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FIN6001 Application Of Various Financial Concepts For Time And Heavy Costs

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Questions:

1. Briefly explain the goal(s) of the financial manager of a corporate form of business organization.
 
2. What advantages does the corporate form of organization have over sole proprietorships or partnerships? Also mention any one disadvantages of the corporate form of organization.
 
3. Briefly explain is agency problem and the main reasons that an agency relationship exists in the corporate form of organization, and what kind of problems can arise?
 
4. Explain briefly the role of Primary Markets and Secondary Markets. Is an initial public offering (IPO) a primary market transaction or a secondary market transaction.
 
5. In recent years, Maxwell company, has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company improved?
 
6. Briefly explain the concept of working capital and list down the components of working capital.
 
7. What is the difference between simple interest and compound interest? Illustrate your answer. Which one will you prefer as an investor.
 
8. State the difference between an annuity and a perpetuity.
 
9. Explain the basic difference between debt and equity?
 
10. Briefly explain the differences between preferred and common stock. If you are the investor which one will you prefer and why?
 
11. Briefly explain the relationship between interest rates and bond prices?
 
12. Explain the differences and similarities between net present value (NPV) and the profitability index (PI).
 
13. What are the different kinds of risk in finance.
 
14. An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year 6. If other investments of equal risk earn 8% annually, what is the investment’s present value?
 
15. Find the future value of the following ordinary annuities.
a. FV of $400 each 6 months for 5 years at a nominal rate of 12%, compounded semiannually
b. FV of $200 each 3 months for 5 years at a nominal rate of 12%, compounded quarterly
c. The annuities described in parts a and b have the same amount of money paid into them during 5-year period, and both earn interest at the same nominal rate. Is the future value of both same or different, if different what is the reason?
 
16. What is the present value of a perpetuity of $100 per year if the appropriate discount rate is 7%? If interest rates in general were to double and the appropriate discount rate rose to 14%, what would happen to the present value of the perpetuity?
 
17. What is compounding? What would the future value of $100 be after 5 years at 10% compound interest?
 
18. Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest, compounded annually. How much will you have when the CD matures? How would you answer change if the interest rate were 5% or 6%, or20%?
 
19. You currently have AED90,000 and plans to purchase a 6-year certificate of deposit (CD). How much will you have when the CD matures if it pays 7% interest, compounded annually?
 
20. Norwegian Adventures offers a 7 percent coupon bond with annual payments. The yield to maturity is 8 percent and the maturity date is 7 years from today. What is the market price of this bond if the face value is $1,000?
 
21. Calculate the cash ratio from the following information:
 
Cash $45,000
Cash equivalent $60,000
Cash flows from operating activities $970,000
Current assets $480,000
Current liabilities $230,000
Net credit sales $890,000
Average net receivables $62,000

22. Firebird Company reported the following financial information at the end of 2017:
in millions
Merchandise inventory $240
Minority interest 70
Cash and equivalents 275
Accounts receivable 1,150
Accounts payable 225
Property & equipment 2,160
Accrued expenses 830
Current portion of long-term debt 120
Long-term debt 1,570
Retained earnings 4,230
Calculate Firebird’s current assets and working capital.
 
23. Lululemon Athletica Inc. pays a constant $11 dividend on its stock. The company will maintain this dividend for the next 15 years and will then cease paying dividends forever. If the required return on this stock is 12 percent, what is the current share price?
 
24. The Dow Chemical Company just paid a dividend (D0) of $6 per share. It is expected to increase its dividend by 5% per year. If the market requires a return of 18% on assets with this kind of risks, how much should the stock is selling for?
 
25. Consider the following two mutually exclusive projects:
Year Cash Flow Project A Cash Flow Project B
0 - $175,000 - $25,000
1 22,500 12,000
2 32,500 11,000
3 32,500 9,750
4 220,000 7,300
Whichever project you choose, if any, you require a 13 percent return on your investment.
a) If you apply the payback criterion, which investment will you choose? Why?
b) If you apply the discounted payback criterion, which investment will you choose? Why?
c) If you apply the NPV criterion, which investment will you choose? Why?
d) If you apply the IRR criterion, which investment will you choose? Why?
e) If you apply the profitability index criterion, which investment will you choose? Why?
f) Based on your answers in (a) through (e), which project will you finally choose? Why?
 
 
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