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School

Jomo Kenyatta University of Agriculture and Technology *

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504

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Finance

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Nov 24, 2024

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docx

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Uploaded by ochandadebra

QUESTION 1 Goals of the Company: A company's main objective should be to increase shareholder wealth. To increase the value of the shareholder's investment, the company should consider this when making choices and doing actions. Increasing earnings is not the same as increasing shareholder wealth because increasing profits can result in taking unwarranted risks that could eventually reduce the value of the company's stock. Additionally, the timing of earnings may need to be considered while maximizing profits, and it may not necessarily reflect the firm's capacity for cash flow. The goal of shareholder wealth maximization is to balance the interests of the company's owners with the long-term value of its stock. QUESTION 2 The Efficient Market Hypothesis (EMH) is a theory that contends that stock prices on financial markets already consider all relevant information. The EMH contends that since stock prices always represent all available information, investors cannot consistently outperform the market average by employing any specific technique. EMH comes in three different forms: Weak Form: In the weak form of the EMH, stock prices already incorporate all historical data, such as trading volumes and price indices. This suggests that it is impossible to anticipate future stock prices using data from the past. Therefore, it is doubtful that technical analysis based on past price trends can continually beat the market.

Semi-Strong Form: Stock prices in the semi-strong form of the EMH consider all publicly available data, including market and non-market data. Since stock prices already account for this information, fundamental research examining financial statements and other publicly available data is unlikely to offer a competitive edge. Strong Form: The strong form of the EMH contends that both public and private information is reflected in stock prices. Even insider knowledge would not be advantageous because the market has already considered it. This form suggests that every investor group can only regularly provide above-average returns. QUESTION 3 Operating profit margin and gross profit: Gross profit margin is calculated as follows: ($5,320,140 - $1,300,000) / ($5,320,140*100) = 75.56% EBIT divided by sales yields an operating profit margin of 41.35% ($2,200,000 / $5,320,140). QUESTION 4 Current Assets - Current Liabilities = ($400,134 + $1,321,500 + $2,188,128 + $521,800) - ($2,490,357 + $120,000 + $200,000) = $4,431,562 - $2,810,357 = $1,621,205, where Current Assets = Current Liabilities. QUESTION 5

For Riyadh Ltd., net income after taxes is calculated as follows: (sales - the cost of goods sold - amortization and depreciation - interest expense - selling, general, and administrative expenses) * ($32,565,420 - $21,400,000 - $1,278,120 - $6,341,250 - $2,556,610) * (1 - Tax Rate) = ($989,440) * (0.70) = $692,608 Thus, Riyadh Ltd.'s fiscal year's net income after taxes is $692,608.

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