Question

You are the new CFO of Risk Surfing Ltd, which has current assets of $7,920, net fixed assets of $17,700, current liabilities of $4,580 and long-term debts of $5,890. Required:

a. What are the three important questions of corporate finance you will need to address? Please briefly explain them and indicate how they are related to the areas in the balance sheet of a company. (1 mark)

b. Calculate owners’ equity and build a balance sheet for the company?

c. How much is net working capital of the company? (1 mark)

d. Calculate the return on assets of the company given that Return on Equity is 30%? (1 mark)

e. What is the PE of the company total number of ordinary share outstanding of the companies is 2,000 and market price of each share is $12? (1 mark)

No Financial Calculator, Excel Calculations and No Excel files are accepted. You are allowed only one attempt to submit your assignment.

Answer 1

Corporate finance has three main areas of concern:
1. Capital budgeting: Capital budgeting is the process a business undertakes to evaluate potential major projects or investments. Construction of a new plant or a big investment in an outside venture are examples of projects that would require capital budgeting before they are approved or rejected.

2. Capital structure: The capital structure is a particular combination of debt and equity used by a company to finance its overall operations and growth.

3. Working capital: Working capital, is the difference between a company's current assets, such as cash, accounts receivable, and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.

The profit or loss is determined by taking all revenues and subtracting all expenses from both operating and non-operating activities. This statement is one of three statements used in both corporate finance and financial modeling and accounting. Current Liabilities. A company shows these on the balance sheet.

B) Owner's equity = Owner’s Equity is defined as the proportion of the total value of a company’s assets that can be claimed by its owners (sole proprietorship or partnership) and by its shareholders

Owner’s equity = Assets – Liabilities
= 7920 + 17700 - (4580 + 5890)
Owner’s equity = 15150

C) Net working capital of the company is Net working capital is the difference between a business’s current assets and its current liabilities.
Current assets less current liabilities = 7920 - 4580 = 3340
Hence, Net working capital is 3340 ​​​​​​​

D) Return on Equity = Net profit/ Equity
Since ROE = 30%
30% = Net Profit / 15150
30%* 15150 = Net Profit
4545 = Net profit

Now, Return on Assets(ROA) = (Net profit / Total Assets)*100

ROA = (4545/ 25620)*100
ROA = 17.74%

E) P/E = MPS/EPS
EPS = Profit/ Equity Share capital
= 4545/15150
= 0.3
Hence, P/E = 12/0.3

= 40