Finance Answers

FREE CASH FLOW Bailey Corporation’s financial statements (dollars and shares are in

millions) are provided here.

76 Part 2 Fundamental Concepts in Financial Management

Balance Sheets as of December 31

2008 2007

Assets

Cash and equivalents $ 14,000 $ 13,000

Accounts receivable 30,000 25,000

Inventories 28,125 21,000

Total current assets $ 72,125 $ 59,000

Net plant and equipment 50,000 47,000

Total assets $122,125 $106,000

Liabilities and Equity

Accounts payable $ 10,800 $ 9,000

Notes payable 6,700 5,150

Accruals 7,600 6,000

Total current liabilities $ 25,100 $ 20,150

Long-term bonds 15,000 15,000

Total debt $ 40,100 $ 35,150

Common stock (5,000 shares) 50,000 50,000

Retained earnings 32,025 20,850

Common equity $ 82,025 $ 70,850

Total liabilities and equity $122,125 $106,000

Income Statement for Year Ending December 31, 2008

Sales $214,000

Operating costs excluding depreciation and amortization 170,000

EBITDA $ 44,000

Depreciation & amortization 5,000

EBIT $ 39,000

Interest 1,750

EBT $ 37,250

Taxes (40%) 14,900

Net income $ 22,350

Dividends paid $ 11,175

a. What was net working capital for 2007 and 2008?

b. What was Bailey’s 2008 free cash flow?

c. Construct Bailey’s 2008 statement of stockholders’ equity.

How are risks faced by financial institutions mitigated or managed?

You are buying your first car for $20,000 and are paying $2,000 as a down payment. You have negotiated a nominal interest rate of 12 percent and you plan to pay-off the car over five years. What is the monthly payments you must make on this loan?

How do higher interest rates affect stakeholders

Identify the following with a sentence or at most two and give an example in each case:

              i.        Money Multiplier

             ii.        Monetary aggregate

            iii.        Money illusion

           IV.        Dollarization

V. Devaluation

How would the supple of oil change giving improvements in drilling equipment?

You place $25,000 in a savings account paying annual compound interest of 8% for three years and then move it into a savings account that pays 10% interest compounded annually. How much will your money have grown at the end of six years?

Q3. Jamie Wong is considering building an investment portfolio containing two stocks, L and M. Stock L will represent 40% of the dollar value of the portfolio, and stock M will account for the other 60%. The expected returns over the next 6 years, 2013–2018, for each of these stocks are shown in the following table.

a. Calculate the expected portfolio return, rp, for each of the 6 years.

 b. Calculate the expected value of portfolio returns, , over the 6-year period.

 c. Calculate the standard deviation of expected portfolio returns, over the 6-year period.

 d. How would you characterize the correlation of returns of the two stocks L and M?

e. Discuss any benefits of diversification achieved by Jamie through creation of the portfolio.  

a) Briefly describe the following techniques for managing inventory: ABC system, economic order quantity (EOQ) model, just-in-time (JIT) system.

) Harte Systems, Inc., a maker of electronic surveillance equipment, is considering selling to a well-known hardware chain the rights to market its home security system. The proposed deal calls for the hardware chain to pay Harte $30,000 and $25,000 at the end of years 1 and 2 and to make annual year-end payments of $15,000 in years 3 through 9. A final payment to Harte of $10,000 would be due at the end of year 10.

 i. Lay out the cash flows involved in the offer on a time line.

ii. If Harte applies a required rate of return of 12% to them, what is the present value of this series of payments?

 iii. A second company has offered Harte an immediate one-time payment of $100,000 for the rights to market the home security system. Which offer should Harte accept?