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Assignment
Financial Management
SBS MBA
STUDENT ID
UNIT TITLE UNIT CODE
Name (in Full)
__________________________________________________________
Total Marks: _______ / 90

2. 1
Answer all the questions, each question 15 carries
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
Additional surtax:
•5% on income between $100,000 and $335,000.
•3% on income between $15,000,000 and $18,333,333.
Answer –
Calculating Corporation’s Tax Liability =
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.
(15 marks)
Answer –
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. For instance, a company may receive possible reductions in
taxes if –
i. It undertakes certain
ii.

3. 2
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
.20 12% .10 4%
.50 18% .30 6%
.30 27% .40 10%
.20 15%
Answer –
Expected Rate of Return of A =
0.20 x 12 = 2.4
+ 0.50 x 18 = 9
+ 0.
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?
(15 marks)
Answer –
Risk involves the chance an investment's actual return will differ from the expected return. Risk
includes the possibility of losing some or all of the original investment. Different versions of risk
are usually measured by calculating the standard deviation of the historical returns or average
returns of a specific investment.
Risk implies future uncertainty about deviation from expected earnings or expected outcome. Risk
measures the uncertainty that an investor is willing to take to realize a gain from an investment.

4. 3
Risks are of different types and originate from different situations. We have liquidity risk,
sovereign risk, insurance risk, business risk, default risk, etc. Various risks originate due to the
uncertainty arising out of various factors that influence an investment or a situation.
Diversification is a technique that reduces risk by allocating investments among various financial
instruments, industries and other categories. It aims to maximize return by investing in different
areas that would each react differently to the same event.
Most investment professionals agree that, although it does not guarantee against loss,
diversification is the most important component of reaching long-range financial goals while
minimizing risk. Here, we look at why this is true and how to accomplish diversification in your
portfolio.
Investors confront two main types of risk when investing:
Undiversifiable - Also known as "systematic" or "market risk," undiversifiable risk is associated
with every company. Causes are things like inflation rates, exchange rates, political instability, war
and interest rates. This type of risk is not specific to a particular company or industry, and it
cannot be eliminated or reduced through diversification; it is just a risk that investors must accept.
Diversifiable - This risk is also known as "unsystematic risk," and it is specific to a company,
industry, market, economy or country; it can be reduced through diversification. The most
common sources of unsystematic risk are business risk and financial risk. Thus, the aim is to invest
in various assets so that they will not all be affected the same way by market events.
Why We Should Diversify
Let's say we have a portfolio of only airline stocks. If it is publicly announced that airline pilots are
going on an indefinite strike,and that all flights are canceled, share prices of airline stocks will
drop. Your portfolio will experience a noticeable drop in value.
If, however, we counterbalanced the airline industry stocks with a couple of railway stocks, only
part of your portfolio would be affected. In fact, there is a good chance that the railway stock
prices would climb, as passengers turn to trains as an alternative form of transportation.
But, we could diversify even further because there are many risks that affect both rail and air
because each is involved in transportation. An event that reduces any form of travel hurts both
types of companies - statisticians would say that rail and air stocks have a strong correlation.
Therefore, to achieve superior diversification, we would want to diversify across the board, not
only different types of companies but also different types of industries. The more uncorrelated our
stocks are, the better.

5. 4
It's also important that we diversify among different asset classes. Different assets - such as bonds
and stocks - will not react in the same way to adverse events. A combination of asset classes will
reduce our portfolio's sensitivity to market swings. Generally, the bond and equity markets move
in opposite directions, so, if our portfolio is diversified across both areas, unpleasant movements
in one will be offset by positive results in another.
There are additional types of diversification, and many synthetic investment products have been
created to accommodate investors' risk tolerance levels. However, these products can be very
complicated and are not meant to be created by beginner or small investors. For those who have
less investment experience, and do not have the financial backing to enter into hedging activities,
bonds are the most popular way to diversify against the stock market.
Unfortunately, even the best analysis of a company and its financial statements cannot guarantee
that it won't be a losing investment. Diversification won't prevent a loss, but it can reduce the
impact of fraud and bad information on your portfolio.
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:
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

6. 5
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
aNot 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).
Answer –
Percentage of Sales =
𝐶𝐴
𝐿𝑎𝑠𝑡 𝑌𝑒𝑎 𝑟′ 𝑠 𝑆𝑎𝑙𝑒
=
6000000
15000000
= 40%
Forecast (This Year Data x 1.4)
CA $ 8400000
NFA $ 12600000
AP $ 5250000
LTD + $ 5950000
b. Give a brief summary of forecasting to determine additional (discretionary) funding
(financing) needed. (15 marks)
Question 4:
The balance sheet and income statement for the McDonald's are as follows.
McDonald's Corporation 2016 Income Statement ($ Millions)

7. 6
Sales $11,508
Cost of goods sold 6,537
Gross profits $ 4,971
Marketing expenses and general
and administrative expenses $ 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

8. 7
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:

9. 8
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 0.70
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%
Answer –
Ratios ->
Current Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
=
1143
2985
= 0.3829

10. 9
Inventory Turnover =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
=
6537
71
= 92.07
Average Collection Period =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑟𝑎𝑑𝑒 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐷𝑎𝑖𝑙𝑦 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
=
484
11508
= 0.04 x 365 = 14.4
Debt Ratio =
𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
𝐸𝑞𝑢𝑖𝑡𝑦
=
9310
8932
= 1.042
Total Asset Turnover =
𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡
=
11508
18242
= 0.6308
Fixed Asset Turnover =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑁𝑒𝑡 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡
=
11508
14961
= 0.77
Operating Profit Margin =
𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑛𝑔 𝑃𝑟𝑜𝑓𝑖𝑡
𝑁𝑒𝑡 𝑅𝑒𝑣𝑒𝑛𝑢𝑒
=
2794
11508
= 0.24
Return on Equity (ROE) =
𝐸𝑞𝑢𝑖𝑡𝑦 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑞𝑢𝑖𝑡𝑦
=
2407
8932
= 0.269
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.
Answer –
Principal = 5000
Time = 5 years
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

11. 10
 The ordering cost is $100 per order.
i. Determine the optimal EOQ level.
ii. Determine the average inventory when the safety stock is 2000 units.
(15 marks)
Answer –
i. Optimum EOQ = √
2 𝑥 𝐷 𝑥 𝑆
ℎ
Where, D = Annual Demand
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.
(15 marks)
Answer-
International business includes any type of business activity that crosses nationalborders. Though
a number of definitions in the business literature can be foundbut no simple or universally
accepted definition exists for the term internationalbusiness. At one end of the definitional
spectrum, international business isdefined as organization that buys and/or sells goods and
services across two or more national boundaries, even if management is located in a single
country. Atthe other end of the spectrum,
Question 6:
Explain the financial Axioms(15 marks)
1. Risk - return trade-off
Answer- The risk-return tradeoff is the principle that potential return rises with an increase in risk.
Low levels of uncertainty or risk are associated with low potential returns, whereas high levels of
uncertainty or risk are associated with high potential returns. According to the risk-return
tradeoff, invested money can render higher profits

12. 11
Dear students get fully solved assignments
Send your semester & Specialization name to our mail id :
help.mbaassignments@gmail.com
or
call us at : 08263069601