Fin 303 Homework #1 Csu

Homework Set I

1. 1.        Discuss the difference between book values and market values and explain which one is more important to the financial manager and why.

Book value is the price paid for an asset or liability. It remains unchanged, even if it has appreciated or depreciated over time, because of this, they are helpful in tracking profits and losses when assets are sold off. The market value is the current price at which an asset or liability can be sold at. In terms of importance to a financial manager, the market value is more helpful because it more accurately reflects possible cash flows that would occur at the present time.

1. 2.        Bonner Collision has shareholders' equity of $135,800. The firm owes a total of $115,000 of which 50 percent is payable within the next year. The firm net fixed assets of $151,900. What is the amount of the net working capital? 

Current Liabilities = 50% * $115,000 = $57,500

Total Assets = 135,800 (Equity) + $115,000 (Liabilities) = $250,800

Current Assets = $250,800 (Total Assets) – $151,900 (Fixed Assets) = $98,900

Working Capital = $98,900 (Current Assets) – $57,500 (Current Liabilities) =  $41,400

1. 3.        Kaylor Equipment Rental paid $70 in dividends and $481 in interest expense. The addition to retained earnings is $428 and net new equity is $500. The tax rate is 35 percent. Sales are $16,900 and depreciation is $690. What are the earnings before interest and taxes? 

The net income for Kaylor would be the dividends paid and the addition to retained earnings.

Net Income = $70 + $428 = $498.

Earnings Before Taxes = $498 (NI) /.65 = $766.15

Earnings Before Interest and Taxes = $766.15 + $481 (Interest Expense) = $1,247.15

1. 4.        The Widget Co. purchased new machinery three years ago for $4.5 million. The machinery can be sold to the Roman Co. today for $2.5 million. The Widget Co.'s current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,475,000, and net working capital of $750,000. If all the current assets were liquidated today, the company would receive $1.7 million in cash. The book value of the Widget Co.'s assets today is _____ and the market value of those assets is _____. 

Book Value = $750,000 (Working Capital) + $1,475,000 (Current Liabilities) +  $2,500,000 (Fixed Assets) = $4,725,000 Market Value = $1,700,000 (Liquidation) + $2,500,000 (Machinery sale) = $4,200,000

1. 5.        What is the amount of dividends paid in 2011?  

Dividends paid = $2,122 (2010 RE) + $1,374 (NI) = $3,496 (RE Before dividends paid) - $2,696 (2011 RE) = $800

1. 6.        Al's Sport Store has sales of $957,400, costs of goods sold of $658,300, inventory of $228,400, and accounts receivable of $84,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit? 

Days Inv. Outstanding = $228,400(Inventory)/$658,300(COGS)*365 = 126.64 Days

1. 7.        The Purple Martin has annual sales of $787,400, total debt of $250,000, total equity of $395,000, and a profit margin of 4.50 percent. What is the return on assets? 

Return On Assets = Net Income/Total Assets = ($787,400*.045)/($250,000+$395,000) = $35,433/$645,000 = 5.49%

1. 8.        The Home Supply Co. has a current accounts receivable balance of $380,000. Credit sales for the year just ended were $1,700,000. How many days on average did it take for credit customers to pay off their accounts during this past year? 

Average Collection Period = Average AR * 365 / Credit Sales = $380,000*365/$1,700,000 = 81.59 Days

1. 9.        You invested $1,500 in an account that pays 7 percent simple interest. How much more could you have earned over a 15-year period if the interest had compounded annually? 

Simple Interest = $1,500(1 + (7%*15)) = $3,075

Compound Interest = $1,400*1.07^20 = $5,417.56

Difference = $5,417.56 – $3,075 = $2,342.56