Finance

ADM2415 – 1B and 2B (Winter 2016) Principles of Finance

Assignment 2

Make Stuff Inc. Statement of Financial Position

As at December 31, 20XX

Liabilities and Shareholder's Equity Assets Liabilities

Cash $1,250,000 Accounts Payable $1,000,000 Account Relievable (net) $750,000 Current Portion of Long-term Debt $150,000 Inventory $2,000,000 Long-term Debt $4,500,000 Property, Plant and Equipment $12,000,000 Total Liabilities $5,050,000

Shareholder's Equity Common Shares $7,000,000 Retained Earnings $3,350,000 Total Shareholder's Equity $10,350,000

Total Assets $16,000,000 Total Liabilities and Shareholder's Equity $16,000,000

Make Stuff Inc. Statement of Financial Position

For the period ending December 31, 2X15

Sales $10,000,000 Cost of Goods Sold $6,000,000 Gross Profit $4,000,000 Expenses Interest Expense $250,000 Other Expenses $2,250,000 Total Expenses $2,500,000 Income before tax $1,500,000 Income Tax Expense $500,000 Net Income $1,000,000

Question 1 a. Using Make Stuff Inc’s financial

statements, calculate the following ratios:

i. Current ratio ii. Quick ratio

iii. Times Interest Earned iv. ROA v. ROE

b. What is the difference between

Book Value and Market Value?

c. Why is EBIT a better measure of a company than is Net Income?

d. What does a higher Inventory Turnover rate say about a company’s inventory?

Assignment is due on 16th March 2016 at the beginning of class.

Question 2 Project 'Mars' creates the following cash flows. You will need to invest $25,000 and starting at the end of Year 1 you will receive a cash flow of $5,000 until the end of Year 10. The cost of capital is 5%. Find the following based on the project cash flow:

a. Payback Period b. Discounted Payback Period c. NPV d. Approximate IRR e. Profitability Index

Question 3 Five years ago, you bought a brand new bond with a maturity equal to 20 years. It pays an 8% coupon. When you bought it five years ago it was at a discount because at the time, the market rate on a similar bond was 9%. The market rate is now 7% and you have decided to sell this bond. Based on this information,

a. What is your yield on the bond based only on capital appreciation? b. What is your yield on the bond based only on the coupon payments? c. What is your total yield on the bond when you sell it?