ACC1005 Foundations of Finance

Tutorial 1 (Week 2)

Q1. Please identify whether the following firm financial activities are investment
decisions or financing decisions.

1.1 Boeing committed more than $7 billion to design, build, test, and sell the 787
Dreamliner aircraft series.
1.2 Boeing negotiated with suppliers to help finance the Dreamliner project.
Japanese suppliers, who will build the wing and fuselage, are raising and
investing more than $1.5 billion.
2.1 Citigroup spend $100 million building bank branches and ATMs in Moscow
and St. Petersburg, Russia.
2.2 Citigroup raised $82 billion in debt financing secured by credit card
receivables, that is, by outstanding balances on Citigroup-owned credit
cards.
3.1 LVMH acquired Glenmorangie PLC, a producer of scotch malt whiskies.
3.2 LVMH issued a 7-year bond in July 2004, raising the euro equivalent of
$812 million.
4.1 Pfizer spent $7. 7 billion in 2004 on research and testing of new drugs.
4.2 Pfizer financed the research and testing with reinvested cash flow generated
by sales of pharmaceutical products.
5.1 Toyota decided to build an $800 million automobile plant in San Antonio,
Texas.
5.2 Toyota total borrowing increased by $2.9 billion during 2004, mainly due to
issues of short-term debt in the U.S.
6.1 Wal-Mart plans for 2005 call for up to 530 new retail stores in the U.S. and
165 stores in other countries.
6.2 Wal-Mart issued $1,883 million of long-term debt, maturing in 2036 and
paying interest at 5.25% per year.

Q2. Outline the advantage and disadvantages of sole proprietorship and partnership
respectively.

Q3. What advantages does a company have over a sole proprietorship and a partnership?

Q4. Why do people usually prefer to receive $1 today instead of in a year's time?

Q5. Comment on this statement: A company should borrow money during times of high
inflation because it can repay the loan in cheaper dollars.

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Q6. Suppose you are considering renting an apartment. You, the renter, can be viewed
as an agent while the company that owns the apartment can be viewed as the
principal. What principal-agent conflicts do you anticipate? Suppose instead that
you work for the apartment company. What features would you put into the lease
agreement that would give the renter incentives to take good care of the apartment?

Q7. Briefly discuss principal - agent problems as related to a corporation. What is the
cause of the problem and how do we try to solve it?

Q8. Facebook sold shares to investors at $38.23 each in its Initial Public Offering (first
time selling to the public investors) on May 18, 2012. On February 2, 2018, the stock
price hit its highest point at $193.09. What was the percentage change in Facebook’s
market value since its first day as a public company if the total number of shares is
1.2 billion?

However, the scandal about user data privacy concerns raised by the Cambridge
Analytica sent Facebook shares spiraling. The stock price settled at $185.09 on
March 18, the trading day before the scandal broke, and have continued to fall over
the next two weeks to just $155.1 per share. How much wealth in market cap has
been wiped out in the wake of the scandal if the CEO Zuckerberg owned about 400
million shares?

Q9. Kenneth Harper has invested $25,000 in Western Block Company. The firm might
declare bankruptcy due to the plummeted profits over the past five years. The firm
has $60,000 in unpaid debts. Explain the financial implication for Kenneth in each of
the following situations.

a. Kenneth is a sole proprietorship of Western Block Company;

b. Kenneth and Joseph Black owned Western Block Company as partners with
equal partnership distribution;
c. Western Block Company is a corporation.

Q10. Answer the following questions.

a. Office Mart has assets equal to $123,000 and liabilities equal to $53,000 at year-
end. What is the total equity for Office Mart at year-end?
b. At the beginning of the year, Logan Company’s assets are $200,000 and its
equity is $150,000. During the year, assets increase $70,000 and liabilities
increase $30,000. What is the equity at the end of the year?
c. At the beginning of the year, Keller Company’s liabilities equal $60,000.
During the year, assets increase by $80,000, and at year-end assets equal
$180,000. Liabilities decrease $10,000 during the year. What are the beginning
and ending amounts of equity?

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