Task 1: Corporate Finance
Select two real companies of your choice (excluding Amazon, British Airways, Home Depot, Nokia, Philips and Toyota) for which detailed, annual financial information (capital structure, dividend policy, number of shares outstanding, etc) and daily market information (stock prices or returns, bond yields, etc) for 2010 to 2019 are available. Good sources of information for historic financial statements are the companies’ homepages on the www. Market data can be found on Factset, Yahoo Finance or similar websites as used during the course for some of the finance tasks. Collect this information and use it to answer the following questions:
(1.1) (a) For each company, describe its capital structure: What has been the company’s capital structure in each of the available years? Make sure to calculate these capital structure measures yourself from raw data (for example for the firm’s financial statements) and provide several different measures of capital structure.
(b) Compare the capital structures of the two companies: How do the capital structures of the two companies differ? In which ways are they similar? Can the similarities and differences be explained by theory such as taxes,
asymmetric information, bankruptcy cost, etc?
(1.2) (a) For each company, describe its payout policy: What has been the company’s dividend policy in each of the available years? Has the company used any other form of payout such as share repurchases?
(b) Compare the payout policies of the two companies: How do the dividend policies of the two companies differ? In which ways are they similar? Can the similarities and differences be explained by theory such as asymmetric information, agency cost, clienteles, etc?
Answer questions (1.3)(a) to (d) for one of the two companies:
(1.3) (a) Using the firm’s historic, daily stock returns and other relevant data such as market returns and risk free rate, calculate the company’s beta. How do you interpret this beta? How does it relate to betas of other firms in the same industry?
(b) What is the company’s cost of debt?
(c) Based on the results of (1.3)(a), (1.3)(b) and (1.1)(a) calculate the company’s cost of capital.
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(d) How would the firm’s cost of capital change if the firm increased its debt by 50%? (Example: If the firm has a debt-to-capital ratio of 40%, a 50% increase would lead to a new debt-to-capital ratio of 60%.) Explain in detail, how the cost of equity and the cost of debt change. Regarding the change in the cost of debt, you can use the information in the table “Key Financial Ratios by Rating
Class” included in task 5 (see this year’s course manual).
Make sure to clearly indicate the sources for all your data. Also describe all calculations in detail.
Task 2: Financing Structure & Options
Review the “Boston Chicken, Inc.: 4 1/2% Convertible Subordinated Debentures Due 2004” case and provide a written answer to the 9 tasks given to Pao in the case. You can find the case study in chapter 33 of the book “Case studies in finance: managing for corporate value creation” by Robert F. Bruner (3rd edition, McGraw Hill) available in the library’s reference section at SF HF 5908 (Inner city library: learning and resource centre SBE, for reference only, publication is not available for loan).
For students who are not at UM, please note that the case is available online for
purchase at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1418373.
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Accounting [ solve as per International accounting standard, this assignment is from a reputed Business School in Netherlands]
Task 3: Preparation of Financial Statements
Listed below are the accounts and their respective balances for ABC, Inc. at
December 31, 2016:
Cash $ 50,000
Accounts Receivable 40,000
Inventory (10 scooters @ $12,000 each) 120,000
Equipment 600,000
Accumulated Depreciation 110,000
Security Deposit 2,000
Accounts Payable 30,000
Taxes Payable 8,000
Rent Payable 4,000
Wages Payable 10,000
Note Payable 100,000
Common Stock (4,000 shares) 200,000
Retained Earnings 350,000
During 2017 the following transactions occurred:
ABC collected all the amounts owed by customers at 31 December 2016.
ABC paid amounts still owed to creditors for 2016 purchases.
During 2017, ABC purchased 10 scooters at $15,000 each. For these purchases, ABC paid 30% in cash and will pay the rest during the next fiscal year.
During 2017, ABC sold 13 scooters for $25,000 each with 75% down payment (cash) and the other 25% will be paid next fiscal year. ABC paid cash for wages of $45,000.
On April 1, 2017 ABC sold 1,000 shares of common stock for $50,000.
On 1 June, 2017, ABC paid fifteen months rent in advance, the total amount being $30,000.
On June 30, 2017 ABC purchased an insurance policy for $4,800. This is a two-year
policy that starts on July 1, 2017.
ABC paid $7,000 for office expenses.
ABC paid a $10,000 dividend to shareholders.
On December 31, 2017, ABC made annual principal payment of $10,000 plus interest of 10% on the Note Payable.
The company uses the FIFO inventory system.
At December 31, 2017 ABC owed $12,000 in wages which had not yet been paid. The equipment originally cost $600,000, had a twenty year life and was expected to be worth $50,000 at the end. The company calculates depreciation using the straight-line method.
(3.1) Journalize these transactions.
(3.2) Prepare the income statement over 2017 and the balance sheet at 31 December
2017.
(3.3) Prepare the cash flow statement over 2017 using the indirect method.
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Task 4: Evaluating Accounting Choices
Solve the case “Second Round Electronics: A case for critical thinking”. (Reference:
Johnstone, Mackintosh, and Philips (2013) Second Round Electronics: A case for critical
thinking , Issues in Accounting Education, Vol. 28, No. 4, pp. 983-1007). You can find
the journal via the e-journals on the library website or by clicking on this link in a UM-
environment:
Sample Solution
