Financial Management Exam Paper A-solution

Financial Management Exam Paper A-solution - Financial...

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Financial Management Exam Paper A 1. Preparing a Balance Sheet Prepare a balance sheet for Tim’s Couch Corp. as of December 31, 2002, based on the following information: . 20 marksi cash = $175,000; patents and copyrights = $720,000; accounts payable=$430,000; accounts receivable = $140,000; tangible net fixed assets=$2,900,000; inventory =$265,000; notes payable = $180,000; accumulated retained earnings=$1,240,000; long-term debt= $1,430,000. The balance sheet for the company looks like this: Balance Sheet Assets Cash Accounts receivable Inventory Current assets Tangible net fixed assets Intangible net fixed assets $175,000 140,000 265,000 $580,000 2,900,000 720,000 Accounts payable Notes payable Current liabilities Long-term debt Total liabilities Common stock Accumulated ret. earnings $430,000 80,000 $610,000 1,430,000 $2,040,000 ?? 1,240,000 Total assets $4,200,00 0 Total liab. & owners’ equity $4,200,000 Total liabilities and owners’ equity is: Solving for this equation for equity gives us: Common stock = $4,200,000 – 1,240,000 – 2,040,000 = $920,000 2. Fama’s Llamas has a weighted average cost of capital of 11.5 percent. The company’s cost of equity is 16 percent and its cost of debt is 8.5 percent. The tax rate is 35 percent. What is Fama’s target debt-equity ratio? i 15 marksi Here we have the WACC and need to find the debt-equity ratio of the company. Setting up the WACC equation, we find: WACC = .1150 = .16(E/V) + .085(D/V)(1 – .35) Rearranging the equation, we find: .115(V/E) = .16 + .085(.65)(D/E) Now we must realize that the V/E is just the equity multiplier, which is equal to: V/E = 1 + D/E .115(D/E + 1) = .16 + .05525(D/E) Now we can solve for D/E as:
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.05975(D/E) = .0450 D/E = .7531 3. The most recent financial statements for Moose Tours, Inc., follow. Sales for 2005’ are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate will also remain constant. Costs, other expenses, current
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Financial Management Exam Paper A-solution - Financial...

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