FIN2023 Financial Management
Semester 2, 2024-2025 Academic Year
Assignment One
Due Date: 5pm, March 14, 2025
Question 1 (20 marks)
a. You recently sold 200 shares of Disney stock, and the transfer was made through a broker. Explain whether this is a primary market transaction or a secondary market transaction. (10 marks)
b. If a firm's manager deliberately understates costs and thereby increases profits, what impact will this unethical behavior. have on the firm’s stock price in the short run and in the long run? What other consequences could possibly result from this unethical behavior? (10 marks)
Question 2 (20 marks)
Using the following financial data, complete the missing entries in the balance sheet and income statement:
Total assets turnover: 1.6×
Days sales outstanding: 73 days (Calculation based on a 365-day year)
Inventory turnover ratio: 3×
Quick ratio: 2×
Debt ratio: 70%
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Assets
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Amount ($)
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Liabilities & Equity
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Amount ($)
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Balance sheet
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Cash
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Accounts Payable
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110,000
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Accounts Receivable
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Long-Term Debt
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Inventories
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Common Stock
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140,000
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Fixed Assets
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220,000
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Retained Earnings
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Total Assets
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Total L&E
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Income statement items
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Sales
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960,000
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Costs of Goods Sold
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Question 3 (20 marks)
Bradley Enterprises is considering two financial plans for next year. Management expects:
- EBIT = $50,000
- Total assets = $200,000
- Tax rate = 30%
Given the company only use debt and equity to finance its asset. Plan A uses 50% debt and 50% equity with an 8% interest rate. Bondholders require a Times Interest Earned (TIE) ratio ≥ 5. Plan B maximizes debt while adhering to the TIE constraint.
Assume all operational metrics, interest rates, and tax rates remain constant.
By how much does the ROE change when switching from Plan A to Plan B?
Question 4 (20 marks)
Your cousin offers to sell you her coffee truck business for $180,000 with "seller financing" at a 12% nominal annual rate (compounded monthly). The loan requires 24 equal monthly payments over 2 years, plus a final balloon payment of $30,000 at the end of the last month to fully repay the loan.
a. What would your monthly payments be? (9 marks)
b. Construct the amortization schedule for the first 3 months. (6 marks)
c. Explain the difference between the nominal interest rate (APR) and the effective annual rate (EAR). Why is the EAR a more accurate measure of the true cost of borrowing? (5 marks)
Question 5 (20 marks)
After graduation, you plan to work for Dynamo Corporation for 12 years and then start your own business. You expect to save and deposit $7,500 annually for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made one year from today. In addition, your grandfather has just given you a $25,000 graduation gift, which you will deposit immediately (t = 0). If the account earns 9% interest compounded annually, how much will you have when you start your business 12 years from now?