FIN 201_Questions

Tutorial 1
1. What are the differences between sole proprietorship and corporation (comparing the strengths
and weaknesses)?
2. Compare and contrast the terms “stockholder” and “stakeholder.”
3. Is the shareholder wealth maximization goal a short or long-term goal? Explain your answer.
4. Can there be a difference between profit maximization and shareholder-wealth maximization?
5. Why is profit maximization, by itself, is an inappropriate goal?
6. Which of the two should be the goal of the firm and its management?
7. What are some of the ways in which manager-shareholder conflicts (agency problem) may be
controlled?
8. What are agency costs or agency problems or agency conflict? Why do these tend to increase
in severity as a corporation grows larger?
9. What issue does agency theory examine? Why is it important in a public corporation rather
than in a private corporation?
10. Why are institutional investors important in today's business world?

Tutorial 1_MCQ answer

1) At its most basic level, the function of financial intermediaries is to ________.

A) track and report interest rates
B) move money from lenders to borrowers and back again
C) report all financial transactions to the federal government
D) effect a transfer of wealth in society

2) Which of the following is NOT an example of a financial transaction?

A) Your parents use their credit card to pay this term's college tuition.
B) You use the ATM to withdraw British pounds so you can fly to London.
C) Your roommate lends you $20 and you repay it in one week.
D) All of the above are financial transactions.

3) The movement of money from lender to borrower and back again is known as ________.
A) the circle of life
B) corporate finance
C) the cycle of money
D) money laundering

4) The common objective of borrowing and lending is to ________.

A) make all parties better off
B) gain a profit at the other's expense
C) make a firm or individual appear more liquid than is really the case
D) thwart regulatory authority

5) Which of the following is NOT a function of a financial intermediary in the

lending/borrowing process?
A) To help establish terms of the lending/borrowing agreement
B) To match the borrower and the lender
C) To bear the risk that the borrower will not repay
D) All of the above are functions of a financial intermediary.

6) You place $500 into your checking account at First Bank and earn 1% APR on your deposit.
Your professor borrows money at a rate of 8% from the same bank for a tuition loan for her son.
Which of the following statements is true?
A) The bank is criminally liable to you for paying an interest rate lower than the expected rate of
inflation.
B) You and your professor have an obvious conflict of interest because you have accounts at the
same financial institution.
C) You benefit from earning interest on your deposit, safety for your funds, and having a
recognizable means for paying for your financial obligations without having to hold cash.
D) Your professor is the only party to be made worse off by this example because she is the only
party paying net interest.

7) The basic function of financial intermediaries is to move advice from lenders to borrowers and
back to lenders.

8) In the lending/borrowing process, a financial intermediary function is to bear the risk that the
borrower will not repay.

9) All financial transactions have a buyer and a seller.

10) Give three examples of a financial transaction.

11) Which of the following best identifies the four main areas of finance?
A) Exchange rate management, investments, financial institutions and markets, international
finance
B) Corporate finance, investments, capital structure, international finance
C) Corporate finance, investments, financial institutions and markets, international finance
D) Corporate finance, capital budgeting, financial institutions and markets, regulation
that each represents.

12) Of the following, which is NOT one of the four main areas of finance?
A) International finance
B) Corporate finance
C) Investments
D) All are considered main areas of finance.
13) The set of financial activities that support the OPERATIONS of a business is best described
by which main area of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance

14) ________ is the area of finance concerned with activities such as borrowing funds to finance
projects such as plant expansions or new product launches.
A) Working capital management
B) International finance
C) Investments
D) Corporate finance

15) ________ is the area of finance concerned with activities such as repayment of borrowed
funds through dividends or interest payments.
A) Investments
B) Corporate finance
C) Capital budgeting
D) International finance

16) ________ is the area of finance concerned with the activities of buying and selling financial
assets such as stocks and bonds.
A) Investments
B) Corporate finance
C) International finance
D) Financial markets and institutions

17) Which of the following is NOT typically thought of as an investment activity?

A) Accurately pricing financial assets
B) The process of buying and selling financial assets
C) Repaying borrowed funds
D) Negotiating the rules and regulations of financial transactions

18) The organized financial intermediaries and the forums that promote the cycle of money is a
good definition of which of the following main areas of finance?
A) Corporate finance
B) Investments
C) Financial institutions and markets
D) International finance

19) Financial institutions and markets

A) are the organized financial intermediaries and the forums that promote the cycle of money.
B) compose the set of financial activities that support the operations of a business.
C) are the activities centered on the purchase and sale of financial assets.
D) are concerned only with the addition of a multinational element to all finance activities.
20) Of the following, which is NOT an example of a financial intermediary?
A) Commercial bank
B) Insurance company
C) Investment bank
D) All of the above are financial intermediaries.

21) Of the following, which is NOT an activity engaged in by a financial intermediary?

A) Matching borrowers and lenders
B) Bearing risk
C) Managing retirement portfolios for large classes of employees
D) All of the above are activities of financial intermediaries.

22) "Concern with the multinational elements of financial activities" best describes which of the
four main areas of finance?
A) Investments
B) International finance
C) Corporate finance
D) Financial institutions and markets

23) Which of the following is a reason why expertise in international finance is important?
A) The process of assessing risk among many countries is more difficult than assessing risk for a
single country.
B) Financial regulatory rules and requirements differ from country to country.
C) Changes in economic conditions impact the relative values of currency among countries.
D) All of the above are reasons for gaining expertise in international finance.

24) Which of the following is NOT an activity of a financial institution or market?

A) Bringing together buyers and sellers of financial assets
B) Providing a market for the transaction of financial assets
C) Providing information to buyers and/or sellers of financial assets
D) All are activities of financial institutions.

Tutorial 2
1. With regard to financial ratio analysis, how do the viewpoints held by the firm’s and
prospective shareholders, creditors, and management differ?
2. What is the difference between dividends and interest expenses?
3 Sosa Diet Supplements had earnings after taxes of $800,000 in the year 20X1 with 200,000
shares of stock outstanding. On January 1, 20X2, the firm issued 50,000 new shares.
Because of the proceeds from these new shares and other operating improvements, earnings
after taxes increased by 30 percent.
a. Compute earnings per share for the year 20X1.
b. Compute earnings per share for the year 20X2.
4. a. Swank Clothiers had sales of $383,000 and cost of goods sold of $260,000. What is
the gross profit margin (ratio of gross profit to sales)?
b. If the average firm in the clothing industry had a gross profit of 25 percent, how is the
firm doing?

5. A-Rod Fishing Supplies had sales of $2,500,000 and cost of goods sold of $1,710,000.
Selling and administrative expenses represented 10 percent of sales. Depreciation was 6
percent of the total assets of $4,680,000. What was the firm’s operating profit?

6. Arrange the following income statement items so they are in the proper order of an income
statement:
Taxes Earnings per share
Shares outstanding Earnings before taxes
Interest expense Cost of goods sold
Depreciation expense Earnings after taxes
Preferred stock dividends Earnings available to common
Operating profit stockholders
Sales Selling and administrative expense
Gross profit

7. Lemon Auto Wholesalers had sales of $1,000,000 last year and cost of goods sold represented
78 percent of sales. Selling and administrative expenses were 12 percent of sales.
Depreciation expense was $11,000 and interest expense for the year was $8,000. The firm’s
tax rate is 30 percent.
a. Compute earnings after taxes.
b. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests
that by increasing selling and administrative expenses to 14 percent of sales, sales can
be increased to $1,050,900. The extra sales effort will also reduce cost of goods sold
to 74 percent of sales. (There will be a larger markup in prices as a result of more
aggressive selling.) Depreciation expense will remain at $11,000. However, more
automobiles will have to be carried in inventory to satisfy customers, and interest
expense will go up to $15,800. The firm’s tax rate will remain at 30 percent. Compute
revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto
Wholesalers. Will her ideas increase or decrease profitability?
8 Vriend Software Inc.’s book value per share is $15.20. Earnings per share is $1.88, and the firm’s
stock trades in the stock market at 3.5 times book value per share, what will the P/E ratio be?
(Round to the nearest whole number.)

Tutorial 3

1. Dr. Zhivàgo Diagnostics Corp. income statements for 20X1 are as follows:

Sales.......................................................................................$2,790,000
Cost of goods sold.................................................................. 1,790,000
Gross profit............................................................................ 1,000,000
Selling and administrative expense........................................ 302,000
Operating profit...................................................................... 698,000
Interest expense...................................................................... 54,800
Income before taxes............................................................... 643,200
Taxes (30%)........................................................................... 192,960
Income after taxes.................................................................. $ 450,240

a. Compute the profit margin for 20X1.

b. Assume that in 20X2, sales increase by 10 percent and cost of goods sold increases by 20
percent. The firm is able to keep all other expenses the same. Assume a tax rate of 30
percent on income before taxes. What is income after taxes and the profit margin for
20X2?

2. Assume the following data for Cable Corporation and Multi-Media Inc.

Cable Multi-
Corporation Media Inc.
Net income................................ $ 31,200 $ 140,000
Sales.......................................... 317,000 2,700,000
Total assets................................ 402,000 965,000
Total debt.................................. 163,000 542,000
Stockholders’ equity................. 239,000 423,000
a. Compute the return on stockholders’ equity for both firms using ratio 3a. Which firm
has the higher return?

b. Compute the following additional ratios for both firms:

Net income/Sales
Net income/Total assets
 Sales/Total assets
Debt/Total assets
c. Discuss the factors from part b that added or detracted from one firm having a higher
return on stockholders’ equity than the other firm as computed in part a.

3. A firm has sales of $3 million, and 10 percent of the sales are for cash. The year-end
accounts receivable balance is $285,000. What is the average collection period? (Use a
360-day year.)

4. NZ’s Shoe Stores has RM 2,000,000 in yearly sales. The firm earns 3.8 percent on each
Ringgit of sales and turns over its assets 2.5 times per year. It has RM60,000 in current
liabilities and RM140,000 in long-term liabilities.
a) What is its return on stockholders’ equity?
b) If the asset base remains the same as computed in part a, but total asset turnover goes up
to 3, what will be the new return on stockholders’ equity? Assume that the profit margin
stays the same as do current and long-term liabilities.

5. Ratio comparisons Robert Arias recently inherited a stock portfolio from his uncle. Wishing to
learn more about the companies in which he is now invested, Robert performs a ratio analysis
on each one and decides to compare them to each other. Some of his ratios are listed below.

Island Burger Fink Roland

Ratio Electric Utility Heaven Software Motors
Current ratio 1.10 1.3 6.8 4.5
Quick ratio 0.90 0.82 5.2 3.7
Debt ratio 0.68 0.46 0.0 0.35
Net profit margin 6.2% 14.3% 28.5% 8.4%

Assuming that his uncle was a wise investor who assembled the portfolio with care,
Robert finds the wide differences in these ratios confusing. Help him out.

a) What problems might Robert encounter in comparing these companies to one another on
the basis of their ratios?
b) Why might the current and quick ratios for the electric utility and the fast-food stock be
so much lower than the same ratios for the other companies?
c) Why might it be all right for the electric utility to carry a large amount of debt, but not the
software company?
d) Why wouldn’t investors invest all of their money in software companies instead of in less
profitable companies? (Focus on risk and return.
Tutorial 4

1. What kind of items should you expect to find recorded in a firm’s cash budget?

2. Is it safe to rely solely on historical data when preparing the forecast for sales revenues? Why
or why not?

3. Explain how preparing sales forecasts requires using both internal and external data?
Table 4.2

Magna Fax, Inc.

Balance Sheet
For the Years Ended December 31, 2014 and 2015
4) The credit manager at First National Bank has just received the income statement and balance
sheet for Magna Fax, Inc. for the year ended December 31,2015. (See Table 4.2.) The bank
requires the firm to report its earnings performance and financial position quarterly as a
condition of a loan agreement. The bank's credit manager must prepare two key financial
statements based on the information sent by Magna Fax, Inc. This will be passed on to the
commercial loan officer assigned to this account, so that he may review the financial condition of
the firm.
(a) Prepare a statement of retained earnings for the year ended December 31, 2015.
(b) Prepare a summary of cash inflows and cash outflows for the year ended December 31, 2015.
(c) Prepare a statement of cash flows for the year ended December 31, 2015, organized by cash
flow from operating activities, cash flow from investment activities, and cash flow from
financing activities.

Tutorial 5
1. Why does money have a time value? Does inflation have anything to do with making a dollar
today worth more than a dollar tomorrow?

2. You invest $3,000 for three years at 12 percent.

a. What is the value of your investment after one year? Multiply $3,000 × 1.12.
b. What is the value of your investment after two years? Multiply your answer to part a
by 1.12.
c. What is the value of your investment after three years? Multiply your answer to part b
by 1.12. This gives your final answer.

d. Combine these three steps by using the formula to find the future
value of $3,000 in 3 years at 12 percent interest.

3. You wish to make a substantial down payment on a lake cottage and you currently have
$18,325 invested at an annual rate of 4.75%. How much money will be in the account in 2.5
years if it continues to earn at its present rate?
A) $18,325
B) $19,464
C) $20,579
D) $20,605
Answer: C
Explanation: C) FV = PV ∗ (1 + r)n = $18,325 ∗ (1.0475)2.5 = $20,579

4. The current price on a 60-inch flat panel LCD HD television is $2,300. Big screen HD
television prices have dropped at an average rate of 9% per year in recent years. If you expect
this trend to continue, how much will this style of television cost in three years?
A) $2,979
B) $2,300
C) $1,958
D) $1,733
Answer: D
Explanation: D) Expected future value of television = $2,300 ∗ (1 - 0.09)3 = $1,733.21

5. You have purchased a Treasury bond that will pay $10,000 to your newborn child in 15 years.
If this bond is discounted at a rate of 3.875% per year, what is today's price (present value) for
this bond?
A) $8,417
B) $8,500
C) $5,654
D) $10,000
Answer: C

Explanation: C) PV = = = $5,654
6. Your parents plan to spend $20,000 on a car for you upon graduation from college. If you will
graduate in three years and your parents can earn 4.125% annually on their investment, how
much money must they set aside today for your car?
A) $20,000
B) $17,704
C) $17,716
D) $16,387
Answer: C

Explanation: C) PV = = = $17,715.97
7. Dividend growth rate is important to many investors. You are considering investing in a firm
after looking at the firm's dividends over a seven-year period. At the end of the year 2002, the
firm paid a dividend of $1.15. At year-end 2009, it paid a dividend of $1.84. What was the
average annual growth rate of dividends for this firm?
A) 7.25%
B) 9.86%
C) 6.94%
D) There is not enough information to answer this question.
Answer: C
Explanation: C) r = (FV/PV)1/n - 1 = ($1.84/$1.15)1/7 - 1 = 6.94%
MODE = END
8. Upon taking his first job out of college, your Dad earned an annual salary of $38,000 and set a
goal to earn $100,000 per year. If his salary increased at an average annual rate of 12%, how
long did it take to reach his goal?
A) At that rate of growth, your Dad still has not earned $100,000 in a single year.
B) 2.63 years
C) 26.31 years
D) 8.54 years
Answer: D

Explanation: D) n = = = 8.54 years

9. Kelvin has $2,500 but needs $5,000 to purchase a new golf cart. If he can invest his money at
a rate of 12% per year, approximately how many years will it take the money in Kelvin's account
to grow to $5,000? Use the Rule of 72 to determine your answer.
Note: The golf cart's price may have changed by the time Kelvin's account reaches a value of
$5,000.
A) 2 years
B) 4 years
C) 6 years
D) 8 years
Answer: C

Explanation: C) = 6 years via the Rule of 72.

10. Lesley will receive RM12,000 a year for the next 15 years as a result of her patent. If a 9
percent rate is applied, should she be willing to sell out her future rights now for RM100,000?

11. (a) Air Atlantic (AA) has been offered a 3-year old jet airliner under a 12-year lease
arrangement. The lease requires AA to make annual lease payments of RM500,000 at the
beginning of each of the next 12 years. Determine the present value of the lease payments if
the opportunity cost of funds is 14 percent.

(b) Your firm, New Sunrise, has just leased a RM28,000 BMW for you. The lease requires six
beginning of the year payments that will fully amortize the cost of the car. What is the amount
of the payments if the interest rate is 12 percent?

12. You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to
receive RM20,000 at the end of each year for 30 years. You know that you will be able to earn
11 percent per year during the 30-year retirement period.

a. How large a fund will you need when you retire in 20 years to provide the 30-years,
RM20,000 retirement annuity?

b. How much will you need today as a single amount to provide the fund calculated in part (i) if
you earn 9 percent per year during the 20 years preceding retirement?
c. What effect would an increase in the rate you earn both during and prior to retirement have on
the vales found in parts (i) and (ii)? Explain.

13. Calculate the future value of an annuity of $5,000 each year for eight years, deposited at 6
percent.

14. Calculate the present value of an annuity of $3,900 each year for four years, assuming an
opportunity cost of 10 percent.

15. Dottie has decided to set up an account that will pay her granddaughter (Lexi) $5,000 a year
indefinitely. How much should Dottie deposit in an account paying 8 percent annual interest?

16. Nico establishes a seven-year, 8 percent loan with a bank requiring annual end-of-year
payments of $960.43. Calculate the original principal amount.

17. A lottery administrator has just completed the state's most recent $50 million lottery.
Receipts from lottery sales were $50 million and the payout will be $5 million at the end of each
year for 10 years. The expenses of running the lottery were $800,000. The state can earn an
annual compound rate of 8 percent on any funds invested.
(a) Calculate the gross profit to the state from this lottery.
(b) Calculate the net profit to the state from this lottery (no taxes).

18. Aunt Tillie has deposited $33,000 today in an account which will earn 10 percent annually.
She plans to leave the funds in this account for seven years earning interest. If the goal of this
deposit is to cover a future obligation of $65,000, what recommendation would you make to
Aunt Tillie?

Tutorial 6
1. Lycan, Inc., has 7 percent coupon bonds on the market that have 8 years left to maturity.
The bonds made annual payments. If the required rate of return on these bonds is 10 percent,
what is the current bond price?

2. Bond Yields. Smart Choice Plc has 10 percent coupon bonds on the market with 9 years left
to maturity. The bonds make annual payments. If the bond currently sells for $1,145.70, what
is the YTM? Given your required rate of return on these bonds is 10 percent, Should you
purchase the bond? Why?

3. Coupon Rates. Merton Enterprises has bonds on the market making annual payments, with
16 years to maturity, and selling for $963. At this price, the bonds yield 7.5 percent. What
must the coupon rate be on Merton’s bonds?
4. App Store Co. Issued 15-year bonds one year ago at a coupon rate of 6.1 percent. The bonds
make semiannual payments. If the YTM on these bonds is 5.4 percent, what is the current
bond price?

5. Bond Yields. Night Hawk Co. Issued 15-year bonds two years ago at a coupon rate of 8.4
percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent
of par value, what is the YTM?

6. A comparison between coupon rate and yield to maturity could not determine whether a bond
is traded at par, premium or discount. It can only be done by comparing market price of the
bond to its par value. True or False? Explain.

7. Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon rate
of 9%. The $1,000 par value bond pays interest semiannually and was originally issued with a
term of 30 years. If today's interest rate is 14%, what is the value of the bond today?

8.Aurand, Inc. has outstanding bonds with an 8% annual coupon rate paid semiannually. The
bonds have a par value of $1,000, a current price of $904, and will mature in 14 years. What is
the annual yield to maturity on the bond?

9.DAH, Inc. has issued a 12% bond that is to mature in nine years. The bond had a $1,000 par
value, and interest is due to be paid semiannually. If your required rate of return is 10%, what
price would you be willing to pay for the bond?

10. The market price of a 20-year, $1,000 bond that pays 9% interest semiannually is $774.31.
What is the bond's yield to maturity?

Tutorial 7

1. What factors make the valuation of common stocks more complicated than the valuation of
bonds and preferred stocks?

2. (a) What are the two components make up the required rate of return on common stock?
(b) Which type of dividend pattern for common stock is similar to the dividend payment for
preferred stock?

3. In what way is preferred stock similar to long-term debt? In what way is preferred stock like
common stock?
4. Garden Beauty provides maintenance services for commercial buildings. Currently, the beta
on its common stock is 1.08. The risk-free is now 10 percent, and the expected return on the
market portfolio is 15 percent. It is january1, the company is expected to pay a RM2 per share
dividend at the end of the year, and the dividends is expected to grow at a compound annual rate
of 11 percent for many years to come. Based o the CAPM and other assumption you might
make, what dollar value would you place on one share of this common stock?
5. Over the past 5 years, the dividends of the Dave Corporation have grown from RM0.70 per
share to the current level RM1.30 per share (D0). This growth rate is expected to continue for
the foreseeable future, g=13.27%. What is the value of a share of Dave Corporation common
stock to an investor who requires a 20 percent return on an investment?

6. (a) The preferred stock of NZ Corporation pays an annual dividend of RM6.30. It has a
required rate of return of 9 percent. Compute the price of the preferred stock.

(b) NZ Sportswear Corporation has preferred stock outstanding that pays an annual dividend
of RM12. It has a price of RM110. What is the required rate of return (yield) on the preferred
stock?

7. Terry Simex is expanding into a new geographic area. Management expects the new market to
fuel growth of 22 percent for three years. After that normal growth of 6 percent will resume.
Terry's most recent annual dividend was RM1.25. Lately other fruit companies return about
12 percent. How much should a share of Terry be worth?

8. Julie's X-Ray Company paid $2.00 per share in common stock dividends last year. The
company's policy is to allow its dividend to grow at 5 percent for 4 years and then the rate of
growth changes to 3 percent per year from year five and on. What is the value of the stock if
the required rate of return is 8 percent?

9. Compute the value of a share of common stock of Lexi's Cookie Company whose most recent
dividend was $2.50 and is expected to grow at 3 percent per year for the next 5 years, after
which the dividend growth rate will increase to 6 percent per year indefinitely. Assume 10
percent required rate of return.

Tutorial 8
1. Barclay plc is assessing an investment project. The estimated cash flows are as follows:
The business’s cost of finance is 15 per cent p.a. and it seeks projects with a three year maximum
discounted payback period. Should the project be undertaken on the basis of NPV and
discounted PBP?
2. Sportsman plc is a manufacturer of sports equipment. The firm is considering whether to
invest in one of two automated processes, the Lara or the Carling, both of which give rise to
staffing and other cost savings over the existing process. The relevant data relating to each
are given below:

The investment outlays are obviously additional cash outflows, while the annual cost savings are
cash flow benefits because total annual expenditures are reduced as a result of the investment.
Should the company invest in either of the two proposals and if so, which is preferable, using the
NPV, IRR, PBP and Profitability Index approach?

3. Branton & Co. Ltd is choosing between two mutually exclusive investment opportunities,
Project A and Project B. The estimated cash flows for the two projects are as follows:
 Calculate:
(a) the net present value for both projects.
(b) the approximate internal rate of return for Project A.
(c) the payback period and discounted payback period for both projects.
(d) the profitability index for both projects
Which project must be selected based on your calculations.
4. RTB plc has recently assessed a potential project to make and sell a newly developed
product. Two possible alternative systems have been identified, either one of which could be
used to make the product. The results of the assessment can be summarized as follows:

System B should be accepted as it has a higher NPV. IRR is giving a contradicting result as the
initial investments for both the projects are different. One should always base the decision on the
superior tool which is NPV.

5. What is meant by capital rationing? What are the two types of capital rationing that exist
in real life?

Tutorial 9
1. What effect would inflation have on a company's cost of capital?
(Hint: Think about how inflation influences interest rates, share prices, corporate profits, and
growth.)

2. Why is the cost of debt less than the cost of preferred stock if both securities are priced to
yield 10 percent in the market?

3. How does internal equity differ from external equity?

4. Kelly Corp's bonds are selling to yield new investors a return of 9%, while its preferred stock
is yielding 11%. Flotation costs are 10% of the proceeds of new issues sold to the public, and the
firm's tax rate is 40%. The company just paid a dividend of RM2.00 and is expected to grow at
6% indefinitely. Its stock is selling for RM21.20.
a. What is Kelly’s cost of debt?
b. What is Kelly”s cost of preferred stock?
c. What is Kelly’s cost of new equity?
5. NZ has a RM1,000 par value bond outstanding with 25 years to maturity. The bond carries an
annual interest payment of RM88 and is currently selling for RM925. NZ is in a 25 percent tax
bracket. The firm wishes to know what the after-tax cost of a new bond issue is likely to be. The
yield to maturity on the new issue will be the same as the yield to maturity on the old issue
because the risk and maturity date will be similar.
a. Compute the approximate yield to maturity on the old issue and use this as the yield for the
new issue.
b. Make the appropriate tax adjustment to determine the after-tax cost of debt.

6. The LexTech Company is trying to determine its weighted average cost of capital for use in
making a number of investment decisions. The firm's bonds were issued 6 years ago and have 14
years left until maturity. They carried an 8 percent coupon rate, and are currently selling for
RM962.50.
The firm's preferred stock carries a RM4.60 dividend and is currently selling at RM42.50 per
share. LexTech's investment banker has stated that issue costs for new preferred will be 50 cents
per share.
The firm has significant retained earnings, but will also need to sell new common stock to
finance the projects it is now considering. LexTech common stock is expected to pay a RM2.50
per share dividend next year, and is expected to maintain an 8 percent growth rate for the
foreseeable future. The stock is currently priced at RM50 per share, but new common stock will
have flotation costs of 60 cents per share.
LexTech has present capital structure of 50 percent long-term debt, 10 percent preferred stock,
and 40 percent common stock. The tax rate is 34 percent.
Calculate LexTech’s Weighted Average Cost of Capital (WACC) before the retained earnings
break occurs

Tutorial 10
1. Explain how rapidly expanding sales can drain the cash resources of a firm.

2. What are three theories for describing the shape of the term structure of interest rates (the yield
curve)? Briefly describe each theory.

3. What are the 5 Cs of credit that are sometimes used by bankers and others to determine
whether a potential loan will be repaid?
4. What does the EOQ formula tell us? What assumption is made about the usage rate for
inventory?

5. Thompson Wood Products has credit sales of $2,160,000 and accounts receivable of $288,000.
Compute the value of the average collection period.
6. Dome Metals has credit sales of $180,000 yearly with credit terms of net 60 days, which is
also the average collection period. Dome does not offer a discount for early payment, so its
customers take the full 60 days to pay. What is the average receivables balance? Receivables
turnover?
7. Why would a financial manager want to slow down disbursements?

8. NZ Athletic Wear has expected sales of 22,500 units a year, carrying costs of RM1.50 per
unit, and an ordering cost of RM3 per order.
a. What is the economic order quantity?
b. What does the EOQ formula tell us? What assumption is made about the usage rate for
inventory?
c. What will be the average inventory? The total carrying cost?
d. Assume an additional 30 units of inventory will be required as safety stock. What will the new
average inventory be? What will the new total carrying cost be?
e. Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of
inventory?
9. Sakura Sendirian Berhad is a retail shop selling food and beverage. The following is the
financial data for Year 2:
Beginning Inventory RM 39,586
Ending Inventory 42,884
Sales 386,590
Cost of goods sold 300,510
Beginning accounts 2,682
receivable
Ending accounts payable 3,536
Beginning accounts payable 26,210
Ending accounts payable 30,184
The retail Industry, as a whole, turns inventory about 90 days per year. Calculate the operating
cycle and cash conversion cycle for Sakura? (Assume 365 days).
10. Explain how should the firm manage its inventory, accounts receivable, and accounts payable
in order to reduce the length of its cash conversion cycle.

11. What is the financial manager’s primary goal with regard to inventory management? How
does this goal compare with the inventory goals of production and marketing? What trade-off
confronts the financial manager with regard to inventory turnover, inventory cost, and stock
outs? In what way is inventory viewed as an investment? Why is it important for the financial
manager to understand the inventory control techniques used by operations / production
managers?

Tutorial 11
1) ________ are just paper financial transactions.
A) Stock dividends and cash dividends
B) Stock splits and coupon payments
C) Stock splits and stock dividends
D) Stock dividends and interest payments

2) A ________ is a payment to current shareholders in which the payment is less than 25% of the
current shares held.
A) stock split
B) stock dividend
C) cash dividend
D) specially designated dividend

3) Stock splits and stock dividends ________.

A) are just paper financial transactions
B) divide the firm's existing shares into multiple shares with the same total dollar value
C) may be used to signal management's intentions to the marketplace
D) All of the above

4) Surf City Inc. has decided on a 3-for-1 stock split. If the firm currently has 900,000 shares
outstanding, how many shares will be outstanding after the stock split?
A) 3,600,000 shares
B) 2,700,000 shares
C) 1,200,000 shares
D) 300,000 shares

5) Tiger Training Inc. has decided on a 4-for-1 stock split. If the firm currently has 1,600,000
shares outstanding, how many shares will be outstanding after the stock split?
A) 400,000 shares
B) 1,600,000 shares
C) 3,200,000 shares
D) 6,400,000 shares
.
6) Tiger Training Inc. has decided on a 4-for-1 REVERSE stock split. If the firm currently has
1,600,000 shares outstanding, how many shares will be outstanding after the stock split?
A) 200,000 shares
B) 400,000 shares
C) 3,200,000 shares
D) 6,400,000 shares

7) Peterson Paper Products Inc. has 2,400,000 outstanding shares of stock selling for $52 per
share. After a 2-for-1 stock split, how many shares of stock are outstanding and what is the
change in the firm value (given no new information)?
A) 4,800,000 shares and a change in value of $124,800,000
B) 4,800,000 shares and a change in value of $0.00
C) 1,200,000 shares and a change in value of $124,800,000
D) 1,200,000 shares and a change in value of $0.00