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)

Answer 1

Hi,

Part (a):-

The three important question of corporate finance are:-

1. Capital budgeting
2. Capital Structure
3. Working Capital Management

Explanations:-

1. Capital Budgeting:- Capital Budgeting is a process by which a firm evaluates whether to invest in particular project or not. For Example:- A Company want to invest in palnt cost $50000, then company should evaluate whether the present value of total return over a period of time is greater than $50000 or not If it is greater than $50000 then comapny will invest in it. This decision is capital budgeting decision. Capital Budgeting affects Fixed Asset and Cash & Cash equivalent of a Balance Sheet.
2. Capital Structure:- The capital structure is the mix of debt and equity used by a company to finance its overall operations and growth. The Debt comprises of Debentures, Bonds etc and Equity Consists of Ordinary Equity Shares and Preference Shares. Capital Structure relates to Shareholder's Equity and Long term Debt in the Balance Sheet of a company.
3. Working Capital Management:- Working capital management is a technique which focuses on the maintenance of a sufficient balance between a company's current assets and liabilities. Working Capita Management ensures effeciency of operation of a company. Working Capital Management relates to Current Asset and Current Liabilities of the Company's Balance Sheet.

Part (b):- Calculation of Owner's Equity & preparation of Balance Sheet:-

Owner's Equity = Total Assets - Long Term Liabilities - Current Liabilities

= ($7,920 + $17,700) - $5,890 - $4580 = $15,150

Part(c):- Calculation of Net Working Capital

Net Working Capital = Current Assets - Current Liabilities = 7,920 - 4,580 = 3,340

Part (d):-Calculation of Return on Asset

To Calculate Return on Asset we have to find Net Income. For this we have given Return on Equity = 30%

Net income = $4,545

Now, Calculate Return on Asset:-

Return on Asset = 17.74%

Part (e):- Caluclation of Price to Earning Ratio:-

First we have to calulate Earning Per Share:-

  

Now Calculate PE Ratio :-

​​​​​​​Thanks!