Seminar Questions Do question three and seven as an individual asignment

Question One Shareholders can take actions that are at variance with the interest of corporate lenders such as banks and insurance companies. To reduce the likelihood of such actions, lending agreements typically will include loan covenants, in some cases these covenants are written on financial statement based variables. (a) Give examples of actions shareholders can take are at variance with interests of corporate lenders (Assume the management and shareholders are the same party). (b) Give examples of actions management can take that are at variance with interest of shareholders. (c) What factors or mechanism might serve to reduce potential conflict between the following stakeholders? (i) Shareholders and corporate lenders and ; (ii) Management and shareholders

Question Two (a) There are both regulatory and market penalties to firms and managers that adopt a policy of financial misrepresentation. What are the cost of misrepresentation to the firm and its managers; what are the methods that could be used to check on possible misrepresentation in the financial statement disclosure. Why is the management of a publicly traded company expected to give accurate and adequate guidance to the markets as to the future outlook for the company?

(b)

Question Three a) Discuss the concept of asymmetric information and explain how it may cause corporate managers to serve as investors. b) Assume that after you graduate, you get a job as the chief financial officer of a small company. Explain why being able to forecast the direction of interest rate changes may be critical for your success in that position. Likewise, why are investment bankers concerned about future changes in the interest rate?

(c)

Discuss the importance on quantitative analysis in Debt rating.

Question Four Mixon companys year end balance sheet show the following: 2010 $ Cash 30,800 Accounts receivable, net 88,500 Inventory 111,500 Prepaid expenses 9,700 Plant assets, net 277,500 Total aseets 518,000 Accounts payables 128,900 Long term notes 97,500 Common stock, 10 par 162,500 value Retain earnings 129,100 Total liabilities and 518,000 equity Required: (i) Compare the year-end short-term liquidity position of this company at the end of 2010, 2009 and 2008 by computing the a) current ratio b) acid-test ratio. Comment on the ratio results (ii) Express the balance sheet in common size percentage. Round to the nearest one-tenth of percentage The companys income statement for the year ended December 31,2010 and 2009 show the following: Sales Cost of goods sold Other operating expenses Interest expenses Income taxes Total cost and expenses Net income Earnings per share 2010 672,500 410,225 208,550 11,100 8,525 638,400 34,100 2.10 2009 530,000 344,500 133,980 12,300 7,845 498,625 31,375 1.93 2009 $ 35,625 62,500 82,500 9,375 255,000 445,000 75,250 102,500 162,500 104,750 445,000 2008 $ 36,800 49,200 53,000 4,000 229,500 372,500 49,250 82,500 162,500 78,250 372,500

Required: (i) For the years ended December 2010 and 2009, assume all the sales are on credit and then compute the following a) days sales in receivables b) accounts receivables turnover c) inventory turnover d) days sales in inventory. Comment on the change in ratios (ii) Compare the long term risk and capital structure positions of the company at the end of 2010mand 2009 by computing the following ratio a) total debt ratio and b) times interest earned. Comment on the results

Question (a)

Five

The following information was extracted from ARQUE Limited financial statements. Income statement: Sales -Cost of goods sold -Operating expenses EBIT -Interest expense EBT -Taxes Net income Other information: cost of debt: tax rate: Total assets Stockholders' equity Ratios: Operating income/Sales Sales/Total assets Total assets/Stockholders' equity Operating income/Stockholders' equity Interest expense/Stockholders' equity Tax burden (= 1 - tax rate) 2002 $3,000.00 -2,200.00 -500.00 $300.00 -80.00 $220.00 -66.00 $154.00 8% 30% $2,000 $1,000 2003 $3,300.00 -2,530.00 -550.00 $220.00 -103.50 $116.50 -46.60 $69.90 9% 40% $2,200 $1,050

10.00% 1.50 2.0 30.00% 8.00% 70.00%

6.67% 1.50 2.1 20.95% 9.86% 60.00%

Before-tax ROE After-tax ROE Required: (i) Evaluation of the companys performance. (ii) Explain why has the after-tax ROE declined?

22.00% 15.40%

11.10% 6.66%

b) Discuss the uses and limitation of using ratio in evaluating company performance.

Question Six The following information is extracted from financial statements of TMK Investments which is a manufacturing company located in Mikocheni Industrial area. (a) The companys 2000 net profit represents 11.4 % of net sales. What is the companys return on net worth if assets turnover is 1.34 and capitalization is 67% of total assets? (b) The company gross margin on 2000 sales is 31.4 %.Total cost of goods sold amount to Tshs 4,391,300 and net profit is 9.7 % of sales. What are the company total assets if the ratio of sales to assets is 82.7%. (c) What is the change in the companys current ratio of 2.2:1 (current assets are Tshs 573,100) if the following actions are taken individually? How does each item affect working capital? (i) The company pays Tshs 67500 of accounts payable with cash (ii) Purchase merchandise worth Tshs 41300 on account (iii) The company collects Tshs 330,000 in notes receivables (iv) Pays dividends of Tshs 600,000 of which Tshs 420,000 had been shown as accrued Question Seven (a) Explain the kind of non financial statement information that can have an effect on the companys earnings. (b) How does the choice of an accounting method influence market value of a firms equity or debt security?

Question Eight Mwananchi Traders is a small trading company that is located at Mwenge shopping

area in Dar es Salaam. The owners of this company have invested Tshs 10 million in form of equity into this business. The following ratios were calculated from the financial statements of Mwananchi traders. Current debt to total debt Total debt to owners equity Fixed assets to owners equity Total assets turnover Inventory turnover 0.4 0.6 0.6 2 times 8 times

Use the information that is given above to complete the balance sheet of Mwananchi traders in the following format Assets Cash Inventory Total current assets Fixed Assets Total assets Liabilities Current liabilities Long term debt Total liabilities Owners equity Total liabilities Owners equity

and

Question Nine

The preparation and analysis of comparative balance sheets and income statements are commonly applied tools of finance statement analysis and interpretation. Required: a) Discuss the inherent limitation of analyzing and interpreting financial statement for a single year. Include in your discussion the extent that these limitations are overcome by use of comparative financial statement computed over more than one year. b) A year to year analysis of comparative balance sheets and income statements is a useful analysis tool. Still without proper care, such analysis can be misleading. Discuss factors or conditions that contribute to such a possibility. How can additional information and supplementary data help prevent this possibility?