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Instructions

. Identify the key financial decisions facing the financial manager of any business firm and Explain the meaning of each decision? (1 mark)

Q2. What can happen if a firm is poorly managed? (1 mark)

Q3. If the expected inflation rate is 10 percent and the real rate of interest is 4 percent:a. Compute the nominal rate of interest. (Hint: use equation 2.1) (0.5 mark)

b. Briefly differentiate between the nominal and the real rates of interest. (0.5 mark)

Q4. Nimitz Rental Company provided the following information to its auditors. For the year ended March 31, 2011, the company had revenues of \$878,412, general and administrative expenses of \$352,666, depreciation expenses of \$131,455, leasing expenses of \$108,195, and interest expenses equal to \$78,122.

If the company’s tax rate was 34 percent, what is its net income after taxes? (1 mark)

Q5. Modern Appliances Corporation has reported its financial results for the year ended December 31, 2011.

Using the information from the financial statements, complete a comprehensive ratio analysis for Modern Appliances Corporation.

a. Calculate these liquidity ratios: current and quick ratios. (0.2 mark)

b. Calculate these efficiency ratios: inventory turnover, total asset turnover. (0.2 mark)

d. Calculate these leverage ratios: total debt ratio, debt-to-equity ratio, Equity multiplier. (0.2 mark)

e. Calculate these profitability ratios: gross profit margin, net profit margin, ROA, ROE. (0.2 mark)

f. Use the DuPont identity, and after calculating the component ratios, compute the ROE for this firm. (0.2 mark)

Q6 Using the values below, answer the questions that follow: (1Mark)

Amount of annuity: \$500

Interest rate: 9%

N=10 years

a)Calculate the future value of the annuity, assuming that it is

(1)An ordinary annuity.

(2)An annuity due.

b)Compare your findings in parts a(1) and a(2). All else being identical, which type of annuity—ordinary or annuity due—is preferable as an investment? Explain why.

Q.7ABC company is issuing eight-year bonds with a coupon rate of 6.5 percent and semiannual coupon payments. If the current market rate for similar bonds is 8 percent, what will be the bond price? If the company wants to raise \$1.25 million, how many bonds does the firm have to sell? (1 Mark)

Q 8You are interested in purchasing the common stock of Inch, Inc., which is currently priced at \$ 40. The company is expected to pay a dividend of \$3 next year and to grow at a constant rate of 8 percent.

a. What should the market value of the stock be if the required rate of return is 15.75 percent? (0.5 Mark)

b. Is this a good buy? Why or why not? (0.5 Mark)

Q9. Raneem owns shares in HP Inc. Currently, the market price of the stock is \$36.34. Management expects dividends to grow at a constant rate of 6 percent for the foreseeable future. Its last dividend was \$3.25. Raneem’s required rate of return for such stocks is 16 percent. She wants to find out whether she should sell her shares or add to her holdings.

a. What is the value of this stock? (1 Mark)

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