# Financial techniques and strategies

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Question: 1
a.  Sandersen, Inc., sells minicomputers. The firm’s taxable income is \$1,225,000. Calculate the corporation’s tax liability.
Corporate Tax Rates

15%
\$ 0–\$50,000
25%
\$ 50,001–\$75,000
34%
\$75,001–\$10,000,000
35%
over \$10,000,000

5% on income between \$100,000 and \$335,000.
3% on income between \$15,000,000 and \$18,333,333.
b.  “Originally, the sole objective of the federal government in taxing income was to generate financing for government expenditures. Although this purpose continues to be important, social and economic objectives have been added.” Substantiate the statement with enough explanations.
Question: 2
a.  Friedman Manufacturing, Inc. has prepared the following information regarding two investments under consideration. Which investment is better, based on risk (as measured by the standard deviation) and return?
Common Stock A
Common Stock B
Probability
Return
Probability
Return
0.2
12%
0.1
4%
0.5
18%
0.3
6%
0.3
27%
0.4
10%

0.2
15%
b.  “ More can be said about risk, especially as to its nature, when we own more than one asset in our investment portfolio.” Define risk and explain how risk is affected if we diversify our investment by holding a variety of securities?
Question 3:
a.  J and S Corporation is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.
Last year J and S Corp. had \$15 million in sales with net income of \$1.5 million. The firm anticipates that next year’s sales will reach \$18 million with net income rising to \$3 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.
The firm’s balance sheet for the year just ended is found below:

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J and S Corporation
Balance Sheet

12/31/2000
% of Sales
Current assets
\$6,000,000
40%
Net fixed assets
9,000,000
60%
Total
\$15,000,000

Liabilities and Owners’ Equity

Accounts payable
\$3,750,000
25%
Long-term debt
4,250,000
NAa
Total liabilities
\$8,000,000

Common stock
2,000,000
NA
Paid-in capital
2,800,000
NA
Retained earnings
2,200,000

Common equity
7,000,000

Total
\$15,000,000

Not applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year’s forecast of financing requirements.
Estimate J and S corp. total financing requirements (i.e., total assets) for 2001 and its net funding requirements (DFN).
b.  Give a brief summary of forecasting to determine additional (discretionary) funding (financing) needed.
Question 4:
The balance sheet and income statement for the McDonald’s are as follows.

McDonald’s Corporation 2016 Income Statement (\$ Millions)
Sales

\$11,508
Cost of goods sold

6,537
Gross profits

\$4,971
Marketing expenses and general

\$1,832

Depreciation expense
345

Total operating expenses

\$2,177
Operating profits

\$2,794
Interest expenses

387
Earnings before taxes

\$2,407
Income taxes

765
Net income before preferred stock dividends
\$1,642
Preferred stock dividends

25
Net income available to common stockholders
\$1,617
McDonald’s Corporation December 31, 2016 Balance Sheet (\$ Millions) Assets

Cash
\$341
Accounts receivables
484
Inventories
71
Prepaid expenses
247
Total current assets
\$1,143
Gross fixed assets
\$20,088
Accumulated depreciation
5,127
Net fixed assets
\$14,961
Investments
702
Other assets
1,436
Total assets
\$18,242
Liabilities and Equity

Liabilities (debt):

Short-term notes payable
\$1,629
Accounts payable
651
Taxes payable
53
Accrued expenses
652
Total current liabilities
\$2,985
Long-term debt
6,325
Total liabilities
\$9,310
Equity:

Preferred stock
\$80
Common stock:

Par value and paid in capital
\$708
Retained earnings
11,927
Treasury stock
-3,783
Total common equity
\$8,852
Total equity
\$8,932
Total liabilities (debt) and equity
\$18,242
a.  Calculate the following ratios:
RATIO
INDUSTRY NORM
Current ratio
0.7
Inventory turnover
90
Average collection period
6.5 days
Debt ratio
50%
Total asset turnover
1.5
Fixed asset turnover
2
Operating profit margin
21%
Return on common equity
15%
b.  Calculate the future sum of \$5,000 given that it will be held in the bank 5 years at an annual interest rate of 6 percent.
c.  Knutson Products, Inc., is involved in the production of airplane parts and has the following inventory, carrying, and storage costs:
Orders must be placed in round lots of 250,000 units.
The carrying cost for 1 unit of inventory is \$ 10
The ordering cost is \$100 per order.
Determine the optimal EOQ level.
Determine the average inventory when the safety stock is 2000 units.
Question 5:
“Some of the financial techniques and strategies are necessary for the efficient operation of an international business. Problems inherent to these firms include multiple currencies, differing legal and political environments, differing economic and capital markets, and internal control problems. The difficulties arising from multiple currencies are stressed here, including the dimensions of foreign exchange risk and strategies for reducing this risk.” Elucidate.
Question 6:
Explain the financial Axioms