Question

. What is XYZ Corp.’s 1-EBIT, 2- Net Cash Flow, 3-Operating Cash Flow, and 4-Free Cash Flow, given: (10 points)

XYZ Corp. (for 2020)

Revenue $10,000,000

Wages: $5,000,000

Rent (mixed space, production and administration): $1,000,000

Selling, General, & Administrative Expenses: $3,000,000

D&A: $1,000,000

Property, Plant & Equipment investment: $1,500,000

Tax Rate: 30%

NOWC (2020): $1,000,000

NOWC (2019): $800,000

Assume no other income, expenses or cash flows.

SHOW ALL WORK

_____10. What is a futures contract? How does that compare against a forward? What is a Call Option? How does it compare against a Put Option? (10 points)

Answer 1

1.

EBIT = Revenue - Expenses - Depreciation

= Revenue - (Wages + Rent + SG&A expenses) - Depreciation

= 10,000,000 - (5,000,000 + 1,000,000 + 3,000,000) -1,000,000

= 10,000,000 - 9,000,000 -1,000,000

EBIT = $0

Net Profit = EBIT - Interest - Taxes

= 0 - 0 - 0

= $0

2. Net Cash Flow = Net Cash Flow from Operating Activities + Net Cash Flow from Investing Activities + Net Cash Flow from Financing Activities.

Net Cash Flow from Investing Activity =  

= - $1,500,000

= - $1,500,000

Net Cash Flow = 800,000 -1,500,000 + 0

= -750,000

3. Operating Cash Flows = CFO = Net Income + non-cash expenses – increase in non-cash net working capital

= Net Income + Depreciation ( Non cash expense) - (Current Year NOWC - Last Year NOWC)

= 0 + 1,000,000 - (1,000,000 - 800,000)

= 0 + 1,000,000 -200,000

Operating Cash Flow = 8,00,000

4. FCF = Cash from Operations – Capital Expenditure

= Net Income + Non-Cash Expenses – Increase in Working Capital – Capital Expenditure

= 0 + 1,000,000 - (1,000,000 - 800,000) - 1,500,000

FCF = - $750,000

Q.2

Futures contract -

A futures contract defines the purchase or sale of a specific asset (underlying) quantity on a future date. A futures contract is a legally binding agreement between a buyer and a seller. It is traded on a exchange. The exchange takes the counter party risk, or is responsible for trade going through.  A futures contract is a standardized financial instrument

The characteristics of futures contract

• A futures contract has a trading unit of underlying called Lot
• Futures are priced by the open market and evolve continuously from launch to expiry.
• An expiration date is the day on which a contract is no longer offered for trade.
• Depending on whether you’re a buyer or seller, each futures contract is settled financially or via physical delivery at expiry.

Forward contract -

It governs the purchase or sale of an asset quantity at a specified price on a future date. It a bilateral over the counter agreement. A forward contract is a binding agreement between a buyer and seller. Forward contracts are customizable derivatives products. They exist as private agreements between parties and are traded in an over-the-counter (OTC) capacity

Forward	Future
Forwards are traded over the counter.	Future contracts are traded on an exchange
It is generally a private agreement	It is a legally binding agreement between buyer and seller
It is a Customized product (Quantity and other terms are privately agreed)	It is a standardized product (Fixed quantity)

There is a counter party risk (Risk of trade not going through if any of the party default)

The exchange takes the counter party risk

It is a bilateral agreement

A futures trade has 3 parties to it - Buyer, Seller & Exchange

Call Option A call gives the buyer the right to buy an underlier at a predetermined price from the seller on a particular date.

Calls give the buyer the right, but not the obligation, to buy the underlying asset at the strike price specified in the option contract. Investors buy calls when they believe the price of the underlying asset will increase and sell calls if they believe it will decrease.

Options - An instrument that derives its value from an stock, currency,  index, commodity, called an underlying. They are of two types calls and puts.

A put gives the buyer the right to sell an underlying at a preset price on a particular date to the seller. In both cases the seller is obliged to sell or buy an underlier from the call or put buyer. Most of times, only the difference is exchanged between the buyer and the seller.

CALLS	PUTS
It offers the right but not obligation to buy the underlying asset at a particular date for the pre-decided strike price	It offers the right but not the obligation for selling the underlying asset at a particular date for the pre-decided strike price.
The gains can be unlimited since the price rise cannot be capped	Gains are limited since the price can fall steadily but will stop at Zero
Buyer gains if the Price of underlying rises	Buyer gains if the Price of underlying drops