mid1s-practice-S10

mid1s-practice-S10 - Financiad Economics ECN134 Midterm 1...

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Financiad Economics ECN134 Midterm 1 Practice test Prof. Farshid Mojaver *********************************************************************** * [18 pts] 1- Some Financial Terms and Ideas i. What is securitization? ii. What is financial engineering? iii. What are financial derivatives? iv. What are futures? v. What is Credit Default Swap (CDS)? vi. How might CDS have contributed to the current financial crisis? [15 pts] 2. Calculating Total Cash Flows Schwert Corp. shows the following information on its 2010 income statement: sales = $167,000; costs = $91,000; other expenses =$5,400; depreciation expense = $8,000; interest expense =$11,000; taxes = $18,060; dividends = $9,500. In addition, you’re told that the firm issued $7,250 in new equity during 2010 and redeemed $7,100 in outstanding long term debt. a. What is the 2010 operating cash flow? b. What is the 2010 cash flow to creditors? c. What is the 2010 cash flow to stockholders? d. If net fixed assets increased by $22,400 during the year, what was addition to net working capital (NWC)? Answer To find the OCF, we first calculate net income. Income Statement Sales $167,000 Costs 91,000 Depreciation 8,000 Other expenses 5,400 EBIT $62,600 Interest 11,000 Taxable income $51,600 Taxes 18,060 Net income $33,540
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Dividends $9,500 Additions to RE $24,040 a. OCF = EBIT + Depreciation – Taxes = $62,600 + 8,000 – 18,060 = $52,540 b. CFC = Interest – Net new LTD = $11,000 – (–$7,100) = $18,100 Note that the net new long-term debt is negative because the company repaid part of its long-term debt. c. CFS = Dividends – Net new equity = $9,500 – 7,250 = $2,250 e. Must solve for Change in NWC from CFA = OCF – Net capital spending – Change in NWC But first need to solve for CFA and Change in NWC CFA = CFC + CFS = $18,100 + 2,250 = $20,350
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mid1s-practice-S10 - Financiad Economics ECN134 Midterm 1...

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