Financial Management Exam Paper B-solution

# Financial Management Exam Paper B-solution - Financial...

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Financial Management Exam Paper B Solution 1. Using Income Statements Given the following information for Soprano Pizza Co., calculate the depreciation expense: i 20 marks0 sales =\$29,000; costs =\$13,000; addition to retained earnings = \$4,500; dividends paid =\$900; interest expense= \$1,600; tax rate =35 percent. The solution to this question works the income statement backwards. Starting at the bottom: Net income = Dividends + Addition to ret. earnings = \$900 + 4,500 = \$5,400 Now, looking at the income statement: EBT – EBT × Tax rate = Net income Recognize that EBT × tax rate is simply the calculation for taxes. Solving this for EBT yields: EBT = NI / (1– tax rate) = \$5,400 / 0.65 = \$8,308 Now you can calculate: EBIT = EBT + interest = \$8,308 + 1,600 = \$9,908. The last step is to use: EBIT = Sales – Costs – Depreciation EBIT = \$29,000 – 13,000 – Depreciation = \$9,908. Solving for depreciation, we find that depreciation = \$6,092. 2. Current Ratio What effect would the following actions have on a firm’s current ratio? Assume that net working capital is positive. 0 20 marks0 a. Inventory is purchased. b. A supplier is paid. c. A short-term bank loan is repaid. d. A long-term debt is paid off early. e. A customer pays off a credit account. f. Inventory is sold at cost. g. Inventory is sold for a profit. a. If inventory is purchased with cash, then there is no change in the current ratio. If inventory is purchased on credit, then there is a decrease in the current ratio if it was initially greater than 1.0. b. Reducing accounts payable with cash increases the current ratio if it was initially

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## This note was uploaded on 05/26/2010 for the course BUSINESS A 139 taught by Professor Cheng during the Spring '09 term at 東京大学.

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Financial Management Exam Paper B-solution - Financial...

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