IFM 2023 Corporate Finance I

Week 6 Assessment

You have 1 hour and 45 minutes from the start of the timer to finish this assignment and
upload your work on Teams as an individual file. When asked to show your work, you can
type your formulas as text et also paste from Excel for the bonus question. Make sure to
use Harvard referencing where necessary.

Question 1 (1 point)
Michael deposits $1000 in a bank account with 5% annual interest, compounded annually.
a) What will the balance of the account be equal to after 10 years? Show your work.
b) How many years would it take for the deposit to double? Show your work.

Question 2 (1 point)
Use the following information to answer the questions below.

Simplified balance sheet

Assets Liabilities
Current assets Total current liabilities $15m
Cash and equivalents $10m Total long-term liabilities $50m
Inventories $1m TOTAL LIABILITIES $65m
A/R $2m TOTAL OWNERS’ EQUITY $48m
Total current assets $13m TOTAL LIABILITIES
Total fixed assets $100m AND OWNERS’ EQUITY $113m
TOTAL ASSETS $113m

a) Current ratio
b) Quick ratio

Question 3 (1 point)
List and explain using your own words the rights offered to owners of shares of common
stock. (shareholders’ rights) Cite your sources.

Question 4 (1 point)
Briefly explain using your own words why it can be said that the intrinsic (fair value) of a
share of common stock is equal to the sum of present values of all its future dividends.

Question 5 (1 point)
Find the intrinsic (fair) value of a share of common that has just paid its annual dividend of
$2.5 per share if the dividends are expected to grow at a rate equal to 4% per year and the
required rate of return is equal to 15%. If the current market price of this share is $18, what
do your recommend? Show your work.
Question 6 (1 point)
Find the intrinsic (fair) value of a share of common that pays a constant annual dividend of
$1 per share if the required rate of return is equal to 15%. If the current market price of this
share today is $5, what do you recommend? Show your work.

Question 7 (1 point)
Which of the following financial statements is used to assess a firm’s solvability?
a. Income Statement
b. Balance Sheet
c. Cash Flow Statement
d. Statement of Owners’ Equity

Question 8 (1 point)
For a firm, total current assets are equal to $10’000, total owners’ equity is $200’000 and
total liabilities are $150’000. What are total fixed assets equal to?
a. $190’000
b. $200’000
c. $210’000
d. $340’000

Question 9 (1 point)
Michael deposits $10’000 into savings account with an APY (annual percentage yield,
meaning annual interest) of 4%, compounded monthly. How much money will there be in
the savings account in 15 years if Michael does not deposit any more money into the
account nor take any money out during the next 15 years?
a. $10’000.00
b. $18’009.44
c. $18’203.02
d. $18’221.18

Question 10 (1 point)
UIZ Inc’s bonds have a face value of $1000, coupon rate of 5%, paid semi-annually, 8 years
to maturity. Similar types of bonds are currently yielding 7% per year. Find the present value
of these bonds, which is equal to their fair (intrinsic) value today.
a. $879.06
b. $1’000
c. $1’130.55
d. $1’200.04

Question 11 (1 point)
Which of the following is not true about bonds?
a. there are voting rights attached to bonds
b. face value is decided on by the firm and does not change throughout a bonds’ life
c. coupon rate is decided on by the firm when the bonds are issued and does not change
throughout a bond’s life
d. maturity date is decided on by the firm when the bonds are issued and does not change
throughout a bond’s life
Question 12 (1 point)
In finance, intrinsic (fair) value can be defined as
a. the true value of an asset independent of its market price
b. the true value of an asset which will always be equal to the asset’s market price
c. the minimum someone would be willing to pay to acquire an asset when taking a long
position (betting on the value of the asset to go up)
d. the suggested retail price of an asset

Question 13 (1 point)
NYR Inc’s bonds have a face value of $1000, coupon rate of 5%, paid semi-annually, 8 years
to maturity. Similar types of bonds are currently yielding 7% per year. These bonds are
currently selling on the market for 60% of their face value (or $600). Provide a
recommendation.
a. Buy the bonds today and wait for the price to go up
b. Buy the bonds today and wait for the price to go down
c. If you own these bonds, then sell them. If you do not own these bonds, do nothing.
d. Do nothing because there is not opportunity to make a profit

Question 14 (1 point)
Find the intrinsic value of a common stock which just paid a dividend of $2, dividends are
paid annually and are expected to grow at a rate of 5% per year, and required rate of return
on similar stocks is 15%.
a. $18 per share
b. $19 per share
c. $20 per share
d. $21 per share

Question 15 (1 point)
ABC Inc’s common stock has just paid a dividend (annual) of $1. Dividends are expected to
grow at constant rate of 3% indefinitely. Investors require an annual return of 10% on stocks
of companies with similar characteristics. If ABC Inc’s common stock currently sells on the
market for $20 per share, what would you recommend? (HINT: You the process of
elimination to help narrow down onto the right answer)
a. Short sell the stock (bet on the market price of the stock to decrease) because you
calculated that the fair value (intrinsic value) for this stock is $14. 71 and you would
therefore expect the current market price of this stock to drop from $20 per share to
closer to $14.71 dollars per share
b. Buy the stock (bet on the market price of the stock to increase) because you calculated
that the fair value (intrinsic value) for this stock is $14.71, so the stock’s price will most
likely near this value
c. If you already own the stock and even if you do not, buy more of it.
d. Do nothing because there is no opportunity for a profit in this setup
Question 16 (1 point)
Use Exhibits 1, 2 and 3 provided at the end of this assessment to compute Apple’s return on
equity, return on assets and asset turnover for the fiscal year which ended on September
27th, 2014. (2013-2014 fiscal year)

a. ROE = 31.43%, ROA = 19.02%, ASSET TURNOVER = 0.78

b. ROE = 33.61%, ROA =18.01% , ASSET TURNOVER = 0.83
c. ROE = 47.87%, ROA = 42.12%, ASSET TURNOVER = 0.92
d. ROE = 37.12%, ROA = 17.23%, ASSET TURNOVER = 0.76

Question 17 (1 point)
Which of the following formulas is called the fundamental accounting equation and
serves as basis for construction of the balance sheet?
a. Profit = Revenue - Expenses
b. Ending balance of equity = Beginning Balance + Investments – Withdrawals +/- Profit
c. Change in cash = Operating Cash Flow + Investment Cash Flow + Financial Cash Flow
d. Assets = Liabilities + Owners’ Equity

Question 18 (1 point)
What happens to a company’s profit or loss reported on its income statement?
a. After any dividends, if any, are subtracted, it is added or subtracted (depending on
whether it is a loss or a gain) to/from the current balance of retained earnings account
under equity on the balance sheet
b. It is a temporary account and is closed at the end of the fiscal year with no effect on
balance sheet
c. It is added to next period’s income or loss.
d. Nothing
Exhibit 1. Consolidated Statement of Income for Apple Corporation
Exhibit 2. Consolidated Balance Sheet for Apple Corporation

.
Exhibit 3. Screenshot of historical prices section of Apple Corporation