National University fin609 week 1 HW

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1 FIN609 Homework FIN609A Seminar in Financial Management 10/28 /2023 Week One Assignment

2 FIN609 Homework Pg.4 1. What are three attributes of successful companies?  Successful companies have the following three attributes that put them above the competition. Those three attributes consist of a skilled workforce, the ability to build and create strong relationships with groups outside the company, and are able to manage their finances and ensure they always have enough funding. 2. What two essential financial skills must every successful manager have?  The two essential financial skills that every successful manager must have are; i. Financial analysis: Managers should be able to analyze financial statements and data to assess the financial health and performance of their company or program and provide the necessary data to make informed decisions and recommendations. ii. Financial Planning and Budgeting: Managers should be able to develop and manage budgets to ensure their departments or projects are effectively allocated and resources are used appropriately. These financial skills are crucial for managers to be successful in strategic decision-making and ensuring the financial well-being of their company. Pg. 131

3 FIN609 Homework (3-14) The Jimenez Corporation’s forecasted 2017 financial statements follow, along with some industry average ratios. Calculate Jimenez’s 2017 forecasted ratios, compare them with the industry average data, and comment briefly on Jimenez’s projected strengths and weaknesses.  Answer: Current Ratio- Current Assets/ Current Liabilities = $1405000/$602000 = 2.33 Quick ratio= (Current Assets-Inventory)/Current liabilities =($1405000-$894000)/$602000 =0.8488 Inventory Turnover= Cost of goods sold/Inventory for the period =$3580000/894000 =4 Days Sales Outstanding= Account receivables/ Average sales per day =$439000/($4290000/365) =37.35 days Fixed Assets Turnover= Sales/Fixed Assets =$4290000/$431000 =9.95 Total Assets Turnover= Sales/Total Assets =$4290000/$1836000

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4 FIN609 Homework 2.33 Return on Assets= Net Income/ Total Assets = $108408/$1836000 =5.9% Return on Equity= Net Income/(Common Stock+ Retained Earnings) =$108408/($575000+$254710) =13.06% Profit margin on sales= Net Income/Sales =$108408/$4290000 =2.5% Debt to Assets ratio= Debt/ Total Assets = $404290/$1836000 =22.02% Liabilities to Asset ratio= Total Liabilities/ Total Assets = ($1006290/$1836000) =54.8% Market to book ratio= (Total Assets-Total liabilities)/ Current Share outstanding =($1836000-$1006290)/23000 36.07  Overall, the analysis of Jiminez Corporation indicates that it is not meeting the standards of the industry. The return on equity and assets is lower compared to the competition. Investing in this company could result in a significant loss of money when considering the effects of compounding interest. Additionally, the company has acquired its assets through debt, which exceeds

5 FIN609 Homework industry ratios. Although the price-to-earnings ratio may appear low, it is important to note that the company’s fundamentals are not up to par. Therefore, it is recommended to avoid investing in this company. Pg. 189 (mini case study) Assume that you are nearing graduation and have applied for a job with a local bank. The bank’s evaluation process requires you to take an examination that covers several financial analysis techniques. The first section of the test addresses discounted cash flow analysis. See how you would do this by answering the following questions; a. Draw timelines for: (1) a $100 lump sum cash flow at the end of Year 2:  Year 0 Year 1 Year 2 (end) | | | | | $100 (2) an ordinary annuity of $100 per year for 3 years:  Year 0 Year 1 Year 2 Year 3 (end) | | | | | $100 $100 $100 (3) an uneven cash flow stream of −$50, $100, $75, and $50 at the end of Years 0 through 3:  Year 0 (end) Year 1 (end) Year 2 (end) Year 3 (end) | | | |

6 FIN609 Homework -$50 $100 $75 $50 b. (1) What’s the future value of an initial $100 after 3 years if it is invested in an account paying 10% annual interest?  The future value of an initial $100 after 3 years, with an annual interest rate of 10%, would equal approximately $133.10. (2) What’s the present value of $100 to be received in 3 years if the appropriate interest rate is 10%?  The value of $100 after 3 years with an annual interest rate of 10% would equal approximately $75.13. c. We sometimes need to find out how long it will take a sum of money (or something else, such as earnings, population, or prices) to grow to some specified amount. For example, if a company’s sales are growing at a rate of 20% per year, how long will it take sales to double?  If a company’s sales are growing at a rate of 20% per year, it will take the company approximately 3.8 years until the sales double. d. If you want an investment to double in 3 years, what interest rate must it earn?  If you want an investment to double in 3 years, it must earn an interest rate of approximately 26%

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7 FIN609 Homework e. What’s the difference between an ordinary annuity and an annuity due? What type of annuity is shown below? How would you change the timeline to show the other type of annuity?  An ordinary annuity is when cash flows occur at the end of each period, while an annuity due is when cash flows occur at the beginning of each period. In the timeline provided: Period 0: no cash flow Period 1: $100 Period 2: $100 Period 3: $10 This represents an ordinary annuity. To change the timeline to demonstrate an annuity due, the cash flows should be shifted one period earlier: Period 0: $100 Period 1: $100 Period 2: $10 In this timeline, the cash flows occur at the beginning of each period, indicating that this is an annuity due. f. (1) What’s the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10%?

8 FIN609 Homework  The future value of a 3-year ordinary annuity of $100, with an interest rate of 10%, would equal $331 (2) What’s the present value of the annuity?  The present value of the annuity would be $248.69 (4) What would the future and present values be if the annuity were an annuity due?  If the annuity were an annuity due, the future value would equal $364.10 and the present value would be approximately $273.55 g. What is the present value of the following uneven cash flow stream? The appropriate interest rate is 10%, compounded annually.  The present value of the uneven cash flow stream provided in the text, with an interest rate of 10% compounded annually, the total would equal (-$530.09). This indivates that the cash flows result in a net outflow h. (1) Define the stated (quoted) or nominal rate INOM as well as the periodic rate IPER.  The (quoted) or nominal rate, INOM, is the interest rate that is quoted by a lender or financial institution. It represents the annual

9 FIN609 Homework interest rate that is used to calculate the interest on a loan or investment. The periodic rate, IPER, is the interest rate that is applied to each compounding period within a specified time frame. It is calculated by dividing the nominal rate by the number of compounding periods per year. For example, if the nominal rate is 8% and is compounded monthly, the periodic rate would be 8% divided by 12, equalling 0.67% (2) Will the future value be larger or smaller if we compound an initial amount more often than annually—for example, every 6 months, or semiannually—holding the stated interest rate constant? Why?  The future value will be larger if we compound an initial amount more often than annually, such as every 6 months, while keeping the interest rate constant. This is because compounding more frequently increases the number of compounding periods within a given time frame and with each compounding period, interest increases. (3) What is the future value of $100 after 5 years under 12% annual compounding? Semiannual compounding? Quarterly compounding? Monthly compounding? Daily compounding?

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10 FIN609 Homework  Annual: $176.23  Semi-Annual: $179.08  Quarterly: $180.61  Monthly: $181.67  Daily: $182.19 (4) What is the effective annual rate (EAR or EFF%)? What is the EFF% for a nominal rate of 12%, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily?  Semi-annually: 12.36%  Quarterly: 12.55%  Monthly: 12.68%  Daily: 12.75% With more frequent compounding, the effective annual rate increases as the compounding intervals become smaller and the compounding effects are applied more often within a year.