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Answer all the questions, each question15 carries

Question 1:

  1. ABC Trading supplies wholesale industrial chemicals. Last year the company had taxable income of $450,000. Compute Marvels Tax liability.
Corporate Income Tax Rates
Since 1993
Taxable Income Corporate Tax Rate
$1 – $50,000 15%
$50,001 – $75,000 25%
$75,001 – $10 million 34%
over $10 million 35%
$100,000 – $335,000 5% surtax
$15m – $18.333 m 3% surtax



  1. The term “business organization” refers to how a business is structured.It refers to a commercial or industrial enterprise and the people who constitute it. Make a note on the forms of organizations

(15 marks)

Question 2:

  1. ABC is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and return?
Common Stock A Common Stock B
Probability Return Probability Return
.60 11% .30 25%
.40 15% .20   16%
.30 19% .50 14%
.20 22%


  1. What is the present value of $2000 to be received 8 years from today if our discount rate is 6 percent?

  1. “In business, there is probably no other single concept with more power or applications than that of the time value of money”. Clarify the concept briefly.

(15 marks)


 Question 3: 

  1. Given the following cash flows, for the two independent projects A and B.
Project A Project B
Initial outlay $50,000 $100,000
Cash inflows
Year 1 $10,000 $ 25,000
Year 2 15,000 25,000
Year 3 20,000 25,000
Year 4 25,000 25,000
Year 5 30,000 25,000



  1. Payback Period
  2. Accounting rate of return
  • Net Present Value
  1. Profitability index

And recommend acceptance or rejection of projects considering individual techniques of capital budgeting. Cost of Capital is 10%.

“The amount of cash involved in a fixed asset investment may be so large that it could lead to the bankruptcy of a firm if the investment fails. Consequently, capital budgeting is a mandatory activity for larger fixed asset proposals.” Substantiate the statement with enough explanations of the different investment decision criteria.

(15 marks) 

Question 4:

  1. J and S Corporation is evaluating its financing requirements for the coming year. The firm has only been in business for 1 year, but its CFO predicts that the firm’s operating expenses, current assets, net fixed assets, and current liabilities will remain at their current proportion of sales.Last year J and S Corp. had $15 million in sales with net income of $1.5 million. The firm anticipates that next year’s sales will reach $18 million with net income rising to $3 million. Given its present high rate of growth, the firm retains all its earnings to help defray the cost of new investments.The firm’s balance sheet for the year just ended is found below:


  J and S Corporation
Balance Sheet
12/31/2000 % of Sales
Current assets $6,000,000 40%
Net fixed assets 9,000,000 60%
   Total $15,000,000
Liabilities and Owners’ Equity
Accounts payable $3,750,000 25%
Long-term debt 4,250,000 NAa
   Total liabilities $8,000,000
Common stock 2,000,000 NA
Paid-in capital 2,800,000 NA
Retained earnings 2,200,000
Common equity 7,000,000
   Total $15,000,000
Not applicable. This figure does not vary directly with sales and is assumed to remain constant for purposes of making next year’s forecast of financing requirements.

Estimate J and S corp. total financing requirements (i.e., total assets) for 2001 and its net funding requirements (DFN).

  1. Give a brief summary of forecasting to determine additional (discretionary) funding (financing) needed.

(15 marks)

Question 5:

  1. Calculate (EOQ) using following information for Apex Inc.
  • Annual demand 20,000 units
  • Cost of placing order $ 15
  • Cost of carrying 1 unit in inventory $6.
  1. Calculate average inventory if safety stock is 2,000 units.
  2. “Good inventory management is all about having the right amount of product, at the right price, at the right time, and in the right place.” Clarify the statement.                                                             (15 marks)

 Question 6:

Explain the financial Axioms

  1. Risk – return trade-off
  2. Time value of money
  3.  Cash is king
  4. Incremental cash flows
  5. The agency problem
  6. Taxes bias business decisions
  7. All risk is not equal
  8. Ethical dilemmas are everywhere in finance

(15 marks)



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