Quiz 1

FIN 440
Corporate Finance
(There are no options, each question has to be answered. The total exam is on 25 points, with 2
additional points.)
Long Holding INC has their balance sheet and income statement provided below: On the basis of
the following conditions adjust the balance sheet and income statements.
a) Long Holding corporation has plan to produce 60000 products for their entire operating cycle.
The final price for the products is $15/product. It found that nearly 1% of products exist as
unused RM, 1% of FG didn’t get sold for last 4 periods causing 1.5% depreciation and nearly
5% of products remain generally in work in process. Under these circumstances provide
i) Income Statement of Long Holding INC (6)
ii) The Retained Earnings are the final Net Income of the organization. Suggest if the
company currently doesn’t have any specific values like brand reputation, petty cash,
prepaid insurance, cash, trade names missing from their balance sheet at the
proportion of 20%, 5%, 5%, 20%, 20% of RE. The rest of RE is equivalent to Other
investments of Asset section. Derive the Balance sheet using the above information.
(3).
b) As the organization observes that the inventory section is not getting used completely due to
unused RM, Leftover FG Inventory and process inventory. The balance is substituted by Short
term loans payable and long-term debts payable. Based on the changes in real COGS and
assumed COGS, suggest what will be the new
i) Current Ratio and Old Current Ratio (2)
ii) Quick Ratio and Old Quick ratio (2)
iii) Inventory Turnover Ratio and Old Inventory Turnover Ratio (2)
c) It found that the organization practices note and bonds payable to be supplementary debt for
FA. The organization has found that during recent days there are more product demand and
the current machineries are at their maximum production capability. The organization has
found that if the new equipment’s are adopted then both short term loans payable and long-
term debts payable are increased by 5% and notes & bonds payable are increased
proportionally. The new equipment price is 50% of the overall FA. Suggest the following (2)
i) Debt Equity Ratio (2)
ii) Debt Ratio (2)
d) The branding reputation of the company increases due to increased market adaptability and
no increase in product prices with more FG requirement. This helps the goodwill to grow by
5% and marketing reputation to increase by 4.5%. The effective changes are observed in the
increase with Common stockholders. Suggest the adjusted changes in
i) Intangible assets to Total Equity ratio (2)
ii) Intangible assets Ratio in Total Assets (2)
e) Its observed that as more productions are going to happen, so the management is expecting
an overall AR increase by 5% and AP increase by 4%. The adjustment is supposed to equivalent
 but it’s found that it impacts both the deferred revenues and warranty liability. Suggest the
changes in terms of the following
i) Cash ratio Changes (2) (Cash / Total Liabilities)
ii) CL to TL (2)

Relevant Financial Ratios

a) Current Ratio = Current Assets / Current Liabilities

b) Quick Ratio = (Current Assets – Inventories) / Current Liabilities
c) Debt Ratio = Total Liabilities / Total Assets
d) Debt Equity Ratio = Total Liabilities / Shareholders Equity
e) Inventory Turnover Ratio = COGS / ((beginning Inventory + Ending Inventory) / 2)

------------------------------------------------------Good Luck-------------------------------------------------------
Balance Sheet Income Statement
Current Asset Current Liabilities Requirement
Cash St Loans Payable 6500 RM expense 0.56
Petty Cash LT Debt Payable 8000 Operating Expenses
Temporary Inv 6350 AP 9500 Monthly Wages 11306
AR Net 13400 Effective IT payable 17000 Utilities Expense 551
Inventory 101000 Accrued Liabilities 8300 Administrative Expense 4163
3 and half
Supplies 37600 Deferred revenues 7850 Operating Cycle Months
Prepaid Ins Warranty Liability 9100 Taxes 30
Total Current Asset 158350 Total CL 66250

Other Investments Other Liabilities 11200

PP&E (Fixed Asset) Fixed Liabilities

Land 80000 Notes Payable 65000
Land Improv 35000 Bonds Payable 210000
Buildings 105000 Total FL 275000
Equipments 155000
(Accm Depr) -35000 Stockholders Equity
Total FA 340000 Common Stock 135000
Retained earnings
Intangible Assets Comprehensive Income 75000
Goodwill 13000 (Less: Treasury Payments) -15000
Brand Reputation
Trade Names Total SE 195000
Marketing Reputation 21600
Total IA 34600

Other assets 14500

Total Assets 547450 Total Liab & SE 547450