Ordering Cost = Sales EOQ 500= 30,622.24
Total Cost = Carrying Cost + Ordering Cost
Total Cost = 30,165 + 30,622.24 = 61,237.24

Cell # : 0334-7481122
91

(A)
EOQ =
2 Sale orderingCost
CayrringCost
EOQ =
2(500,000)90
.40
EOQ =15,000 Units
(b)
Orders per year
500,000
= 33
15,000
1/3 orders per year
(c)
Inventory order point = delivery time stock + safety stock
Inventory order point =
1
50
x 500,000 + 15,000
Inventory order point = 10,000 + 15,000

Inventory order point = 25,000 units
(d)
Average inventory =
EOQ
+ safety time stock
2
Average inventory =
15,000
+ 15,000
2
Average inventory = 7,500 + 15,000

Average inventory = 22,500 units

Cell # : 0334-7481122
92

2/10 , net 60
2 (100-2) x 360 (60-10) = 2 98 x 360 50
= 2 98 x 7.2 = 0.0204 x 7.2
= 0.1469 = 14.69 %
n

n
(1+ i m) 1
= (1+ 0. 1469 7.2) 7.2 1
= (1+ 0.0204) 7.2 1 = (1.0204) 7.2 1
= 1.1565 1 = 0. 1565 = 15.65 %
360 50 = 7.2

2/20 , net 40
2 (100-2) x 360 (40-20) = 2 98 x 360 20
= 2 98 x 18 = 0.0204 x 18
= 0.3673 = 36.73 %
n

n
(1+ i m) 1
= (1+ 0. 3673 18) 18 1
= (1+ 0.0204) 18 1 = (1.0204) 18 1
= 1.4385 1 = 0.4385 = 43.85 %
360 20 = 18

Cell # : 0334-7481122
93

(A) 1/5 , net 20
1 (100 - 1) x 360 (20 - 05) = 1 99 x 360 15
= 1 99 x 24 = 0.01010 x 24
= 0.2424 = 24.24 %
n

n
(1+ i m) 1
= (1+ 0. 2424 24) 24 1
= (1+ 0. 01010) 24 1 = (1. 01010) 24 1
= 1.2727 1 = 0. 2727 = 27.27 %
360 15 = 24
(B) 2/20 , net 90

2 (100-2) x 360 (90-20) = 2 98 x 360 70
= 2 98 x 5.14 = 0.0204 x 5.14
= 0.1048 = 10.48 %
n

n
(1+ i m) 1
= (1+ 0. 1048 5.14) 5.14 1
= (1+ 0.0204) 5.14 1 = (1.0204) 5.14 1
= 1.1094 1 = 0.1094= 10.94 %
360 70 = 5.14

Cell # : 0334-7481122
94
(C) 1/20 , net 100

1 (100 - 1) x 360 (100 - 20) = 1 99 x 360 80
= 1 99 x 4.5 = 0.0101 x 4.5
= 0.0454 = 4.55 %
n

n
(1+ i m) 1
= (1+ 0. 0454 4.5) 4.5 1
= (1+ 0. 0101) 4.5 1 = (1.0101) 4.5 1
= 1.0426 1 = 0.04626 = 4.62 %
360 80 = 4.5
(D) 4/10 , net 50

4 (100 - 4) x 360 (50-10) = 4 96 x 360 40
= 4 96 x 9 = 0.04166 x 9
= 0.3750 = 37.50 %
n

n
(1+ i m) 1
= (1+ 0. 3750 9) 9 1
= (1+ 0.04166) 9 1 = (1.04166) 9 1
= 1.4439 1 = 0.4439 = 44.39 %
360 40= 9

Cell # : 0334-7481122
95
(E) 5/20 , net 100

5 (100 - 5) x 360 (100-20) = 5 95 x 360 80
= 5 95 x 4.5 = 0.05263 x 4.5
= 0.2368 = 23.68 %
n

n
(1+ i m) 1
= (1+ 0. 0. 2368 4.5) 4.5 1
= (1+ 0.05263) 4.5 1 = (1.05263) 4.5 1
= 1.2596 1 = 0.2596 = 25.96 %
360 80 = 4.5
(F) 5/30 , net 50

5 (100 - 5) x 360 (50 - 30) = 5 95 x 360 20
= 5 95 x 18 = 0.05263 x 18
= 0.9473 = 94.73 %
n

n
(1+ i m) 1
= (1+ 0.3789 18) 18 1
= (1+ 0.05263) 18 1 = (1.05263) 18 1
= 2.5175 1 = 1.5175 = 51.75 %
360 20 = 18

Cell # : 0334-7481122
96

Applicant #1
Z
= 3.3(0.3) + 1.0(0.4) + 0.6(1.2) + 1.4(0.3) + 1.2(0.5)
Z
= 0.99 + 0.4 + 0.72 + 0.42 + 0.6
Z
= 3.13 High than 2.7 thus, accepted
Applicant #2
Z
= 3.3(0.2) + 1.0(0.6) + 0.6(1.3) + 1.4(0.4) + 1.2(0.3)
Z
= 0.66 + 0.6 + 0.78 + 0.56 + 0.36
Z
Applicant #3
Z
= 3.3(0.2) + 1.0(0.7) + 0.6(0.6) + 1.4(0.3) + 1.2(0.2)
Z
= 0.66 + 0.7 + 0.36 + 0.42 + 0.24
Z
= 2.38 less than 2.7 thus, rejected
Applicant #4
Z
= 3.3(0.1) + 1.0(0.5) + 0.6(1.8) + 1.4(0.5) + 1.2(0.4)
Z
= 0.33 + 0.5 + 1.08 + 0.7 + 0.48
Z
Applicant #5
Z
= 3.3(0.5) + 1.0(0.7) + 0.6(0.5) + 1.4(0.4) + 1.2(0.6)
Z
= 1.65 + 0.7 + 0.30 + 0.56 + 0.72
Z
Applicant #6
Z
= 3.3(0.2) + 1.0(0.4) + 0.6(0.2) + 1.4(0.4) + 1.2(0.4)
Z
= 0.66 + 0.4 + 0.12 + 0.56 + 0.48
Z
= 2.22 less than 2.7 thus, rejected

Cell # : 0334-7481122
97

(A)
Cost of goods sold
$ 495,000
Cost of goods sold

Average inventory
$ 495,000
Average inventory
Average inventory
$ 99,000
360
Average Collection Period
Inventory turnover
360
35
10.285 times
Cost of goods sold

Average inventory
10.285 times
$480,000
Average inventory
10.285 times
Average inventory
$ 46,669
$1,250,000
Average inventory
Average inventory
$ 208,333
=
=
(0.85) ($25,000,000)
$21,250,000 (CGS)
(B)
(C)
Cost of goods sold
Average inventory
(D)
(1 - Gross profit margin) (Sales)
Cost of Goods Sold
Inventory turnover ratio =

$21,500,000
Average inventory
Average inventory
360
50
= 7.2 times
7.2 times
$ 2,951,389

Cell # : 0334-7481122
98

= ($ 80,000)
Net Benefit =
$120,000
Accounts receivable = $6,000,000 40 360 = $ 666,666.66
Proposed Level of Accounts receivable =$7,000,000 x 90 360
Increases in Accounts receivable = $1,750,000 - $ 666,667
$ 1,083,333
Investment in Inventory = $ 40,000
Increases in accounts receivable & inventory = ($1,083,333+ $ 40,000)
Increases in accounts receivable & inventory = 1,123,333
Operating Cost of Investment = 1,123,333 15 % = $168,500
Step 3:

=
$0 (no change)

=
=
=

$120,000 - $168,500
$ 48,500

Cell # : 0334-7481122
99

= ($ 80,000)
Net Benefit =
$120,000
Accounts receivable = $17,000,000 30 360 = $ 1,416,667
Proposed Level of Accounts receivable =$ 18,000,000 x 50 360
Proposed Level of Accounts receivable = $ 2,500,000
Increases in Accounts receivable = $2,500,000 - $ 1,416,667
$ 1,083,333
Investment in Inventory = $ 60,000
Increases in accounts receivable & inventory = ($1,083,333 + $ 60,000)
Increases in accounts receivable & inventory = 1,143,333
Operating Cost of Investment = 1,143,333 15 % = $ 171,500
Step 3:

=
$0 (no change)

=
=
=

$120,000 - $ 171,500
$ 51,500

Cell # : 0334-7481122
100

(A)
EOQ =
2(3500)9
0.2
EOQ = 315,000
EOQ =562 units
(B)
Number of orders:
Order Cost= 09
Average Inventory(35002)
Carrying Cost(.2)
Total
1
9
1750
350
359
4
36
437.5
87.5
123.5
5
45
350
30
115
10
90
175
35
125
15
135
116.6
23.32
158.32
For Check = 3500 562 = 6.229 = 56.04
(C)
(6)
Independent orders

Cell # : 0334-7481122
101

(A)
EOQ =
2 Sale orderingCost
CayrringCost
2(21,000)55
0.20
EOQ =
EOQ =3398.52 boxes
(B)
It assumes among other things that the rolls are not perishable.
Other assumptions include:
(6) Independent orders

(A)
EOQ =
2 Sale orderingCost
CayrringCost
EOQ =
2(55,000)500
70
EOQ =
886.4 boxes
(B)
Carrying Cost = EOQ 2 75 = 31,024
Ordering Cost = Sales EOQ 500= 31,038
Total Cost = Carrying Cost + Ordering Cost
Total Cost = 31,024+ 31,038= 62,062

Cell # : 0334-7481122
102

(A)
EOQ =
2 Sale orderingCost
CayrringCost
2(600,000)90
.45
EOQ =
EOQ =15,400 Units
(b)
600,000
= 39 orders
15,400
(c)
Inventory order point = delivery time stock + safety stock
Inventory order point =
1
50
x 600,000 + 15,000
Inventory order point = 12,000 + 15,000

Inventory order point = 27,000 units
(d)
Average inventory =
EOQ
+ safety time stock
2
Average inventory =
15,400
+ 15,000
2
Average inventory = 7,700 + 15,000

Average inventory = 22,700 units

Cell # : 0334-7481122
103

Financial Management

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Financial Management

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Chapter # 1,

An Introduction to Financial Management

Goal of the firm:

relationships among the partners within the firm. As with the

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.1A, Book page # 53:

Liabilities & Equity

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.2A, Book page # 54:

Cost of Sales (-):

Liabilities & Equity

Long Term Debts

$ 790,000 Total(CL + Equity)

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.3A, Book page # 54:

The tax Liability Is = $ 459,900

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.4A, Book page # 54:

The tax Liability Is = $ 125,800

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.5A, Book page # 54:

Payment of Interest ($ 60,000)

3. Change In Fixed Asset

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.6A, Book page # 55:

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.7A, Book page # 56:

Payment of Dividend ($ 32,000)

Increase / Decrease ($ 70,000)

Change In Current Asset

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.1B, Book page # 60:

Liabilities & Equity

$ 1,123,800 Total(CL + Equity)

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.2B, Book page # 60:

Cost of Sales (-):

Liabilities & Equity

Long Term Debts

$ 814,000 Total(CL + Equity)

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.3B, Book page # 60:

The tax Liability Is = $ 249,900

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.4B, Book page # 60:

The tax Liability is = $ 122,400

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.5B, Book page # 61:

Payment of Interest ($ 60,000)

Finance Free Cash

6. Change In Fixed Asset

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.6B, Book page # 61:

Payment of Interest ($ 10,000)

Increase / Decrease ($ 10,000)

Finance Free Cash

Change In Current Asset

Recommended Text Book: Financial Management; Principles and Applications:

Problem 2.7B, Book page # 62:

Payment of Dividend ($ 40,000)

Increase / Decrease ($ 60,000)

Recommended Text Book: Financial Management; Principles and Applications:

Asset test Ratio

Time interest earned