In the above question 4, I am unsure how to calculate market value of long-term debt without face value.
Assignment 1 - Individual Assignment/TMA01
July 2016 Presentation FIN303 Assignment 1 Individual Assignment
This assignment is worth 25% of the final mark for FIN303 Financial Management.
The cut-off date for this assignment is 14 October 2016, 2355hrs.
In this assignment, you are expected to:
Compute and interpret financial ratios
Evaluate investment proposals
Apply knowledge to decide appropriate financing plan and dividend policy
___________________________________________________________________________ Modern Technology Corporation is involved in manufacture and sale of computer hardware.
It was started in 2010 and has shown considerable growth. The financial statements of
Modern Technology for the years 2014 and 2015 are shown in Exhibits 1 and 2. Exhibit 1
Modern Technology Corporation
Balance Sheets as of December 31 ($ in millions)
Net Plant and Equipment
Liabilities and Owners' Equity
Common Stock and paid-in-surplus
Total Liabilities and Equity
Number of shares outstanding SIM UNIVERSITY 2014 2015 84
33 Assignment 1 ? Page 2 of 4 FIN303 Assignment 1 Exhibit 2
Modern Technology Corporation
Income Statement for the year ending December 31 ($ in millions) Sales
Cost of Goods sold
Addition to retained earnings 2014
242 ___________________________________________________________________________ Question 1
Analyse the financial performance of Modern Technology by calculating the following ratios
and by explaining the changes in ROE. Return on equity
Gross profit margin
Net profit margin
Total asset turnover
Fixed assets turnover
Total debt ratio
Times Interest earned
Return on assets 2014
(30 marks) SIM UNIVERSITY Assignment 1 ? Page 3 of 4 FIN303 Assignment 1 Question 2
The beta of Modern Technology is 1.1. The risk-free rate is 4% and the market risk premium
is 7%. Calculate the cost of equity of Modern Technology.
(10 marks) Question 3
The dividends are expected to grow at a constant rate of 5% every year for a long period from
2016. Calculate the stock price of Modern technology as of January 1, 2016.
(10 marks) Question 4
Long term debt consists of 10 year bonds issued on January 1, 2013. The bonds bear coupon
of 8% paid every 6 months at the end of June and December every year. The current yield to
maturity of these bonds is 9%. Calculate the market value of long-term debt as of January 1,
Modern Technology is planning to generate a new device which would require investment of
$10 million. This new device will produce cash flow of $3 million at the end of every year
for the next 5 years. Calculate the net present value of this investment. Use the cost of equity
calculated in Question 2 as the discount rate.
(15 marks) Question 6
Working capital management is vital for the operation of a company. Discuss the issues that
should be considered in managing working capital.
(15 marks) ---- END OF ASSIGNMENT ---- SIM UNIVERSITY Assignment 1 ? Page 4 of 4
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