WEEK 2 (Chapter 3)
Short Essay: (Due date: On Wednesday at 11:00a.m.)
1 What is a market? Differentiate between the following types of markets: physical asset markets versus financial asset markets, spot markets versus futures markets, money markets versus capital markets, primary markets versus secondary markets, and public markets versus private markets.
2 Why are financial markets essential for a healthy economy and economic growth?
3 What is a depository institution and what types of depository institutions are found in the United States? How do they act as intermediaries between savers and borrowers? Why do they play this role?
4 Some economists argue that deregulated deposit rates combined with deposit insurance led to the insolvency of many depository institutions. On what basis do they make such an argument?(Each one 100 words)
Questions: (Due date: On Friday at 11:00P.m.)
3-1 BALANCE SHEET The assets of Dallas & Associates consist entirely of current assets andnet plant and equipment. The firm has total assets of $2.5 million and net plant and
equipment equals $2 million. It has notes payable of $150,000, long-term debt of $750,000,and total common equity of $1.5 million. The firm does have accounts payable and accruals
on its balance sheet. The firm only finances with debt and common equity, so it has nopreferred stock on its balance sheet.
a. What is the amount of total liabilities and equity that appears on the firm’s balance sheet?
b. What is the balance of current assets on the firm’s balance sheet?
c. What is the balance of current liabilities on the firm’s balance sheet?
d. What is the amount of accounts payable and accruals on its balance sheet? [Hint:Consider this as a single line item on the firm’s balance sheet.]
e. What is the firm’s net working capital?
f. What is the firm’s net operating working capital?
g. What is the explanation for the difference in your answers to parts e and f?
3-2 INCOME STATEMENT Little Books Inc. recently reported $3 million of net income. ItsEBIT was $6 million, and its tax rate was 40%. What was its interest expense? [Hint:Write out the headings for an income statement and fill in the known values. Thendivide $3 million of net income by (1 – T) = 0.6 to find the pretax income. The differencebetween EBIT and taxable income must be interest expense. Use this same procedure tocomplete similar problems.
3-3 INCOME STATEMENT Pearson Brothers recently reported an EBITDA of $7.5 million and netincome of $1.8 million. It had $2.0 million of interest expense, and its corporate tax rate was40%. What was its charge for depreciation and amortization?
3-4 TATEMENT OF STOCKHOLDERS’ EQUITY In its most recent financial statements, NewhouseInc. reported $50 million of net income and $810 million of retained earnings. The previous
retained earnings were $780 million. How much in dividends were paid to shareholdersduring the year? Assume that all dividends declared were actually paid.
3-5 MVA Henderson Industries has $500 million of common equity; its stock price is $60 pershare; and its Market Value Added (MVA) is $130 million. How many common shares are
currently outstanding?
3-6 MVA Over the years, McLaughlin Corporation’s stockholders have provided $35,000,000 ofcapital, when they purchased new issues of stock and allowed management to retain some of
the firm’s earnings. The firm now has 2,000,000 shares of common stock outstanding, and theshares sell at a price of $30 per share. How much value has McLaughlin’s management
added to stockholder wealth over the years, i.e., what is McLaughlin’s MVA?
3-7 BALANCE SHEET Which of the following actions are most likely to directly increase cash asshown on a firm’s balance sheet? Explain and state the assumptions that underlie your
answer.
a. It issues $2 million of new common stock.
b. It buys new plant and equipment at a cost of $3 million.
c. It reports a large loss for the year.
d. It increases the dividends paid on its common stock.
3-8 STATEMENT OF STOCKHOLDERS’ EQUITY Computer World Inc. paid out $22.5 million intotal common dividends and reported $278.9 million of retained earnings at year-end. The
prior year’s retained earnings were $212.3 million. What was the net income? Assume that alldividends declared were actually paid.
3-9 EVA For 2012, Everyday Electronics reported $22.5 million of sales and $18 million ofoperating costs (including depreciation). The company has $15 million of investor-suppliedoperating capital. Its weighted average cost of capital is 9% and its federal-plus-state income
tax rate was 35%. What was the firm’s Economic Value Added (EVA), that is, how muchvalue did management add to stockholders’ wealth during 2012?
3-10 STATEMENT OF CASH FLOWS W.C. Cycling had $55,000 in cash at year-end 2011 and$25,000 in cash at year-end 2012. The firm invested in property, plant, and equipment totaling
$250,000. Cash flow from financing activities totaled +$170,000.
a. What was the cash flow from operating activities?
b. If accruals increased by $25,000, receivables and inventories increased by $100,000, and
depreciation and amortization totaled $10,000, what was the firm’s net income?
