ACTSC 371 Corporate Finance I Assignment 1 Due Friday January 27th at noon in drop boxes outside MC 4066 [See

ee posting on D2L]
Question 1: Consider the following information from XYZ Inc. Total Equity Balance, end of 2009 Total Equity Balance, end of 2010 Total shares issues during 2010 Dividends paid in 2010 Retained Earnings Balance, end of 2010 $250,000 $350,000 $40,000 $15,000 $125,000

(a) (b)

Calculate the net income for 2010. Present the equity section of the balance sheet on a gross basis for both 2009 and 2010.

Question 2: The following tables contain 2009 Income Statement and 2008 and 2009 Balance sheet information for ABC Inc. Income Statement Information Revenues Cost of Goods Sold Administrative Expenses Interest Expense Depreciation Dividend payout ratio Income tax rate

1200 500 250 150 100 60% 40%

Balance Sheet Information 2008 Cash Accounts Receivable Inventory Fixed Assets (net) Current Liabilities LTD Equity 50 20 100 900 50 820 200

2009 70 30 85 1000 35 750 400

Calculate the cash flow of the firm. In your solution, clearly show how the cash flow of the firm is distributed to the investors. Question 3: In this question, please refer to the financial information in Question 2. Assume ABC wishes to grow sales by 35% in 2010. Assume the following: Sales, Cost of Goods Sold, and depreciation are all expected to grow at the same rate. Interest costs and Administrative expenses are all expected to remain constant. All assets (except inventory) are expected to grow at the same rate as sales. Inventory is expected to grow at half the rate of sales. Current liabilities are expected to grow at the same rate as sales. LTD is expected to remain constant. Assume ABC does not wish to issue any new shares. The dividend policy is expected to remain fixed. Prepare a pro forma Income Statement and Balance Sheet for 2010. What is ABCs EFN? What is ABCs sustainable growth rate? (Use Excel for this). (Hint: Set the EFN=0 by changing the growth rate. Use goalseek to do this) The sustainable growth rate you calculated in (b) is different from the rate given by the formula in class. Verify this. Why are these rates different?

(a)

(b)

(c)

Question 4. Assume that you wish to increase your companys current ratio. Show mathematically, why a business owner should repay accounts payable when the current ratio is greater than 1 but not when the current ratio is less than 1. Question 5: a) Describe the primary and secondary markets for equities. Specifically, discuss cash flows to the issuing company. b) Should a Company care if its equity trades poorly in the secondary market? Why or why not?