BA 2802 – PRINCIPLES OF FINANCE

Graded Homework 1 – Due on April 12, 2022 by 17:00

Rules: Students are allowed to work in groups on this homework assignment

however a single submission for the whole group is not allowed. Each and every
student in the group should turn in his or her own work. If you work in groups,
you need to list the names of people that you worked together on the upper right-
hand corner of the first page of your assignment. Your answers to the
questions should be hand written on PROFESSIONAL LOOKING A4
paper.

1. (38 points) Jane is working for an investment bank as an equity analyst. Her manager gave
her the financial statements of The Box of Chocolate Inc. Jane has to determine if the
company is financially healthy or not. Unfortunately, both the balance sheet and the income
statement of the company are not in the correct format. Furthermore, Jane spilled over
coffee on some numbers, and she cannot read them now. Fortunately, she has some ratios
that she can use to prepare the balance sheet and the income statement for 2021. The Box
of Chocolate Inc. has 5 million shares outstanding and paid $1.54 as dividends to its
shareholders at the end of 2021. The retained earnings at the beginning of 2021 was $12.9
million.
Debt ratio = 0.4
TIE = 10
Current ratio = 1.4
Quick ratio = 1.0
Cash ratio = 0.2
ROA = 0.12
Inventory turnover = 5.0
Days’ Sales in Receivables = 73 days

She listed the numbers she can read from financial statements of the company in the table
below in alphabetical order:
Accounts payable 20
Accounts receivable
Cash
Common Stock
Cost of Goods Sold
Depreciation 20
Equity
Fixed assets, net
Inventories
Long-term Debt
Notes Payable 5
Retained Earnings
Sales
Selling, general, and administrative expenses 10
Total assets 115

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 a. (14 points) By using the information provided above, prepare the correctly formatted
balance sheet and income statement of the company for 2021. Please note that the list
given above does not include all the items in the income statement. You should find
these items and prepare the income statement for the company in the correct format.

b. (15 points) Her manager asks Jane to analyze the profitability and market value of
the company. Jane realized that she needs some additional information, and she finds
out that the dividend yield for 2021 is 5%. She also gets the industry averages for a set
of ratios listed in the table below. Identify the ratios she needs to look at to analyze the
profitability and market value of the company. Calculate these ratios for The Box of
Chocolates Inc. Analyze the profitability and market value of the company relative to
the Industry Average. Conduct the Du Pont Analysis for both the company and the
industry.

Industry Average for 2021

Current Ratio 1.6
Quick Ratio 1.2
ROA 0.15
Profit Margin 0.125
Debt Ratio 0.385
Debt to Equity Ratio 1.5
Total Asset Turnover 1.20
Inventory turnover 5.5
Accounts Receivable Turnover 6
P/E 13.50
M/B 3.15

c. (5 points) Jane also calculated how fast The Chocolate Box Inc. can grow by using
only its internal sources. However, her manager does not like the number she sees. She
wants Jane to calculate the dividend payout ratio that will allow the company to grow
at 8% next year by using internal sources only. Calculate the dividend payout ratio
required to achieve this growth rate.

d. (4 points) By using the dividend payout ratio you solved for in part (c) of this question,
calculate the maximum growth rate the company can have next year by using internal
sources and borrowing while keeping a constant debt ratio.

2. (62 points) Last night, you watched “Midnight at the Pera Palace” and learned about time
travel. Your grandfather works at the Pera Palace and has the key for time traveling. Also,
in class, you learned about how a $10 deposited in a bank account becomes $447,189.84 in
200 years. This gives you an idea. With the help of your grandfather, first, you traveled
back to October 29, 1933, and celebrated the 10th anniversary of the Turkish Republic with
your grand grandfather and grand grandmother. After doing this trip couple of times, you
wondered if you could turn these trips into an opportunity by depositing some money into
a bank account under your grand grandfather’s name. You told your grand grandfather
about your plans and asked him not to withdraw any money from this account. Suppose
your grandfather is the only descendant of your grand grandfather. Furthermore, you talked
to Is Bank about this account, and the bank promised a return of 8.4% compounded monthly
per year until April 12, 2023.

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a. (5 points) After returning from your last time travel, you sat down and made some
calculations. First, you try to determine how much money you have in the bank account
on April 12, 2023, your 25th birthday, if you make a single deposit of 100 Liras on April
12, 1933.

b. (6 points) Unsatisfied with the amount of money you have in the account on April 12,
2023, under the alternative in part (a), you want to determine the amount of money
you will have in this account on April 12, 2023, if you make 100 lira deposits into the
bank account in every 10 years on April 12. The first deposit will be in 1933, and the
last will be in 2023.

c. (6 points) Still unsatisfied with the amount of money you have in the account on April
12, 2023, under the alternative in part (b), you want to determine the amount of money
you will have in this account on April 12, 2023, if you make 100 Lira deposits into the
bank account every 2.5 years. The first deposit will be on April 12, 1933, and the last
one will be on April 12, 2023.

d. (2 points) Satisfied with the amount of money you have in the account on April 12,
2023, you made these deposits under the alternative in part (c). Now you and your
brother are making plans on how to spend this money. Since this was your idea, your
brother insists that you should get 60% of the money in the bank account on April 12,
2023. Determine the division of wealth between you and your brother.

e. (8 points) Your brother celebrates his 18th birthday on April 12, 2023. He plans to
marry a rich girl on his 35th birthday and has no intention of going to college or working.
He wants to support himself with this money and not live with your parents. He would
like to withdraw money from this account every six months. The first withdrawal will
be on April 12, 2023, and the last one will be 6 months before his 35th birthday. He
plans to leave the money in the account at Is Bank, and the bank promises to pay 15%
compounded monthly on his account until his 35th birthday. Determine the semiannual
withdrawals your brother can make from this account.

f. (10 points) Your brother is very disappointed with the semiannual withdrawals you
calculated in part (e) of this question. He wants to be able to withdraw 72,000TL every
six months from this account. He still wants to marry a rich girl on his 35th birthday. He
will continue to live with your parents until he can start making withdrawals from this
account. While he is living with your parents, he will not touch this money. He will
continue to earn 15% with monthly compounding on his account. He will move to his
own place when he can make his first withdrawal from the account and the last
withdrawal will still be 6 months before his 35th birthday. Determine how long your
brother has to live with your parents before moving into his own place.

g. (25 points) Being a finance wizard, you would like to use your share of the money to
buy a house on your 36th birthday and finance your retirement. You will keep the money
in an account at Is Bank, earning an interest rate of 12% with monthly compounding
until your 85th birthday. You will start working on your 25th birthday and retire on your
60th birthday.

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i. (9 points) You think you need to pay 2.5 million TL for your dream house on your
36th birthday. After careful analysis, you determined that you can make quarterly
deposit of 3,350TL into this account until your 36th birthday. The first deposit will
be 3 months after your 25th birthday and the last one on your 36th birthday. Check
if you have enough money in this bank account on your 36th birthday to buy your
dream house.

ii. (16 points) Any money remaining after you buy your house will be saved to support
you during your retirement. You think you can live till your 85th birthday. You
would like to be able to withdraw 36,000TL from your retirement account every
month during your retirement. The first withdrawal from the account will be on
your 60th birthday, and the last one will be one month before your 85th birthday.
Determine the quarterly deposits you have to make into this account between your
36th and 60th birthdays to satisfy your retirement goal. The first deposit will be 3
months after your 36th birthday and the last one on your 60th birthday.