Essays on Finance and Accounting Assignment

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ACCOUNTING AND FINANCE Program of Faculty Advisor Project Timeline Q1) Ratio analysis-Is just but an estimation of the financial status of a business hence don’t give the right answers but lead to right questions. Thus, in quick asset ratio the value of the closing stock is not included hence may lead to a decline while in the current ratio the value of the stock is included. Q2) Planning for a new business is harder. This is because the strategic manager in charge will have to incur costs of building new premises, strategically placing itself in the market, stating new operations that customers may even reject.

That is Greenfield investment where the unstructured decision are based on the judgment / instructions on the existing business is easier because there are already procedures to follow in planning as before. Q3) Similarities between preferred stock, bonds and common stock. Preferred stock and common stock both earn dividend as a return on capital invested. The return on investment (dividend) are only paid when the business makes profit They are both units of capital in the business. Preferred stock and bonds both earn fixed rate of return annually. Difference between preferred stock, bond and common stock. Preferred stock and common stock have the first claim/ preferential claim on the assets of the company incase of winding up unlike to bonds. Preferred stock is cumulative in nature unlike to common stock. Preferred stock holders do not have the voting rights while common stock holder have the right to vote in company. Preferred dividends can only be paid if the business makes profit whereas bonds earn their interest whether the business makes profit or losses. Q4) Importance of bond rating It will increase the liquidity of the bond. Q5) Avenues available to shareholders Incur agency cost-This refers to cost of resolving the conflict of interest between managers and shareholders.

They are borne by the shareholders to either minimize or eliminate conflict of interest by management for example, monitoring cost which include costs incurred in monitoring managers performance closely e. g. audit fees, investigation fees and etc. Performance based compensation through stock options and cash bonuses to managers. Threat of hostile takeover where the managers who have mismanaged the company loose there jobs. Q6) Tax payable $300,000 First $.

50,000×15%=7,500 2nd $. 25000×25%=6250 3rd $. 25000×34%=8500 22250 Excess $200,000×39%=78000 Total tax payable =$100250 Q9) Growth problem gs = Retention× Return on sales× Total asset turnover× Equity multiplier =90%×40%×1.9×3.0 = 2.052 Negatives associated with the following problems The multiplier effect will change and the true value of total asset turnover will be affected. Q10) Balance sheet for next year Total asset =$2000 C. L =$200 Long term debt =$100 Equity =$1700 Total Equity and Liability= $2000 Income statement Revenue = $5000 Operating expenses =($4000) EBIT =$1000 Interest (8%) =$8 EBT =$992 Tax (40%) =($396.80) EAT =$595.20 Q7) ACP lowered to 10 days next year Receivables=$15M Credit sales=120M Growth credit sales=20% New sale level=120M×120%=144M 24M ×10 = 666,666.667 360 Therefore new level of receivables=15M-0.667M=$14.333 Q8) E(Rp)=80,000 × (0.09×0.8+5+0.06)+(120,000×0.09×1.4+5+0.07) =5.16% 200,000 200,000 Citation Shim, J.

K., & Siegel, J. G. (2000). Financial management (2nd ed. ). Hauppauge, N.Y. : Barrons.

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