Question

Part B :

Answer any 4 of the following questions.

Exercise 1 -

A firm generated net income of $862. The depreciation expense was $47 and dividends were paid in the amount of $25. Accounts payables decreased by $13, accounts receivables increased by $28, inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What is the net cash flow from operating activity? Explain the usefulness of the net cash flow from operating activities in decision making.

Exercise 2:

Following information is extracted from the books of Brox Ltd: a. Current Accounts  2017: CA = 18,900; CL = 11,300  2016: CA = 14,700; CL = 11,600 b. Fixed Assets and Depreciation  2017: NFA = 88,100; 2016: NFA = 85,700  Depreciation Expense = 1500 c. Long-term Debt and Equity (R.E. not given)  2017: LTD = 17,000; Common stock & APIC = 1,400  2016: LTD = 15,650; Common stock & APIC = 1,400 d. Income Statement  EBIT = 16,000; Taxes = 1400  Interest Expense = 1,240; Dividends = 1,700 Required: i. Compute the cash flow from asset for Brox Ltd. ii. Comment on usefulness of cash flow from asset in financial decision making.

Exercise 3 :

A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current assets of $720. The firm has $310 in inventory. What is the common-size statement value of inventory? Also explain the implications of common size analysis.

Exercise 4 :

Following financial information is related to Glow Corporation and Blue Corporation: Glow Corporation Blue Corporation 2001 2000 2001 2000 Current ratios 1.16 .95 2.25 2.17 Working capital $11 ($2) $30 $28 A/R turnover 31.7 times 45 times 30 times 30 times Inventory Turnover 16.6 times 22.5 times 15 times 15 times Asset turnover 2.4 times 3.2 times 3.6 times 3.8 times Total debt to total assets 86.9% 81.7% 14.2% 15.4% Sh. Equity to total assets 13.1% 18.3% 85.8% 84.6% Gross margin ratio 30% 33% 25% 25% Return on sales 10% 11.9% 10% 10% Return on assets 24.5% 38.5% 35.5% 38.5% Return on equity 186.3% 210.5% 41.4$ 45.5% Required: Conduct financial analyses of the two companies on the basis of above data and deduct which is performing better and why?

Exercise 5:

a. A stock is expected to pay a year-end dividend of $4.00. The dividend is expected to grow at a rate of 7% a year forever. If the company is in equilibrium and its expected and required rate of return is 10%, what is the price of stock? Show all calculations. b. Zello’s preferred stock pays a dividend of $2.00 per months. If the price of the stock is $85.00, what is its nominal (not effective) annual rate of return? Show all calculations. c. Contrast between preferred and common stock. Discuss which one of these two investments is suitable for investors.

Answer 1

	NET CASH FLOW FROM OPERATING ACTIVITY
	Net Income	$862
	Add: Depreciation Expense	$47	(Non cash Expense , hence added back)
	Decrease in Accounts payable	($13)	(Negative cash flow since current liability is reduced)
	Increase in accounts receivable	($28)	(Negative cash flow since current asset is increased)
	Decrease in Inventory	$14	(Positive cash flow since current asset is decreased)
	Net Cash Flow from Operating Activities	$882	SUM
	Note:Decrease in net fixed asset is not Operating ActivIty .It is investing activity cash flow
	Net Cash Flow from Operating Activities	$882
	Net Cash Flow from Operating Activities show where the cash is coming from and how it is used.
	It helps in decision like credit policy, inventory policy, vendor payment policy etc