Assignment 1 _Answer Key

Assignment 1 _Answer Key - FN 361: CORPORATE FINANCE...

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Assignment # 1 Page 1 FN 361: C ORPORATE F INANCE Assignment #1 (Due February 10, 2010) ANSWER KEY 1. Suppose you own 100 shares of Microsoft stock which you intend to sell today. Since you will sell it in the secondary market, Microsoft will receive no direct cash flows as a consequence of your sale. Why, then, should Microsoft's management personally care about the price you get for your shares? The current market price of Microsoft stock reflects, among other things, market opinion about the quality of Microsoft's management. If the value of the stock is low, this indirectly reflects on the reputation of the managers, as well as potentially impacting each manager's value in the employment market. Alternatively, if the sale price is high, this indicates that the market believes current management is increasing firm value, and therefore the individual worth of each manager is increased. Should those managers own shares of Microsoft, which many do, then they are also affected personally by the market value of the stock. 2. You have just obtained financial information for the past 2 years for Jaxs Industries. The balance sheets and income statements for these years are shown below. Balance Sheet 2008 2009 2008 2009 Cash $ 1,400 $ 2,300 Accounts payable $ 5,300 $ 4,700 Accounts receivable 4,100 4,300 Long-term debt 12,800 9,400 Inventory 8,400 7,600 Common stock 7,500 10,000 Net fixed assets 17,600 19,100 Retained earnings 5,900 9,200 Total assets $31,500 $33,300 Total liabilities and equity $31,500 $33,300 Income Statement Net Sales $32,700 Costs 20,705 Depreciation 2,510 EBIT 9,485 Interest 1,000 Taxable income 8,485 Taxes 2,885 Net Income $ 5,600 As a Financial Analyst for a bank serving Jaxs Industries, you are asked to identify, for the year 2009, the financial cash flows for the company. That is, you need to show the components of the cash flows from assets (CF(A)), cash flows to creditors (CF(B)), cash flows to equity holders (CF(S)). Of course, you should make sure that the identify CF(A)=CF(B)+CF(S) holds in this case.
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FN 361 (Spring 2010) Professor Zebedee Assignment # 1 Page 2 Deriving Cash Flow from Assets A EBIT $9,485 B Depreciation $2,510 C Taxes $2,885 D Operating Cash Flow (A+B-C) $9,110 E Net Fixed Assets, 2007 $19,100 F Net Fixed Assets, 2006 $17,600 G Deprecition $2,510 H Net Capital Spending (E-F+G) $4,010 I NWC, 2008. $8,600 J NWC, 2009 $9,500 K Additions to NWC $900 L CF(A) [D-H-K] $4,200 Deriving Cash Flow to Creditors M Interest Payments $1,000 N LT Debt, 2009 $9,400 O LT Debt, 2008 $12,800 P CF(B) [M-N+O] $4,400 Deriving Cash Flow to Equity Holders Q Dividends $2,300 R Common Stock, 2009 $10,000 S Common Stock, 2008 $7,500 T CF(S) [Q-R+S] -$200 And, as expected, CF(A)=CF(B)+CF(S) 3. Use the following financial statements to answer this question. Balance Sheet
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Assignment 1 _Answer Key - FN 361: CORPORATE FINANCE...

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