ACF 103 – Fundamentals of Finance

Tutorial 1 - Solutions
Chapter 1
1. When a firm is meeting the present needs of the firm without compromising
the ability of future generations to meet their own needs it is commonly
referred to as ________.
* A. sustainability
B. personal social responsibility
C. the investment decision
D. None of the above answers are correct.

2. The ________ decision is concerned about the make-up of the right-hand side
of the balance sheet with the dividend policy of the firm being integral as well
as the mechanics of physically requiring the necessary funds.
A. investment
* B. financing
C. asset management
D. wealth management

3. The ________ decision is concerned about charging the manager with an

appropriate level of operating responsibility over existing assets to supervise
the assets efficiently.
A. investment
B. financing
* C. asset management
D. wealth management

4. The price of a share of common stock in a publicly-traded firm represents

________.
A. earnings after tax divided by the number of shares outstanding
B. the book value of the firm's assets less the book value of its liabilities
C. the board of directors' assessment of the intrinsic value of the firm
* D. the market's evaluation of a firm's present and future performance

5. The long-run objective of financial management should be to ________.

A. maximize the firm's earnings after taxes
B. maximize the firm's earnings per share
* C. maximize the value of the firm's common stock
D. maximize the firm's percentage of product market share

Chapter 2
1. A 30-year corporate bond issued in 2005 would now trade in the ________.
A. primary money market
B. secondary money market
C. primary capital market
* D. secondary capital market

2. The expected return on a security typically increases as ________.

A. default risk decreases
B. marketability increases

ACF 103 HAUT 2015 Tutorial 1 Solns 1

* C. maturity increases
D. taxability decreases

3. The term structure of interest rates refers to the relationship between yield and
________.
* A. maturity, for the same security class
B. risk, for securities with the same maturity
C. rating, for securities with the same maturity
D. marketability, for securities with the same tax status

4. Text book Ch 2 problem # 2 (p.37)

Answer:
Equipment Machine
Cost $28,000.00 $53,000.00
Depreciation in year:
1 9,332.40 10,600.00
2 12,446.00 16,960.00
3 4,146.80 10,176.00
4 2,074.80 6,105.60
5 6,105.60
6 3,052.80
$28,000.00 $53,000.00

5. Text book Ch 2 question # 13 (p.36)

Answer:
Financial markets allow for efficient allocation in the flow of savings in an
economy to ultimate users. In a macro sense, savings originate from savings-
surplus economic units whose savings exceed their investment in real assets.
The ultimate users of these savings are savings-deficit economic units whose
investments in real assets exceed their savings.
Efficiency is introduced into the process through the use of financial markets.
Since the savings-surplus and savings-deficit units are usually different
entities, markets serve to channel these funds at the least cost and
inconvenience to both.
As specialization develops, efficiency increases. Loan brokers, secondary
markets, and investment bankers all serve to expedite this flow from savers to
users.

6. In general, what would be the likely effect of the following occurrences on the
money and capital markets?
a. The savings rate of individuals in the country declines.
b. The government taxes capital gains at the ordinary income tax rate.
c. Unanticipated inflation of substantial magnitude occurs, and price
levels rise rapidly.
d. Savings institutions and lenders increase transaction charges for
savings and for making loans.
Answer:

ACF 103 HAUT 2015 Tutorial 1 Solns 2

 a. All other things being the same, the cost of funds (interest rates) would
rise. If there are no disparities in savings pattern, the effect would fall
on all financial markets.
b. It would lower the demand for common stock, bonds selling at a
discount, real estate, and other investments where capital gains are an
attraction for investment. Prices would fall for these assets relative to
fixed income securities until eventually the expected returns after taxes
for all financial instruments were in equilibrium.
c. Great uncertainty would develop in the money and capital markets and
the effect would likely be quite disruptive. Interest rates would rise
dramatically and it would be difficult for borrowers to find lenders
willing to lend at a fixed interest rate. Disequilibrium would likely to
continue to occur until the rate of inflation reduced to a reasonable
level.
d. Financial markets would be less efficient in channelling funds from
savers to investors in real estate.

Homework problem
7. Text book Ch 2 self-test problem # 1 (p.37)

Answer – See p.38 of text book

Chapter 6
1. Here are Fang Jiang's balance sheets for 2011 and 2012.

Current Assets 2012 2011 Change

Cash and Equivalents $3,122 $3,600 -$ 478
Short-Term Investments $2,104 $6,020 -$3,916
Accounts Receivable $7,232 $6,258 $ 974
Inventories $3,632 $3,086 $ 546
Other Current Assets $ 1,414 $ 1,202 $ 212
Total Current Assets $17,504 $20,166 -$2,662
Current Liabilities
Accounts Payable $10,346 $10,222 $ 248
Short-Term Debt $ 576 $ 554 $ 22
Other Current Liabilities $2,802 $2,196 $ 606
Total Current Liabilities $13,724 $12,972 $ 752

a. What is the Net Working Capital for

(i) 2012?
(ii) 2011?
b. What is the Change in Net Working Capital (NWC)?

Answer:
a. Net Working Capital for 2012 is $17,504 - $13,724 = $3,780
b. Net Working Capital for 2011 is $20,166 - $12,972 = $7,194
Decrease in Net Working Capital (NWC) = $3,780 - $7,194= -$3,414
= $14,310 - $4,744 - (-$3,414) = $12,980.

2. From the following balance sheet accounts of Hubei Corporation:

ACF 103 HAUT 2015 Tutorial 1 Solns 3

a. list all the working capital accounts
b. find the net working capital for the years ending 2013 and 2014
c. calculate the change in net working capital for the year 2014

Account Balance 2013/12/31 Balance 2014/12/31

Accumulated Depreciation $8,468 $9,732
Accounts Payable $5,800 $6,420
Accounts Receivable $6,320 $7,288
Cash $2,420 $2,980
Common Stock $9,556 $14,556
Inventory $8,694 $10,332
Long-Term Debt $7,200 $4,860
Plant, Property & Equipment $17,350 $19,680
Retained Earnings $3,760 $4,712
Answer:
a. The Working Capital Accounts are:
Cash, Accounts Receivable, Inventory, and Accounts Payable
b. The Net Working Capital for 2013 and 2014:
Net Working Capital = Cash + Accounts Rec. + Inventory – Accounts Pay.
2013 Net Working Capital = $2,420 + $6,320 + $8,694 - $5,800 = $11,634
2014 Net Working Capital = $ $2,980+ $7,288 + $10,332 - $6,420 = $14,180
c. The Change in Net Working Capital for 2014 is, $14,180 - $11,634 = $2,546
or an increase in Net Working Capital of $2,546.

3. Text book p160 – Self-correction problem 1

Solution:

3. Present current ratio = $800/$500 = 1.60.

a. $700/$500 = 1.40. Current assets decline, and there is no change in current liabilities.
b. $900/$600 = 1.50. Current assets and current liabilities each increase by the same
amount.
c. $800/$500 = 1.60. Neither current assets nor current liabilities are affected.
d. $760/$540 = 1.41. Current assets decline and current liabilities increase by the same
amount.

4. Text book p.161/162 Problem 2, parts a – d only

Solution:

ACF 103 HAUT 2015 Tutorial 1 Solns 4

4. a. Current ratio = ($3,800 / $1,680) = 2.26
b. Acid-test ratio = ($3,800 – $2,100)/ $1,680 = 1.01
c. Average collection period = ($1,300 × 365 days)/$12,680 = 37.42 days
d. Inventory turnover = ($8,930/$2,100) = 4.25

5. Text book p.163 Problem 5

Solution:

5. a. Cost of goods sold = (1 – Gross profit margin)(Net sales)

= (1 – 0.20)($400,000) = $320,000

Inventory turnover = Cost of goods sold/(average)Inventory

Therefore, . . . (average) Inventory = Cost of goods sold/Inventory turnover

= $320,000/4 = $80,000

b. Average collection period = (average) Receivable× 360 days Annual credit sales
45 days = ($50,000 × 360 days)/$400,000

Chapter 7
1. Text book p195/196 – Self-correction problem 2 – parts a and b only

Solution:

ACF 103 HAUT 2015 Tutorial 1 Solns 5

2. Text book p.198 Problem 4

Solution:

ACF 103 HAUT 2015 Tutorial 1 Solns 6

ACF 103 HAUT 2015 Tutorial 1 Solns 7
ACF 103 HAUT 2015 Tutorial 1 Solns 8