Financial Analysis
Question #1: Chapter 1 (Ten Points)
Distinguish between a firm's capital budgeting decisions and its financing decisions by giving examples of each.
Capital budgeting decisions are investment decisions and financing decisions focus on raising the money that the firm needs for investments and operations. A company needs to decide which real assets to invest in (capital budgeting) and ways to raise funds to pay for those investments (financing decisions). An example of capital budgeting would be a company spending 1 million on a marketing campaign to advertise a new line of products to a new market. An example of financing decisions would be allowing investors to buy stock in the company.
Question #2: Chapter 2 (Ten Points)
Describe the distinguishing characteristics of the major financial markets.
A financial market is a market where securities are issued and traded. These financial markets channel savings to corporate investment and they help match up borrowers and lenders. They provide liquidity and diversification opportunities for investors. Some of these markets include the primary market, which is the sale of new securities by corporations. The next is secondary market, which previously issued securities are traded among investors. The fixed income market is for debt securities. Capital market is a market for long-term financing and money market is for short-term financing, which is usually less than a year.
Question #3: Chapter 3 (Twenty Points)
Determine earnings before interest and taxes, net income, and also the cash flow from operations for the following firm: $500,000 sales, $10,000 cash dividends, $300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation expense, $40,000 interest expense, $10,000 purchase of productive equipment, no changes in working capital, and a tax rate of 35%.
EBIT= total revenue-costs-depreciation = 500,000-(300,000+20,000)-20,000 =160,000
Net income= 160,000- 20,000 –
Distinguish between a firm's capital budgeting decisions and its financing decisions by giving examples of each.
Capital budgeting decisions are investment decisions and financing decisions focus on raising the money that the firm needs for investments and operations. A company needs to decide which real assets to invest in (capital budgeting) and ways to raise funds to pay for those investments (financing decisions). An example of capital budgeting would be a company spending 1 million on a marketing campaign to advertise a new line of products to a new market. An example of financing decisions would be allowing investors to buy stock in the company.
Question #2: Chapter 2 (Ten Points)
Describe the distinguishing characteristics of the major financial markets.
A financial market is a market where securities are issued and traded. These financial markets channel savings to corporate investment and they help match up borrowers and lenders. They provide liquidity and diversification opportunities for investors. Some of these markets include the primary market, which is the sale of new securities by corporations. The next is secondary market, which previously issued securities are traded among investors. The fixed income market is for debt securities. Capital market is a market for long-term financing and money market is for short-term financing, which is usually less than a year.
Question #3: Chapter 3 (Twenty Points)
Determine earnings before interest and taxes, net income, and also the cash flow from operations for the following firm: $500,000 sales, $10,000 cash dividends, $300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation expense, $40,000 interest expense, $10,000 purchase of productive equipment, no changes in working capital, and a tax rate of 35%.
EBIT= total revenue-costs-depreciation = 500,000-(300,000+20,000)-20,000 =160,000
Net income= 160,000- 20,000 –