Home Assignment # 1 (05 marks) FIN 312 (Answers must be hand written)

Last date of submission = 16/07/2022

Chapter 1
Answer the following questions:
1. Identify the key financial decisions facing the financial manager of any business firm.
2. Identify the basic forms of business organization and their respective strengths and
weaknesses.
3. Explain why maximizing the current value of the firm’s stock is the appropriate goal for
management.
4. Discuss how agency conflicts affect the goal of maximizing shareholder value.

(1) Financial managers must make three far-reaching decisions for their companies. He has to make
the right investment decisions. He must make financing decisions and, ultimately, dividend
payments. He has been instrumental in developing investment guidelines and decision-making.
He must assess the returns and the level of cost required to achieve those returns.

(2) Basic corporate forms include corporations, limited liability companies, and sole proprietorships.
The advantage of a capital company is that the owners are separated from management and the
personal liability of the owners or shareholders is protected. The business continues even after
the owner's death. The downside of a company is that this business requires double taxation
and is a very expensive way to start a business. LLCs have the advantage of having limited
liability to the owners and offer tax advantages. However, the downside of an LLC is that it is not
permanent, and it is difficult to raise funds for the business. A sole proprietorship, on the other
hand, has unlimited liability and does not last forever against the owner. Business continuity
costs are lower, and taxes on income generated by the sole proprietorship are passed on to the
owner's tax liability.

(3) In a company, the owner is different from the management, the owner is regarded as the
principal, and the management is regarded as the agent of the principal. The goal of an agent or
manager is to increase profits for the company and maximize returns for shareholders.
Therefore, wealth maximization is an appropriate goal of management, which is essentially an
agent of the principal, working under its direction and expectations.

(4) When managers act in their own interests rather than in the interests of shareholders, they
create representation conflicts. Agency conflict results when managers focus not on maximizing
shareholder wealth, but on maximizing their own wealth, as they pursue their own interests at
the expense of shareholders.

Chapter 9
1. For the given cash flows, suppose the firm uses the NPV and IRR decision rule. At a required
return of 11 percent, should the firm accept this project? What if the required return was 30
percent?
Year Cash Flow
0 -34,000
1 16,000
2 18,000
3 15,000

Required return of 11 %:

PV of Cash
Year Cash Flow PVF @ 11%
Flow
0 -34000 1 -34000
1 16000 0.900901 14414.41
2 18000 0.811622 14609.2
3 15000 0.731191 10967.87
NPV 5991.489
IRR 21%

ü Accept the project as NPV is positive & IRR is more than required return

Required return of 30 %:

PV of Cash
Year Cash Flow PVF @ 30%
Flow
0 -34000 1 -34000
1 16000 0.769231 12307.69
2 18000 0.591716 10650.89
3 15000 0.455166 6827.492
NPV -4213.93
IRR 21%

NOT accept the project as NPV is negative & IRR is less than required return

Chapter 10
1. You purchase equipment for $100,000, and it costs $10,000 to have it delivered and installed.
Based on past information, you believe that you can sell the equipment for $17,000 when you
are done with it in 6 years. The company’s marginal tax rate is 40%. What is the depreciation
expense each year and the after-tax salvage in year 6 by using Straight Line depreciation
method and three years MACRS depreciation? (Slide # 16)

Suppose the appropriate depreciation schedule is straight-line :

• Depreciation every year = (110,000 – 17,000) / 6 = 15,500 every year for 6 years

• Book value in year 6 = 110,000 – 6(15,500) = 17,000

• After-tax salvage = 17,000 - .4(17,000 – 17,000) = 17,000

Three years MACRS depreciation

Year MACRS D
percent BV in year 6 =
1 0.3333 .3333(110,000) II0,000 -36,663 -
= 36,663
48,895- 16,291 -
8,15l = O
2 0.4445 .4445(110,000)
After-tax salvage
= 48,895
3 0.1481 .1481(110,000) = 17,000 -
= 16,291 .4 ( l 7,000- 0) =
4 0.0741 .0741(110,000) $10,200
= 8,151

Chapter 13

• Consider the following information:

State Probability X Z
Boom .25 15% 10%
Normal .60 10% 9%
Recession .15 5% 10%
• What are the expected return and standard deviation for a portfolio with an investment of
$6,000 in asset X and $4,000 in asset Z? (Slide # 15)
Asset X's Expected Return = [P(Boom) * r(Boom)] + [P(Normal) * r(Normal)] +
[P(Recession) * r(Recession)]

= [0.25 * 15%] + [0.60 * 10%] + [0.15 * 5%]

= 3.75% + 6% + 0.75% = 10.50%

Asset Z's Expected Return = [P(Boom) * r(Boom)] + [P(Normal) * r(Normal)] +

[P(Recession) * r(Recession)]

= [0.25 * 10%] + [0.60 * 9%] + [0.15 * 10%]

= 2.50% + 5.40% + 1.50% = 9.40%

Portfolio's Expected Portfolio = [w(Asset X) * r(Asset X)] + [w(Asset Z) * r(Asset Z)]

= [{6000/(6000+4000)} * 10.50%] + [{4000/(6000+4000)} * 9.40%]

= 6.30% + 3.76% = 10.06%

Portfolio's S.D. = [{w(Asset X) * (rP - rX)2} + {w(Asset Z) * (rP - rZ)2}]1/2

= [{0.6 * (10.06 - 10.50)2} + {0.4 * (10.06 - 9.40)2}]1/2

= [0.11616 + 0.17424]1/2

= [0.2904]1/2

= 0.54%