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Principles of Finance

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Principles of Finance

The difference between a company's current assets, such as cash, accounts

receivable/unpaid bills from customers, and inventories of raw materials and finished goods, and

its current liabilities, such as accounts payable and debts, is known as working capital, also

known as net working capital (NWC).

Net Working Capital = Current Assets - Current Liabilities

= ($200,000 + 121,800 + $1,501,500 + $5,288,128) - ($220,000 + $100,000+51,000)

=7111428-371000=6740428

= $6740428

Company net working capital = $6740428

Managers manage the firm working capital by ensuring that the firm has enough cash on

hand to meet its short-term obligations, while also maintaining enough inventory to meet

customer demand (van Deurzen et al., 2019). They may also invest the firm's excess cash in

short-term investments, such as Treasury bills, to earn a return on the firm's idle cash.

Solution 2

$1,500 invested at 7% interest for 1 year

$1,500 x 0.07 = $105

$1,500 + $105 = $1,605

The trip costs after inflation will be

$1,600 x 1.03 = $1,648

To test whether the invested cash will purchase the trip after inflation ,then

Amount after investment- amount after inflation

$1,605 - $1,648 = -$43

No, you will not have enough money to purchase the trip.

Solution 3

To determine net income, start with gross income (the total amount of money earned) and

subtract costs like taxes and interest payments.

XYZ Company Income Statement

For the Year Ended December 31, 2017

Revenues

Total Revenues

$970

Interest

$55

1025

Expenses

Cost of Goods Sold

450

Depreciation

50

(500)

Income Before Taxes

525

Income Taxes (35%)

(183.75 )

Net Income

341.23

Solution 4

A balance sheet with a typical size has an extra column that displays each dollar figure as

a proportion of the total assets of the company. The common size balance sheet also displays the

proportion that each line item has to the total liabilities plus equity since total assets equals total

liabilities plus equity according to the accounting equation.

One definitive way to calculate a common-size balance sheet. However, one approach is

to express each asset and liability item as a percentage of total assets, and each income and

expense item as a percentage of total revenue (Berk et al., 2013).

Calculate the proportion of each line item on the balance sheet to the total assets with this

typical size balance sheet calculator. Each line item's calculation is provided by:

Line Item% = Line Item Value / Total Asset Value multiplied by 100%

Balance

sheet

Assets

Balance sheet 1

%

Cash

Accounts

receivable

Inventories

Current

assets

Net fixed

assets

Total

assets

50,000

60,000

11.30

13.56

200,500

310,500

45.31

70.16

132,000

29.83

442,500

100.00

25,800

30,000

11.97

13.92

9,700

4.50

65,500

30.39

150,000

69.61

215,500

100.00

227,000

51.30

442,500

100%

Liabilities

Accts/Pay

Accrued

expenses

Short-term

N/P

Current

liabilities

Long-term

debt

Total

liabilities

Equity

Owner's

equity

Total

liabilities

and

owners’

equity

Solution 5

Fv= pv (1 +r)^n

Pv=20000

R=5%

N=10

Alternatively

Value of investment today = investment amount * (1+ rate)^n

$20,000 * (1 + 0.05)^10 = $32,000

$20,000 * 1.05^10 = $32,000

The amount of interest on interest earned on this investment

The interest on interest earned is calculated by taking the value of the investment today, $32,000,

and multiplying it by the annual interest rate, 0.05.

$32,000 * 0.05 = $1,600

Solution 6

Given a specific rate of return, or discount rate, the present value of an annuity is the

current value of the future payments from an annuity. The present value of the annuity decreases

as the discount rate increases.

PV = PMT [(1 - (1+i)^-n)/i]

PV = $120000 [(1 - (1+0.08)^-15)/0.08]

PV = $629,290.66

Solution 7

The company standard deviation of returns is the standard deviation of the returns of the

company's stock over a period of time.

Assume rate of return of company as variable "x"

Probability

Rate of return

State of Economy

P

x

0.30

20%

boom

0.40

19%

growth

0.20

2.50%

decline

0.10

-10%

depression

Calculation of Expected Return of company is as follows:

Expected return = Probability x Rate of return

(0.30 x 20) + (0.40 x 19) + (0.20 x 2.50) + (0.10 x -10) = 13.10%

So Expected Return of company (x̄) is 13.10%

Step 2/2

Final answer

σ = √((E[r_p - E(r_p)]^2)/n)

Where: σ = standard deviation

E(R) = expected return

R = actual return

n = number of periods

So company standard deviation of returns is 10.20%

References

Berk, J., DeMarzo, P., H...