Ten Financial Management Questions - Essay Example

Ten Financial Management Questions This paper of articulated mathematics in illustration of the questions of Financial Management shows how the basic nature of transactions are ensured to yield maximum benefit for investors in the company. Order#: 153825 Deadline: 2007-03-03 06:57 Style: APA Language Style: English US Pages: 6 Sources: 1 Writer ID: 6746 Question 1: In January, 1950 Billy Bob bought 100 shares of stock in Ben's Barbeque, Inc. for $37.50 per share. He sold them in January, 2004 for a total of $9,715.02. What is Billy Bob's annual rate of return Billy Bob bought shares in January 1950 He sold them altogether in January 2004 Hence he possessed them for 54 years Number of shares he bought were 100 Total investment in the shares were $37.50x100= $3700.00 Total return of the shares were $9715.02 Less the investment $3700.00 Net Return of the investment $6015.02 Annual rate of return were $6015.02/54= $111.39 Question 2: Yellow fruits company's bonds are currently selling for $ 1,157.75 per 1,000 value bond. The bonds have a 10% coupon rate and will mature in 10 years. What is the approximate yield to maturity of the bonds Present cost of company bonds $1,157.75 Each value bond yields $1,157.75x1000= $1,15775 The coupon rate assigned as $1157x10%=$11577.5 The yield in maturity casts $127352.5 Question 3: Bar T Ranches Inc, is considering buying a helicopter for $350,000. The company's old helicopter has a book value of $85,000, but will only bring $60,000 if it is sold. The old helicopter can be depreciated at the rate of $13,500 per year for next four years. The new helicopter can be depreciated using the five-year MARCS schedule. The new helicopter is expected to save $62,000 after the taxes through reduced fuel and maintenance expenses. Bar T Ranches is in the 34% tax bracket and 12% cost of capital. a. What is the cash flow from selling the old helicopter b. What is the net cost of the new helicopter The book value of the old helicopter $85,000 The sale value of the old helicopter $60,000 Hence the net loss forecast $25,000 Add Depreciation 13,500x4 $54,000 Therefore the cash flow from the old helicopter 54000+60000= $114,000 The on route cost of the new helicopter $350,000 Add bracketed tax @ 34% $119,000 Add the cost of capital $ 35,000 Total $504,000 Less depreciation of the old helicopter $54,000 So the net cost of the new helicopter $450,000 Question 4: Mud Construction Co. is considering buying a new equipment with cost of $625,000 and a salvage value of $50,00 at the end of its useful life of ten years. The equipment is expected to generate additional annual cash flow for ten years with the following possibilities. Probability Cash Flow 15 $60,000 25 $85,000 45 $110,000 15 $130,000 a. What is the expected cash flow b. If the company's cost capital is 10% what is the expected net present value c. Should the company buy the equipment a. The cost of the equipment is $625,000 10 years post installation salvage value $50,000 With probability 15, cash flow $60,000 The inflow of income 60,000x10=$600,000 b. Salvage value after 10 years $600,000 Hence the present value 600,000/10=$60,000 c. The cash flow shows that the company gets a marginal profit, therefore it is not advisable to buy the equipment. Question 5: Explain how the price of a new security is determined Security is the condition of being protected against danger or loss. In the general sense, security is a concept similar to safety. The nuance between the two is an added emphasis on being protected from dangers that originate from outside. Individuals or actions that encroach upon the condition of protection are responsible for the breach of security. A security is a fungible, negotiable interest representing financial value. Securities are broadly categorized into debt and equity securities. Securities may be represented by a certificate or, more typically, by an electronic book entry interest. Certificates may be bearer, meaning they entitle the holder to rights under the security merely by holding the security, or registered, meaning they entitle the holder to rights only if he or she appears on a security register maintained by the issuer or an intermediary. They include shares of corporate stock or mutual funds, bonds issued by corporations or governmental agencies, stock options or other options, limited partnership units, and various other formal investment instruments that are negotiable and fungible. Precisely the price of new security is determined by the assets holding by the individual enterprise in terms of collateral guarantee. Question 6: Aero Company currently has net income of $3 million and 1 million common shares outstanding which sell for $18 per share, Aero has decided to issue new stock to raise $4000, 000 to expand its operations. Aero's investment banker will sell the new shares for $18 per shares with the spread of 7%. There will be a $60,000 registration cost. a. Calculate the current EPS and PE ratio. b. How many shares have to be sold to net the $4,000,000 that Aero needs EPS: (Earning Per Share) EPS is generally considered to be the single most important variable in determining a share's price. It is also a major component of the price-to-earnings valuation ratio. As cited above Aero has a net income of $3000,000. If the company paid out $1 million in preferred dividends and had 10 million shares for one half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million. Then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M). The EPS and PE ratio stands 3:1 And Aero needs to sell 222.22 Question 7: PG Corp has bond outstanding with a par value of $1,000 an annual interest payment of $110 a market price of $ 1,200 and a maturity in ten years. Determine the following a. Coupon rate b. Current yield c. Approximate yield of maturity. The Coupon Rate is the amount promised per dollar of the face value of the bond. For instance, PG Corp the annual interest to be paid on a $1000 bond with a nominal interest rate of 8% is $80. Typically, interest payments are made semiannually. The term derives from Bearer Bonds, once more common than now, which actually bore coupons to be detached and presented for payment as interest became due. Even with registered bonds the term survives and is distinguished from Yield, which relates the coupon rate to the market price of the bond. A certificate evidencing the obligation to pay an installment of interest or a dividend that must be cut and presented to its issuer for payment when it is due. Coupons are usually attached to a document, such as a promissory note, bond or share of stock. A coupon is a written contract for the payment of a definite amount on a specified date according to the terms of the main document from which it must be separated for presentation for payment. Each coupon represents a separate promise by its issuer to pay its holder on the due date. Annual income divided by the current price of the security. This measure looks at the current price of a bond instead of its face value and represents the return an investor would expect if he or she purchased the bond and held it for a year. Therefore the coupon rate of PG Corpn results $179 The current yield results to be $179,000 And its yield in maturity outcomes $179000,000 Question 8: Shares of Darwin Inc sell for $20 per share. 40% earnings are paid in dividends. What is the dividend yield Earnings are $100,000 and there are 10,000 shares of stock outstanding. Dividend Yield is a financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows: Dividend yield is a way to measure how much cash flow you are getting for each dollar invested in an equity position - in other words, how much "bang for your buck" you are getting from dividends. Investors who require a minimum stream of cash flow from their investment portfolio can secure this cash flow by investing in stocks paying relatively high, stable, dividend yields. Therefore $20,00 Question 9: Ross owns 918 shares of Flag Fabric Co. There are 13 directors to be elected. 31,000 share of common stock are outstanding. There is a cumulative voting. a. How many votes can be cast for directors b. How many votes does Betsy control c. What percentage of vote does Betsy control Since Ross owns shares of Flag Fabric numbered 918, it owes similar proportionate privilege of veto. In relation to a company, directors are officers of the company charged with the conduct and management of its affairs. The directors collectively are referred to as a board of directors. Sometimes the board will appoint one of its members to be the chairman of the board. Plainly Ross can cast 33 votes. Theoretically, the control of a company is divided between two bodies: the board of directors, and the shareholders. In practice, the amount of power exercised by the board varies with the type of company. In small private companies, the directors and the shareholders will normally be the same people, and thus there is no real division of power. In large public companies, the board tends to exercise more of a supervisory role, and individual responsibility and management tends to be delegated downward to individual professional executive. Betsy thus, control rest of the votes that counts 63, with the percentage same. Question 10: The stockholders' equity portion of the balance sheet of Rollover Tire Company is as follows Common Stock (200,000 shares at $10 par) $20,000,000 Paid-in-Capital in Excess of Par $17,000,000 Retained Earnings $33,000,000 $70,000,000 The current market value of Rollover stock is $20 per share. Show what the balance sheet would look like if Rollover declares a 10% stock dividend. A comprehensive financial statement that is a summarized assessment of a company's accounts specifying its assets and liabilities. A report, usually prepared by independent auditors or accountants, which includes a full and complete statement of all receipts and disbursements of a particular business. A review that shows a general balance or summation of all accounts without showing the particular items that makes up the several accounts. The balance would look like thus. Rollover Tire Company Balance Sheet As of December 03,2007 ----------------------------------- Fixed Assets Machinery 20,000 ----------------------------------- Total fixed assets 20,000 ----------------------------------- Accounts Payable 1700,000 Add 300,000 ----------------------------------- Net current assets Long-Term Liabilities 1700,000 ----------------------------------- Total Long Term Liabilities 17,000 ----------------------------------- NET ASSETS 70,000000 ----------------------------------- Shareholders' Equity Share Capital Retained profits 70,000000 ----------------------------------- Read More