1. Describe the field of finance. How is it different from the field of accounting?
2. What are the three forms of business generally encountered in the US? What are the main defining characteristics of each?
3. What should be the basic financial goal of a business?
4. In the context of a corporation seeking to maximize the wealth of its owners, how is “wealth” defined?
5. What are the three broad factors that influence the market price of a corporation’s stock?
6. Name three ways in which businesses can raise money from external sources when they need it for expansion or project funding.
7. What is the purpose of a balance sheet? What are some examples of typical balance sheet accounts?
8. What is the purpose of an income statement? What are some examples of typical income statement accounts?
9. What is the purpose of a statement of cash flows? What are some examples of typical statement of cash flow accounts?
10. a. What are “Free Cash Flows (FCF)?”
b. What is “NOPAT?”
For the remaining questions in this assignment, base your answers on the following information for Joe’s Fly-By-Night Oil Company, whose latest income statement and balance sheet are shown below.
Stock price on Dec 31, 2014…$60.00
Number of common shares outstanding on Dec 31, 2014...1,000
11. What was Joe’s average, or effective tax rate in 2014?
12. What was Joe’s NOPAT in 2014?
13. What was Joe’s Free Cash Flow (FCF) in 2014? (Note: For this question, assume Joe obtained no new plant and equipment or additional net working capital in 2014. Thus his Net Investment in Operating Capital (NIOC) for 2014 is $0.00.)
14. Suppose you were an investor and you were considering whether to buy a corporate bond from Joe’s Corporation or a Municipal Bond from the city of St. Louis. Joe’s corporate bond has a yield of 6%. The St Louis city bond has a yield of 4%. The income from Joe’s bond is taxable. The income from the St Louis city bond is tax-free. If your effective tax rate is 36%, which bond would give you the higher after-tax yield?
15. What was Joe’s Net Worth at the end of 2014?
16. Why is the market value of a firm’s stock almost always higher than the book value of the firm’s stock as shown on the balance sheet?
17. a. Calculate Joe’s ROE for 2014.
b. Construct a Du Pont equation (use the extended, or modified version shown in the Week 1, chapters 2 & 3 lesson notes) and comment on the sources of Joe’s ROE as revealed by the equation.