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FIN 515 Week 1 Problem Set
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FIN 515 Week 1 Problem Set

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Chapter 1

The Corporation

1-1.      What is the most important difference between a corporation and all other organizational forms?

1-2.      What does the phrase limited liability mean in a corporate context?

 

 

1-3.      Which organizational forms give their owners limited liability?

           

 

1-4.      What are the main advantages and disadvantages of organizing a firm as a corporation?

 

 

1-5.      Explain the difference between an S corporation and a C corporation.

 

1-6.      You are a shareholder in a C corporation. The corporation earns $2 per share before taxes. Once it has paid taxes it will distribute the rest of its earnings to you as a dividend. The corporate tax rate is 40% and the personal tax rate on (both dividend and non-dividend) income is 30%. How much is left for you after all taxes are paid?

 

1-7.      Repeat Problem 6 assuming the corporation is an S corporation.

 

 

Chapter 2

Introduction to Financial Statement Analysis

2-8.      In early 2009, General Electric (GE) had a book value of equity of $105 billion, 10.5 billion shares outstanding, and a market price of $10.80 per share. GE also had cash of $48 billion, and total debt of $524 billion. Three years later, in early 2012, GE had a book value of equity of $116 billion, 10.6 billion shares outstanding with a market price of $17 per share, cash of $84 billion, and total debt of $410 billion. Over this period, what was the change in GE’s:

a.         market capitalization?

b.         market-to-book ratio?

c.         enterprise value?

 

2-11.    Suppose that in 2013, Global launches an aggressive marketing campaign that boosts sales by 15%. However, their operating margin falls from 5.57% to 4.50%. Suppose that they have no other income, interest expenses are unchanged, and taxes are the same percentage of pretax income as in 2012.

a.         What is Global’s EBIT in 2013?

b.         What is Global’s income in 2013?

c.         If Global’s P/E ratio and number of shares outstanding remains unchanged, what is Global’s share price in 2013?

 

2-24.    Suppose your firm receives a $5 million order on the last day of the year. You fill the order with $2 million worth of inventory. The customer picks up the entire order the same day and pays $1 million upfront in cash; you also issue a bill for the customer to pay the remaining balance of $4 million in 30 days. Suppose your firm’s tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following:

a.         Revenues

b.         Earnings

c.         Receivables

d.         Inventory

e.         Cash

 

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