St.

Mary`s University
Department of Accounting and Finance
Financial Management I
Group Assignment
Submission Date December 10, 2022
Target group: Third year regular Marketing Management student
Instructor name: Yared D.
Chapter one: -
1. Define each of the following terms:
a. money market and capital market
b. primary market and secondary market
c. organized exchange and over the counter (OTC) market
d. Profit maximization and wealth maximization
e. Debit security and equity security
f. Agency cost and agency relationship
Chapter two: -
1. Define each of the following terms:
a. Liquidity ratios: current ratio; quick, or acid test, ratio
b. Asset management ratios: inventory turnover ratio; days sales outstanding (DSO); fixed assets turnover ratio;
total assets turnover ratio
c. Financial leverage ratios: debt ratio; times-interest-earned (TIE) ratio; coverage ratio
d. Profitability ratios: profit margin on sales; basic earning power (BEP) ratio; return on total assets (ROA); return
on common equity (ROE)
e. Market value ratios: price/earnings (P/E) ratio; price/cash flow ratio; market/ book (M/B) ratio; book value per
share
f. Trend analysis; comparative ratio analysis; benchmarking g. Du Pont equation; window dressing; seasonal
effects on ratios
2. Financial ratio analysis is conducted by managers, equity investors, long-term creditors, and short-term creditors. What
is the primary emphasis of each of these groups in evaluating ratios?
Problem
The following data apply to Jacobus and Associates (millions of dollars)
1. Cash and marketable securities $ 100.00 Fixed assets $ 283.50 Sales $1,000.00 Net income $ 50.00, Current ratio 3.0
DSO 40.55 days ROE 12%
a. Find Jacobs’s (1) accounts receivable, (2) current liabilities, (3) current assets, (4) total assets, (5) ROA, (6) common
equity, and (7) long-term debt.
b. In part a, you should have found Jacobus’s accounts receivable = $111.1 million. If Jacobus could reduce its DSO
from 40.55 days to 30.4 days while holding other things constant, how much cash would it generate? If this cash were
used to buy back common stock (at book value), thus reducing the amount of common equity, how would this affect (1)
the ROE, (2) the ROA, and (3) the ratio of total debt to total assets?
 2. Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the
following financial data:
Debt ratio: 50%
Quick ratio: 0.80
Total assets turnover: 1.5
Gross profit margin on sales: (Sales – Cost of goods sold)/Sales = 25%
Inventory turnover ratio: 5.0
Calculation is based on a 365-day year.
Balance Sheet
Cash ________ Accounts payable __________
Accounts receivable ___________ Long-term debt 60,000
Inventories __________ Common stock _________
Fixed assets 138,000 Retained earnings 97,500
Total assets $300,000 Total liabilities and equity___________
Sales _____________ Cost of goods sold __________
3. The Kretovich Company had a quick ratio of 1.4, a current ratio of 3.0, and an inventory turnover of 6 times, total
current assets of $810,000, and cash and marketable securities of $120,000. What were Kretovich’s annual sales and it’s
DSO? Assume a 365-day year.
4. Morton Chip Company: Balance Sheet as of December 31, 2010 (Thousands of Dollars)
Cash $ 77,500 Accounts payable $129,000
Receivables 336,000 Notes payable 84,000
Inventories 241,500 Other current liabilities 117,000
Total current assets $655,000 Total current liabilities $330,000
Net fixed assets 292,500 Long-term debt 256,500
Common equity 361,000
Total assets $947,500 Total liabilities and equity $947,500
Morton Chip Company: Income Statement for Year Ended December 31, 2010 (Thousands of Dollars)
Sales $1,607,500
Cost of goods sold 1,392,500
Selling, general, and administrative expenses 145,000
Earnings before interest and taxes (EBIT) $ 70,000
Interest expense 24,500
Earnings before taxes (EBT) $ 45,500
Federal and state income taxes (40%) 18,200
Net income $ 27,300
Ratio Morton Industry Average
Liquidity ratio ________ 2.0
Days sales outstanding _______ 35.0 days
Day`s of collection period _______ 76 days
Fixed assets turnover _______ 12.1
Total assets turnover _______ 3.0
profit margin ratio _______ 1.2%
return on investment / (RoA) _______ 3.6%
Net income/Common equity _______ 9.0%
Total debt/Total assets _______ 60.0%
Chapter three: -
1. Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e., D1 = $1.50). The dividend
is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, valuation of stock is $150
with a flotation cost 3%. What is the cost of share of Boehm’s stock?
2. The beta coefficient for Stock C is bC = 0.4 and that for Stock D is bD = −0.5. (Stock D’s beta is negative, indicating that
its rate of return rises whenever returns on most other stocks fall. There are very few negative-beta stocks, although
collection agency and gold mining stocks are sometimes cited as examples.)
a. If the risk-free rate is 9% and the expected rate of return on an average stock is 13%, what are the required rates of
return on Stocks C and D?
b. For Stock C, suppose the current price, P0, is $25; the next expected dividend, D1, is $1.50; and the stock’s expected
constant growth rate is 4%. Is the stock?
3. Suppose CBE is issuing preferred stock at $1050 per share, with a stated dividend of $150, and a flotation cost of 5%.
Which one is the cost of preferred stock?
4. An issue of common stock is sold to investors for $40 per share. The issuing corporation incurs a flotation cost (selling
expense) of $2 per share. The current dividend is $ 3 per share and is expected to grow at a 5% annual rate. Which one is
the cost of this retained earning stock?
5. ABC Company has a β = 0.3. The T-bills rate is currently 4% and the market return has averaged 8%. Which one is the
cost of this common stock?
6. b. Lion's Insurance Co. plans to sell preferred stock for its par value of $25 per share. The issue is expected to pay
quarterly dividends of $0.60 per share and to have flotation costs of 6% of the par value. Calculate the cost of the
preferred stock to the company?
b. Consider the same question; calculate the cost of preferred stock under the following assumptions:
I. if the preferred stock is sold at 95% of its par II. if the preferred stock is sold at 102% of its par
7. X Company plans to issue 20-year bonds. Each bond has a par value of $100 and carries an interest rate of 8.5%.
The firm’s marginal tax rate is 35%.
Assume the following conditions:
i. The bonds sell at par with no flotation cost
ii. The bond is expected to sell for 98% per bond and flotation costs are estimated to be $26 per bond
iii. The bond is expected to be sold for 104% of par value and flotation costs are anticipated to be $26 per bond
Required: under each of the above assumptions calculate:
 a. Net proceeds per bond b. The before tax cost of the bond and
c. The after tax cost of the bond
9. Consider the following data for ABC share co.

Book value Dollar amount Cost of capital

Debt 2,000 bond at par, or $500 1,000,000 15%
Preferred stock 1,000 shares at $ 550 par 550,000 13%
Common stock 5,000 shares at $1,000 par 5,000,000 12.5%
Total book value of cost 6,550,000
Market value Dollar amount Cost of capital
Debt 2,000 bond at par, or $600 1,200,000 15%
Preferred stock 1,000 shares at $ 500 par 500,000 13%
Common stock 5,000 shares at $1,010 par 5,050,000 12.5%
Total book value of cost 6,750,000
How much weighted average cost of capital under book value and market value?
Chapter Four and Five: - Summary
1. You are a financial analyst for the Hittle Company. The director of capital budgeting has asked you to analyze two
proposed capital investments, Projects X and Y. Each project has a cost of $10,000, and the cost of capital for each is 12%.
The projects’ expected net cash flows are as follows: Expected Net Cash Flows Year
Project X Project Y
0 −$10,000 −$10,000
1 6,500 3,500
2 3,000 3,500
3 3,000 3,500
4 1,000 3,500
a. Calculate each project’s payback period, net present value (NPV), profitability index (PI) Discount payback period (DPP)
and Payback period (PP).
b. Which project or projects should be accepted if they are independent?
c. Which project should be accepted if they are mutually exclusive?
d. How might a change in the cost of capital produce a conflict between the NPV, PI, PP and DPP rankings of these two
projects? Would this conflict exist if r were 5%?
e. Why does the conflict exist?
2. Your division is considering two investment projects, each of which requires an upfront expenditure of $15 million.
You estimate that the investments will produce the following net cash flows:
Year Project A Project B
1 $ 5,000,000 $20,000,000
2 10,000,000 10,000,000
3 20,000,000 6,000,000
What are the two projects’ net present values, assuming the cost of capital is 5%? 10%? 15%?