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    MBA 5015 Managerial Finance-Lesson 1-Homework

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    pravin
    The document contains sample questions and answers from an MBA finance course. It discusses key concepts like shareholder wealth maximization versus profit maximization, liability for different business structures, how amortization affects cash flows, and why interest expenses are tax deductible but dividend payments are not. It also includes sample financial statements - an income statement, balance sheet, and statement of cash flows - for a company along with explanations of major line items.

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    MBA 5015 Managerial Finance-Lesson 1-Homework

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    pravin
    11 views3 pages
    The document contains sample questions and answers from an MBA finance course. It discusses key concepts like shareholder wealth maximization versus profit maximization, liability for different business structures, how amortization affects cash flows, and why interest expenses are tax deductible but dividend payments are not. It also includes sample financial statements - an income statement, balance sheet, and statement of cash flows - for a company along with explanations of major line items.

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    The document contains sample questions and answers from an MBA finance course. It discusses key concepts like shareholder wealth maximization versus profit maximization, liability for different business structures, how amortization affects cash flows, and why interest expenses are tax deductible but dividend payments are not. It also includes sample financial statements - an income statement, balance sheet, and statement of cash flows - for a company along with explanations of major line items.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    11 views3 pages

    MBA 5015 Managerial Finance-Lesson 1-Homework

    Uploaded by

    pravin
    The document contains sample questions and answers from an MBA finance course. It discusses key concepts like shareholder wealth maximization versus profit maximization, liability for different business structures, how amortization affects cash flows, and why interest expenses are tax deductible but dividend payments are not. It also includes sample financial statements - an income statement, balance sheet, and statement of cash flows - for a company along with explanations of major line items.

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    © All Rights Reserved
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    MBA 5015 - Managerial Finance-Lesson 1 Homework

    Chapter 1 Q3: What is meant by the goal of maximization of shareholder wealth? Why is
    profit maximization, by itself, an inappropriate goal? (LO3)

    The objective of shareholder wealth maximization is to increase stock price. Profit


    maximization is of a short-term nature and focuses more on what earnings are generated than
    value maximization, which is consistent with the maximization of shareholder wealth.

    Chapter 1 Q10: Contrast the liability provisions for a sole proprietorship, a partnership, a
    limited partnership, and a corporation. (LO5)

    The sole owner of a sole proprietorship has unlimited liability for the business.
    A partnership consists of two or more individuals who pool their resources for a business and
    divide profits and losses. Depending on the provisions, owners' liability is divided. Individuals
    are not directly liable when a corporation has limited liability.

    Chapter 2 Q3Explain how amortization generates actual cash flows for the company. (LO4)

    The expense of amortization is a noncash expense. When preparing the indirect cash flow
    statement, noncash expenses are added to net income.

    Chapter 2 Q10Why is interest expense said to cost the firm substantially less than the actual
    expense, whereas dividends cost it 100 percent of the outlay? (LO6)

    The corporation is able to deduct interest expense, but not dividends. The actual cost of interest
    is less than the outlay, whereas the actual cost of the dividend is identical to the expenditure.

    Problem

    A. Income Statement

    Sales 220,000
    COGS(60%) 132,000
    Gross Profit 88,000
    Selling and Admin Expense 22,000
    Amortization Expense 20,000
    EBIT 46,000
    Interest Expense on Bonds 4,000
    Interest Expense on Notes 2,000 = 6,000
    Earning Before Taxes 40,000
    Taxes 7,200
    Earnings After Taxes 32,800
    Common Stock Dividends 12,800
    Change in Retained Earnings 20,000

    B. Balance Sheet

    CURRENT ASSETS LIABILITIES


    Cash 10,000 Accounts Payable 12,000
    Accounts Receivable 15,000 Notes Payable 20,000
    Inventory 25,000 Bonds Payable 50,000
    Prepaid Expenses 12,000
    Total Current Assets 62,000 Total Liabilities 82,000

    CAPITAL ASSETS SHAREHOLDERS EQUITY


    Gross Plant and 250,000 Common Stock 75,000
    Equipment
    Less: Accumulated 50,000 Retained Earnings 105,000
    Amortization
    Net plant and 200,000 Total Shareholders Equity 180,000
    Equipment
    Total Assets 262,000 Total Liabilities and Equity 262,000

    C. Statement of Cash Flows

    OPERATING ACTIVITIES
    Net Income 32,800
    Amortization 20,000
    Cash Flow From Operations 52,800
    Change in Non Cash Working 5,000
    Capital
    Cash Provided by Operating 57,800
    Activities
    INVESTING ACTIVITIES
    Increase in plant and (35,000)
    equipment
    Cash used in investing (35,000)
    activities
    FINANCING ACTIVITIES
    Decrease in Bonds Payable (10,000)
    Common Stock Dividends (12,800)
    Paid
    Cash Used in Financing Act (22,800)

    Net increase in cash during 0


    year
    Cash at beginning of year 10,000
    Cash at end of year 10,000

    Major accounts that contribute:


    - Net income (32,800)
    - Amortization (20,000)
    - Plant and equipment (35,000)
    - Payments on Bonds (10,000)
    - Dividends Paid (12,800)

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