Principles of Finance

  Q1. Identify the key financial decisions facing the financial manager of any business firm and Explain the meaning of each decision? (1 mark) Q2. What can happen if a firm is poorly managed? (1 mark) Q3. If the expected inflation rate is 10 percent and the real rate of interest is 4 percent: Compute the nominal rate of interest. (Hint: use equation 2.1) (0.5 mark) Briefly differentiate between the nominal and the real rates of interest. (0.5 mark) Q4. Nimitz Rental Company provided the following information to its auditors. For the year ended March 31, 2011, the company had revenues of $878,412, general and administrative expenses of $352,666, depreciation expenses of $131,455, leasing expenses of $108,195, and interest expenses equal to $78,122. If the company’s tax rate was 34 percent, what is its net income after taxes? (1 mark) Q5. Modern Appliances Corporation has reported its financial results for the year ended December 31, 2011. Modern Appliances Corporation Income Statement for the Fiscal 31-Dec-11 Sales 5,398,412,000 Cost of goods sold 3,432,925,255 Gross profit margin 1,965,486,745 Selling, general, and admin. expenses 1,036,311,231 Depreciation 299,928,155 Operating income 629,247,359 Interest expense 35,826,000 EBT 593,421,359 Income taxes 163,104,554 Net earnings 430,316,805 Consolidated Balance Sheet Modern Appliances Corporation Balance Sheet as of December 31, 2011 Assets Liabilities and Stockholders’ Equity Cash and cash equivalents $ 514,412,159 Short-term borrowing $ 117,109,865 Accounts receivable 1,046,612,233 Trade accounts payable 466,937,985 Inventories 981,870,990 Other current liabilities 994,289,383 Other current assets 313,621,610 Total current assets $2,856,516,992 Total current liabilities $1,578,337,233 Net fixed assets 754,660,275 Long-term debt 1,200,691,565 Total liabilities $2,779,028,798 Goodwill 118,407,710 Common stock 397,407,352 Other assets 665,058,761 Retained earnings 1,218,207,588 Total equity 1,615,614,940 Total assets $4,394,643,738 Total liabilities and stockholders’ equity $4,394,643,738 Using the information from the financial statements, complete a comprehensive ratio analysis for Modern Appliances Corporation. a. Calculate these liquidity ratios: current and quick ratios. (0.2 mark) b. Calculate these efficiency ratios: inventory turnover, total asset turnover. (0.2 mark) d. Calculate these leverage ratios: total debt ratio, debt-to-equity ratio, Equity multiplier. (0.2 mark) e. Calculate these profitability ratios: gross profit margin, net profit margin, ROA, ROE. (0.2 mark) f. Use the DuPont identity, and after calculating the component ratios, compute the ROE for this firm. (0.2 mark)