QUESTION 1:

Taxable Income = Rs. $701,500/-

Tax Rate = 34%

Total Tax = $238,510/-

B:

Question: 2
Stock A
Probability (Px) Return (x) x(Px) (x-u)2*px
0.000346
0.3 12% 3.60% 8
0.000014
0.4 16% 6.40% 4
0.000202
0.3 18% 5.40% 8

The mean return is given by μx=∑n=1(xi)P(xi)= 15.40%

The standard deviation is given by σx=∑n=1(xi−μx)^2 P(xi)= 2.3749%

Stock B
Probability (Px) Return (x) x(Px) (x-u)2*px
15% 0.000088
0.2 3% 2
6% 0.001428
0.3 2% 3
13% 0.000000
0.3 4% 3
21% 0.001312
0.2 4% 2
 The mean return is given by μx=∑nk=1(xi)P(xi)= 12.90%
The standard deviation is given by σx=∑nk=1(xi−μx)2P(xi)= 5.3188%

Standard Deviation of return is used in investing to measure volatility. The bigger its value,
the higher the risk inherent in investing in a particular asset. In contrast, lower values indicate
lower risk. The asset with the lowest standard deviation of return is preferred. Keeping in
view, stock A should be preferred because of low risk and high return.
B:

Question 3:
JSN Enterprises, Inc.
Data:
Sales $ 15,000,000
Net Income $ 2,000,000

JSN ENTERPRISES, INC.

BALANCE SHEET
FOR THE YEAR ENDED 2001
Current assets $ 3,750,000
Net fixed assets $ 7,500,000
Total Assets $ 11,250,000

Liabilities and Owners' Equity

Accounts payable $ 3,750,000
Long-term debt $ 1,000,000
Total liabilities $ 4,750,000
Common stock $ 2,000,000
Paid-in capital $ 1,900,000
Retained Earnings $ 1,100,000
Common Equity $ 5,000,000
Total Liabilities and Owners' Equity $ 9,750,000

DFN = discretionary financing needed = projected total assets – projected total liabilities –
 projected owner’s equity
DFN = $ 11,250,000 – $ 4,750,000 – $5,000,000 = $ 1,500,000
B:

QUESTION 4:
Payback Period:
(Initial Investment - Cumulative of Base
Year) Payback Period= Base Year + —————————————————
Cash Inflow of Next Year
Project X:

(cash flows in millions)

Year Annual Cumulative
Cash Flow Cash Flow

0 (200,000) -

1 110,000 110,000

2 65,000 175,000

3 100,000 275,000

4 115,000 390,000

5 35,000 425,000

Payback Period = 2 + (200,000-175,000)/100,000

= 2.25
Project Y:

Year (cash flows in millions)

 Annual Cumulative
Cash Flow Cash Flow

0 (200,000) -

1 75,000 75,000

2 150,000 225,000

3 60,000 285,000

4 55,000 340,000

5 60,000 400,000

Payback Period = 1 + (200,000 – 75,000)/150000

= 1.833

ARR:

Average Profit
Accounting Rate of Return = ————————— x 100
Average Investment
Project X:

Average Profit = The revenues (inflow) - expenditures (outflow) 

= $ 425,000 – $200,000
=$ 225,000
Average Investment = $200,000

Accounting Rate of Return = 225,000/200,000

= 1.125
Project Y:

Average Profit = The revenues (inflow) - expenditures (outflow) 

 = $ 400,000 – $200,000
=$ 200,000
Average Investment = $200,000
Accounting Rate of Return = 200,000/200,000
=1

NPV:

Project X:

  Project X 1/(1+i)^n CF*1/(1+i)^n

Year 1 110,000 0.870 95,652

Year 2 65,000 0.756 49,149

Year 3 100,000 0.658 65,752

Year 4 115,000 0.572 65,752

Year 5 35,000 0.497 17,401

NPV = ∑(CFn / (1 + i)n) – Initial Investment

= $ 293,706 - $200,000
= $ 93,706

Project Y:
   Project Y 1/1+i)^n CF*1/(1+i)^n
Year 1 75,000 0.870 65,217

Year 2 150,000 0.756 113,422

Year 3 60,000 0.658 39,451

Year 4 55,000 0.572 31,446

Year 5 60,000 0.497 29,831

NPV = ∑(CFn / (1 + i)n) – Initial Investment

= $ 279,367 - $200,000
= $ 79,367

PROFITABILITY INDEX:
PI = 1 + (NPV/ICO)
Project X:
PI = 1 + (93,706/200,000)
= 1.46
Project Y:

PI = 1+ (79,367/200000)
= 1.396

Question 4 (b):
Based on Capital Budgeting measures, Project X is recommended to develop because of higher
NPV, ARR & Profitability Index than Project Y.
QUESTION 5:

STEVE ANDERSON LTD

BALANCE SHEET
AS ON DECEMBER 2017.
 
Cash $30,000
Accounts Receivable $9,000
$200,00
Stock
0
$239,00
Current Assets
0
Building and Equipment $90,000
Accumulated Depreciation ($9,000)
Net Fixed Assets $81,000
$320,00
Total Assets
0
 
Short Term Debt $70,000
Notes Payable $8,000
Current Liabilities $78,000
$112,00
Long Term Debt
0
owners’ equity $130,00
 0
$320,00
Total Liabilities & Owner's Equity
0

STEVE ANDERSON LTD

INCOME STATEMENT
FOR THE YEAR ENDED 2017.
   
Net Sales $77,600
Sales Return $12,000
Cost of Goods Sold $34,000
Gross Profit $31,600
Fuel expense $1,000
Interest expense $10,000
Income tax expense $2,400
Net Income $18,200

B:

Question 6:

A)
Current Ratio = Current Assets / Current Liabilities
= 1,143 / 2,985
= 0.382
Interpretation:
Current Ratio less than 1 means that the company doesn’t have enough assets to pay
down short term obligations. The current ratio for McDonald’s Corporation is lower than the
industry average this means that the company underperforms the industry which is a negative
indicator.

Inventory Turnover = COGS / Inventory

 = 3,300 / 1,000
= 92.07
Interpretation:
Inventory turnover ratio measures how fast a company sells inventory. A high turnover
ratio implies either high sales. The company has higher turnover ratio as compared to industry showing
considerable demand for its products. This is a positive indicator about company’s revenue generation.

Total Asset Turnover = Sales / Total Assets

= 11,508 / 18,242
= 0.630
Interpretation:
Total asset turnover ratio measures the efficiency with which a company uses its assets to
produce sales. The company’s ratio is lower than the industry showing that the company is not utilizing
its assets optimally just as other companies are utilizing which is a negative indicator.

Operating Profit Margin= Operating Income / Sales

= 2,794 / 11,508
= 0.2427 OR 24.27%
Interpretation:
Operating Profit Margin reflects the percentage of profit a company produces from its
operations prior to subtracting tax and interest. The company has high profit margin ratio as compared to
industry indicating the company as high performer.

Operating Income Return on Investment = Operating Income / Total Assets

= 2,794 / 18,242
= 0.15316 OR 15.316%
Interpretation:
Return on investment is used to evaluate the efficiency of an investment. The company
has high ratio as compared to industry which shows that the investments made by the company are
profitable.
 Debt Ratio = Total Debt / Total Assets
= 6,325 / 18,242 = 0.3467 OR 34.67%
Interpretation:
Debt ratio can be interpreted as the proportion of company’s assets financed by debt.
Ratio less than 100% shows that the company has more assets to pay back its debt. Industry ratio is more
than the company’s ratio which means that the company is on the safer side from distress as compared to
industry average.

Fixed Asset Turnover = Sales / Net Fixed Assets

= 11,508 / 14,961
= 0.769
Interpretation:
The fixed asset turnover measures a company’s ability to generate net sales from its fixed
asset investment. A higher fixed asset turnover ratio indicates that a company has effectively used
investments in fixed assets to generate sales and vice versa. The company has lower fixed asset turnover
ratio as compared to industry which means that the company has done inefficient investment in fixed
assets.

Return on Equity = Net Income / Common Equity

= 1,617 / 8,852
= 0.1826 or 18.26%
Interpretation:
Return on equity measures the profitability of a corporation in relation to stockholder’s equity.
This shows that how well a company deploys its shareholder capital. Company’s ratio is more than the
industry which means company is earning more from shareholders’ funds as compared to industry.

B: