Corporate Finance and Applications Fall 2016
Professor R.A. Michelfelder, Ph.D. 52:390:310
December 14, 2016
Due: Tuesday, December 20, 2016 11:59 PM by Email
FINAL EXAMINATION
Please briefly respond to all of the following questions on each page. There are 6 pages of questions. This is a take-home examination. All responses are to be in your own words. This examination is due on Tuesday, 12/20/2016 at 11:59 PM and there are no exceptions. Any late submittals will result in a temporary incomplete grade for the course.
Name__________Nishant Patel ( Nick)___________________________
Grade____________
1. Please briefly describe an income statement, statement of cash flows, and balance sheet. Please describe the five types of financial ratio analyses.
• Income Statement: It is the financial statement that describes company’s revenue, expenses and net income during period of time
• Cash Flow: It is the financial statement that describes company’s cash inflow and payment during a period of time.
• Balance Sheet: It is the financial statement that describes total asset and liabilities of a company during particular period of time.
Financial Ratios
• Valuation ratio : It is the ratio which measures the value of company
• Leverage ratio: It is the ratio which evaluate debt and fixed expense of company
• Liquidity ratio: It is the ratio which evaluate the company’s access to cash
• Profitability ratio: It is the ratio which measures return on Investment. • Efficiency ratio: It is the ratio which measures the use asset in company. 2. What is financial and business planning? What is a financial model and what is it used for? Please describe a hypothetical example of a pro forma income statement. Financial planning is the ongoing process that helps to make effective decisions for money. It helps managers to ensure that their financial strategies are consistent with their capital. Financial process includes • Analyzing the investment and financing choice • Projecting consequences • Looking for alternative • Measuring performance Business planning describe in detail, how company going to achieve its goal. It defines the what, how, who, when, where, and why for a business. Components of Business plans are • Vision • Mission • Strategic Plan • Marketing and Sales Plan • Operating requirement • Financial projection • Business valuation assessment • Exit Business plan is used to plan activities in order to achieve goal. It describe vision of a company; Therefore, strategic plan is applied to mission in order to achieve vision of the company. Once it occurs, mission will achieve vision. A financial model is designed to represent performance of business, project and other investment portfolios. • Inputs: It is current financial statements, such as sales and interest rates • Planning Model: It is an equation specifying key relationships. • Outputs: It is pro forma financial statement • Pro Formas: It is forecasted financial statement • Percentage of Sales Model: In this model, sales forecasts are driving variable and other variables are proportional to sales. • Balancing item: It is also called plug. It adjusts the consistency of a financial plan. Example of pro forma income statement Income statement Pro forma income statement Sales 2000 Sales 2500 Cost 1500 Cost 1800 Net Income 500 Net Income 700 3. What is the weighted average cost of capital (WACC) and provide the equation when long-term debt and common equity are used to obtain capital funds? Please describe each component and how you measure each? Please briefly describe divisional WACC’s of a firm. How do you use WACC for each division when making investment decisions? How does a higher beta affect WACC and why? How does a drop in the bond market effect WACC and why? WACC is weighted average cost of capital. It is expected rate of return on portfolio on all firms’ securities. WACC = rD (1- Tc)*(D / V) + re *(E / V) rD is the required return of the firm’s debt financing (1- Tc) is the tax adjustment for interest expense (D / V) is (Debt/ Total value re is Cost of equity (E / V) (Equity/ Total value) • Debt and Equity are two component of WACC. Cost of Equity: Risk free rate of return + Beta × (market rate of
Professor R.A. Michelfelder, Ph.D. 52:390:310
December 14, 2016
Due: Tuesday, December 20, 2016 11:59 PM by Email
FINAL EXAMINATION
Please briefly respond to all of the following questions on each page. There are 6 pages of questions. This is a take-home examination. All responses are to be in your own words. This examination is due on Tuesday, 12/20/2016 at 11:59 PM and there are no exceptions. Any late submittals will result in a temporary incomplete grade for the course.
Name__________Nishant Patel ( Nick)___________________________
Grade____________
1. Please briefly describe an income statement, statement of cash flows, and balance sheet. Please describe the five types of financial ratio analyses.
• Income Statement: It is the financial statement that describes company’s revenue, expenses and net income during period of time
• Cash Flow: It is the financial statement that describes company’s cash inflow and payment during a period of time.
• Balance Sheet: It is the financial statement that describes total asset and liabilities of a company during particular period of time.
Financial Ratios
• Valuation ratio : It is the ratio which measures the value of company
• Leverage ratio: It is the ratio which evaluate debt and fixed expense of company
• Liquidity ratio: It is the ratio which evaluate the company’s access to cash
• Profitability ratio: It is the ratio which measures return on Investment. • Efficiency ratio: It is the ratio which measures the use asset in company. 2. What is financial and business planning? What is a financial model and what is it used for? Please describe a hypothetical example of a pro forma income statement. Financial planning is the ongoing process that helps to make effective decisions for money. It helps managers to ensure that their financial strategies are consistent with their capital. Financial process includes • Analyzing the investment and financing choice • Projecting consequences • Looking for alternative • Measuring performance Business planning describe in detail, how company going to achieve its goal. It defines the what, how, who, when, where, and why for a business. Components of Business plans are • Vision • Mission • Strategic Plan • Marketing and Sales Plan • Operating requirement • Financial projection • Business valuation assessment • Exit Business plan is used to plan activities in order to achieve goal. It describe vision of a company; Therefore, strategic plan is applied to mission in order to achieve vision of the company. Once it occurs, mission will achieve vision. A financial model is designed to represent performance of business, project and other investment portfolios. • Inputs: It is current financial statements, such as sales and interest rates • Planning Model: It is an equation specifying key relationships. • Outputs: It is pro forma financial statement • Pro Formas: It is forecasted financial statement • Percentage of Sales Model: In this model, sales forecasts are driving variable and other variables are proportional to sales. • Balancing item: It is also called plug. It adjusts the consistency of a financial plan. Example of pro forma income statement Income statement Pro forma income statement Sales 2000 Sales 2500 Cost 1500 Cost 1800 Net Income 500 Net Income 700 3. What is the weighted average cost of capital (WACC) and provide the equation when long-term debt and common equity are used to obtain capital funds? Please describe each component and how you measure each? Please briefly describe divisional WACC’s of a firm. How do you use WACC for each division when making investment decisions? How does a higher beta affect WACC and why? How does a drop in the bond market effect WACC and why? WACC is weighted average cost of capital. It is expected rate of return on portfolio on all firms’ securities. WACC = rD (1- Tc)*(D / V) + re *(E / V) rD is the required return of the firm’s debt financing (1- Tc) is the tax adjustment for interest expense (D / V) is (Debt/ Total value re is Cost of equity (E / V) (Equity/ Total value) • Debt and Equity are two component of WACC. Cost of Equity: Risk free rate of return + Beta × (market rate of