Problem Set 1 - FI 311H Financial Management Professor...

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FI 311H- Financial Management - Professor Hadlock Problem Set #1 Due by 5:00 p.m. September 13th Chapter 2 Problems #1. In the year 2000 XYZ Corp. had total revenues of $2 million, costs of good sold of $400,000, and overhead expenses of $500,000. Depreciation was $300,000. During the year XYZ Corp’s sole debt liability was a $2 million bank loan on which it pays an annual interest rate of 10%. The principal on the loan will not be repaid for several more years. Taxes paid in the year 2000 were $300,000. Capital expenditures were $100,000. There was no change in any working capital items. (a) What was XYZ Corp’s net income in 2000? (b) What was XYZ Corp’s total cash flow to investors in 2000? #2. ABC Corp is considering changing its payment policy for customers. Currently, ABC requires customers to pay for all delivered shipments within 90 days of receipt. Since the economy is slowing down, ABC is contemplating allowing customers to have up to 270 days to pay for all delivered shipments. Briefly (i.e., in 1 or 2 sentences) explain your answers to the following. (a) Will this policy increase or decrease the accounts receivable item on ABC’s balance sheet? (b) In the short run, will this policy result in a major change in the net income of ABC Corp? (c) In the short run, will this policy result in a major change in the cash flow of ABC Corp? (d) In the long run (i.e. after a few years), will this policy result in a major change in the cash flow of ABC Corp. Chapter 3 Problems #3. Professor X currently earns $80,000. His students like him, and thus he expects that next year his income will be $100,000. Professor X is a big spender and would like to spend $120,000 this year. Interest rates are 10%.
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