Professional Documents
Culture Documents
Answer No. 1
Part I:- Policies in hand
Shareholders or stockholders own parts or shares of companies. They act as root for
Running the company properly and efficiently.In large corporations, shareholders are
people and institutions that simply invest money for future dividends
Shareholders strongly believe and propose managers should always strive to act in
the best interest of the best interest of the firm’s owners. This view does not cause
managers to ignore non – owner stakeholders, indeed, when taking actions that
benefit stakeholders also benefit owners, the separation perspective would advise
managers to do so.
In nut shell, Shareholders want least level of risk while purchasing share and
moderate level of return.
Thirdly, creditors knows that they are being considered preferably so small
issues as leisure set up of companies and handsome salary of manager would not
affect the creditor’s perspective. It would be not noticeable for them.
Answer#2A
Return of Assets (ROA):
It estimates that what the company can do with what it possesses,i.e. how many
dollars of earnings they derive from each dollar of assets they control. It's a useful
number for comparing competing companies in the same industry. The number will
vary widely across different industries. Return on assets gives an indication of the
capital intensity of the company, which will depend on the industry; companies that
require large initial investments will generally have lower return on assets.
Answer#2 B
Your gross profit margin will depend on the industry you’re in, so it’s important to
measure yourself against industry benchmarks.
For example, run high-volume, low-margin businesses, while others sell a small
number of expensive items with plenty of margin built in.
Current ratio
You’re making profitable sales but are they enough to cover short term liabilities? To
answer that, you need the current ratio. It helps to measure the solvency of your
business by comparing your current assets (like unpaid invoices) to your current
liabilities (unpaid bills and the like):
For example If sales are growing and you have a short operating cycle, a lower
number may be OK. But if you have a long operating cycle, you might want your
current ratio to be higher, to make sure liabilities don’t get out of control.
Inventory turnover
If you have trading stock, then inventory turnover is an incredibly useful number. It
shows you how many times your business’ inventory is sold and replaced over a
particular period:
So, if you’ve spent $200,000 buying stock over the year, and you keep an average of
$20,000 worth of stock on hand, then your inventory turnover is 10 times a year.
Inventory turnover varies by industry but as a rule of thumb the higher it is the
better. A low turnover indicates you have a lot of money tied up in stock for long
periods of time, which is not good for cash flow. Too high a figure could indicate
you’re not keeping enough stock on hand!
Return on owner’s equity compares your net business income to the equity you’ve
invested in the business. It reveals how much you’re making from your investment:
So if you’ve invested $200,000 of your own money in the business, but it’s
generating a net income of $100,000 a year, then your return on owner’s equity is
50%.
This ratio is a great way to compare what you’ve earned from your business to what
you might have earned from another investment. If you’re just starting up, it might
not be as high as you’d like, but it tends to increase over time as your business
grows, especially if your personal investment remains the same.
Answer#2 C
Allied Corporation
Incom statement
For the period ended 2008
Sale 100
Less:COGS 68.60
Depreciation 13.60
EBIT 17.80
Interest paid 12.40
Taxable Income 5.45
Tax deduction 1.85
PV =500
i=12%
n=5%
Fv=Pv (1 + i)n
i. 12% Compounded Semi-Annually for 5 year
Fv - Pv (1 + i %)nx2
n=500 (1.06)10
Answer#3 B
Pv =25000
i= 10
n=5%
PvA = FvA (Fvi x FA10% x ny )
25000= FvA (Fvi x FA10% x 5y )
25000= FvA (3.791)
FvA =25000/ 3.791
FvA =6595
Answer#3 C
Div =3
g=8%
What will the dividend be in 5 Year
Do =3
D1=3(1.08) =3.24
D2=3.24 (1.08)=3.50
D3=3.50 (1.08)=3.78
D4=3.78 (1.08)=4.08
D5=4.08 (1.08)=4.41
Answer#4 A
i. Expected Rate of Return
Ki Probability Ki x Pn
0.20 0.30 0.06
0.05 0.40 0.02
.12 0.30 0.036
0.116
Ỏ= [sum(Ki-(K/n)xPn)]1/2
Ki K K1 –K (K1 - K)2 Pn (Ki - K) x Pn
.20 .116 0.084 .0071 .30 .00213
.05 .116 -0.066 .0044 .40 .00176
.12 .116 0.004 .000016 .30 .000048
.0038948
Ỏ = 0.0624
Ỏ=
Answer#5 A
RELATIONSHIP
IF Then Capital Budgeting NPV <0 IRR<Cost of Capital Reject the investment
from the cash flow perspective. Other factors could be important. Provides the
minimum return. Probably reject .
NPV =0 IRR = Cost of capital from the cash flow perspective. Other factors cold
be important.
Screen in for further analysis. Other investments May provide NPV > 0 IRR> Cost of
capital rationed, i.e., go to the most profitable projects. Others factors could be
important.
When we pay that the required return an investment so, say, 10% we usually
mean that the investment will have a positive NPV only if return exceeds 10%
another way of interpreting the required return is to observe that the firm must earn
10% an the investment to compensate its investor for the use of the capital needed
to finance the project. This is why we could also say that 10% is the cost of capital
associated with the investment imagine that we are evaluating a risk-free project, in
this case how to determine that required return is obvious, we look at the capital
markets and 0bserve the current rate offered by the risk-free investment and we use
this rate to discount the projects cash flows. Then the cost of capital for a risk-free
investment is the risk free rate. If s project is risky, then assuming that all the other
information is unchanged . the required return is obviously higher. In other words
the cost of capital for this project if it risky, in greater then the risk-free rate and the
appropriate discount rate would exceed the risk-free rate .
Answer#5 B
i. Do = 2
Po = 23
g =7
D1 = D ( 1 + g ) Di = 2.147
= 2(1.07) =
Ke = Dividend1 + g
Po
=2.14 + 7%
23
= 9.3% + 7%
= 16.30%
ii. CAPM
Ke = Rf + B ( Rm – Rf )
= 9% + 1.60 ( 13% - 9% )
= 9% + 1.60 ( 4% )
= 9% + 6.4%
=15.4%