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Assignment
Financial Management
SBS MBA
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STUDENT ID |
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UNIT TITLE |
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Name (in Full)
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Total Marks:
_______ / 90
Answer all the questions, each question 15 carries
Question: 1
a. Sandersen,
Inc., sells minicomputers. The firm's taxable income is $1,225,000. Calculate the corporation's tax liability.
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Corporate Tax Rates |
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Answer –
Calculating Corporation’s Tax Liability =
b. “Originally, the
sole objective of the federal government in taxing income was to generate
financing for government expenditures. Although this purpose continues to be
important, social and economic objectives have been added.” Substantiate the
statement with enough explanations. (15
marks)
Answer –
Originally, the sole
objective of the federal government in taxing income was to generate financing
for government expenditures. Although this purpose continues to be important,
social and economic objectives have been added. For instance, a company may receive
possible reductions in taxes if –
i.
It undertakes certain
ii.
Question: 2
a. Friedman
Manufacturing, Inc. has prepared the following information regarding two
investments under consideration. Which investment is better, based on risk (as
measured by the standard deviation) and return?
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Common Stock A |
Common Stock B |
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Probability |
Return |
Probability |
Return |
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.20 |
12% |
.10 |
4% |
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.50 |
18% |
.30 |
6% |
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.30 |
27% |
.40 |
10% |
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.20 |
15% |
Answer –
Expected Rate of Return of A =
0.20 x 12 = 2.4
+
0.50 x 18 = 9
+ 0.
b.
“More can be said about risk, especially as to its nature, when we
own more than one asset in our investment portfolio.” Define risk and explain
how risk is affected if we diversify our investment by holding a variety of
securities?
(15
marks)
Answer –
Risk
involves the chance an investment's actual return will differ from the expected
return. Risk includes the possibility of losing some or all of the original
investment. Different versions of risk are usually measured by calculating the
standard deviation of the historical returns or average returns of a specific
investment.
Risk
implies future uncertainty about deviation from expected earnings or expected
outcome. Risk measures the uncertainty that an investor is willing to take to
realize a gain from an investment.
Risks
are of different types and originate from different situations. We have
liquidity risk, sovereign risk, insurance risk, business risk, default risk,
etc. Various risks originate due to the uncertainty arising out of various
factors that influence an investment or a situation.
Diversification
is a technique that reduces risk by allocating investments among various
financial instruments, industries and other categories. It aims to maximize
return by investing in different areas that would each react differently to the
same event.
Most
investment professionals agree that, although it does not guarantee against
loss, diversification is the most important component of reaching long-range
financial goals while minimizing risk. Here, we look at why this is true and
how to accomplish diversification in your portfolio.
Investors
confront two main types of risk when investing:
Undiversifiable
- Also known as "systematic" or "market risk,"
undiversifiable risk is associated with every company. Causes are things like
inflation rates, exchange rates, political instability, war and interest rates.
This type of risk is not specific to a particular company or industry, and it
cannot be eliminated or reduced through diversification; it is just a risk that
investors must accept.
Diversifiable
- This risk is also known as "unsystematic risk," and it is specific
to a company, industry, market, economy or country; it can be reduced through
diversification. The most common sources of unsystematic risk are business risk
and financial risk. Thus, the aim is to invest in various assets so that they
will not all be affected the same way by market events.
Why We Should Diversify
Let's
say we have a portfolio of only airline stocks. If it is publicly announced
that airline pilots are going on an indefinite strike,and that all flights are
canceled, share prices of airline stocks will drop. Your portfolio will
experience a noticeable drop in value.
If,
however, we counterbalanced the airline industry stocks with a couple of
railway stocks, only part of your portfolio would be affected. In fact, there
is a good chance that the railway stock prices would climb, as passengers turn
to trains as an alternative form of transportation.
But,
we could diversify even further because there are many risks that affect both
rail and air because each is involved in transportation. An event that reduces
any form of travel hurts both types of companies - statisticians would say that
rail and air stocks have a strong correlation.
Therefore,
to achieve superior diversification, we would want to diversify across the
board, not only different types of companies but also different types of industries.
The more uncorrelated our stocks are, the better.
It's
also important that we diversify among different asset classes. Different
assets - such as bonds and stocks - will not react in the same way to adverse
events. A combination of asset classes will reduce our portfolio's sensitivity
to market swings. Generally, the bond and equity markets move in opposite
directions, so, if our portfolio is diversified across both areas, unpleasant
movements in one will be offset by positive results in another.
There
are additional types of diversification, and many synthetic investment products
have been created to accommodate investors' risk tolerance levels. However,
these products can be very complicated and are not meant to be created by
beginner or small investors. For those who have less investment experience, and
do not have the financial backing to enter into hedging activities, bonds are
the most popular way to diversify against the stock market.
Unfortunately,
even the best analysis of a company and its financial statements cannot
guarantee that it won't be a losing investment. Diversification won't prevent a
loss, but it can reduce the impact of fraud and bad information on your
portfolio.
Question 3:
a.
J and S Corporation is evaluating its financing
requirements for the coming year. The firm has only been in business for 1
year, but its CFO predicts that the firm's operating expenses, current assets,
net fixed assets, and current liabilities will remain at their current
proportion of sales.
Last year J and S Corp. had $15 million in sales with net income of $1.5
million. The firm anticipates that next year's sales will reach $18 million
with net income rising to $3 million. Given its present high rate of growth,
the firm retains all its earnings to help defray the cost of new investments.
The firm's balance sheet for the year just ended is found below:
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J and S Corporation |
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aNot applicable. This figure does
not vary directly with sales and is assumed to remain constant for purposes
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Estimate J and S corp. total financing requirements (i.e., total assets) for
2001 and its net funding requirements (DFN).
Answer –
Percentage of Sales = 
= 
= 40%
Forecast (This Year Data x 1.4)
CA
$ 8400000
NFA $ 12600000
AP
$ 5250000
LTD
+ $ 5950000
b.
Give a brief
summary of forecasting to determine additional (discretionary) funding
(financing) needed. (15
marks)
Question
4:
The balance sheet and income
statement for the McDonald's are as follows.
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McDonald's Corporation 2016 Income Statement ($
Millions) |
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McDonald's Corporation December 31, 2016 Balance
Sheet ($ Millions) Assets |
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a. Calculate
the following ratios:
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RATIO |
INDUSTRY NORM |
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Current ratio |
0.70 |
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Inventory turnover |
90 |
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Average collection period |
6.5 days |
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Debt ratio |
50% |
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Total asset turnover |
1.5 |
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Fixed asset turnover |
2 |
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Operating profit margin |
21% |
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Return on common equity |
15% |
Answer –
Ratios ->
Current
Ratio = 
= 
= 0.3829
Inventory
Turnover = 
= 
= 92.07
Average
Collection Period = 
= 
= 0.04 x 365 = 14.4
Debt
Ratio = 
= 
= 1.042
Total
Asset Turnover = 
= 
= 0.6308
Fixed
Asset Turnover =
= 
= 0.77
Operating
Profit Margin = 
= 
= 0.24
Return
on Equity (ROE) = 
= 
= 0.269
b.
Calculate the future sum of $5,000 given that it will
be held in the bank 5 years at an annual interest rate of 6 percent.
Answer –
Principal
= 5000
Time
= 5 years
c.
Knutson Products, Inc., is involved in the production
of airplane parts and has the following inventory, carrying, and storage costs:
- Orders must be placed in round
lots of 250,000 units.
- The carrying cost for 1 unit of
inventory is $ 10
- The ordering cost is $100 per
order.
i.
Determine the optimal EOQ level.
ii.
Determine the average inventory when the safety stock
is 2000 units.
(15 marks)
Answer –
i.
Optimum EOQ = 
Where,
D = Annual Demand
Question
5:
“Some of the financial techniques and strategies are necessary for
the efficient operation of an international business. Problems inherent to
these firms include multiple currencies, differing legal and political
environments, differing economic and capital markets, and internal control
problems. The difficulties arising from multiple currencies are stressed here,
including the dimensions of foreign exchange risk and strategies for reducing
this risk.” Elucidate. (15 marks)
Answer-
International business includes any type of business
activity that crosses nationalborders. Though a number of definitions in the
business literature can be foundbut no simple or universally accepted
definition exists for the term internationalbusiness. At one end of the
definitional spectrum, international business isdefined as organization that
buys and/or sells goods and services across two or more national boundaries,
even if management is located in a single country. Atthe other end of the
spectrum,
Question
6:
Explain the financial Axioms(15 marks)
- Risk - return trade-off
Answer-
The
risk-return tradeoff is the principle that potential return rises with an
increase in risk. Low levels of uncertainty or risk are associated with low
potential returns, whereas high levels of uncertainty or risk are associated
with high potential returns. According to the risk-return tradeoff, invested
money can render higher profits
Dear
students get fully solved assignments
Send
your semester & Specialization name to our mail id :
help.mbaassignments@gmail.com
or
call
us at : 08263069601
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