Grand Canyon Univ FIN 350 Summer 2015 Module 1 Discussion & Practice Problems

| June 8, 2016

Question
FIN-350 | Introduction to Finance

Module 1 DQ 1

Identify a party (other than stockholders) that can be classified as a stakeholder for a corporation. What obligation does the corporation have to this party? Describe a situation where stockholder claims on the organization might conflict with the claims of this stakeholder group. If you were CEO, how would you resolve these conflicts?

Module 1 DQ 2
During the summer and fall of 2008, the U.S. financial system and financial systems around the world appeared to be on the verge of collapse. How did we get into this condition? What did we do to get out of it? How can we prevent another such scenario in the future?

Module 1 Practice Problems
Accrual income versus cash flow for a period Thomas Book Sales, Inc., supplies

textbooks to college and university bookstores. The books are shipped with a proviso

that they must be paid for within 30 days but can be returned for a full refund

credit within 90 days. In 2014, Thomas shipped and billed book titles totaling

$760,000. Collections, net of return credits, during the year totaled $690,000. The

company spent $300,000 acquiring the books that it shipped.

a. Using accrual accounting and the preceding values, show the firm’s net profit for the past year.

Accounting view (accrual basis)

b. Using cash accounting and the preceding values, show the firm’s net cash flow for the past year.

Financial view (accrual basis)

c. Which of these statements is more useful to the financial manager? Why?

P2-4

Interest versus dividend income During the year just ended, Shering Distributors,

Inc., had pretax earnings from operations of $490,000. In addition, during the year

it received $20,000 in income from interest on bonds it held in Zig Manufacturing

and received $20,000 in income from dividends on its 5% common stock holding in

Tank Industries, Inc. Shering is in the 40% tax bracket and is eligible for a 70% dividend

exclusion on its Tank Industries stock.

a. Calculate the firm’s tax on its operating earnings only.

b. Find the tax and the after-tax amount attributable to the interest income from Zig Manufacturing bonds.

c. Find the tax and the after-tax amount attributable to the dividend income from the Tank Industries, Inc., common stock.

d. Compare, contrast, and discuss the after-tax amounts resulting from the interest income and dividend income calculated in parts b and c.

e. What is the firm’s total tax liability for the year?

P2-6

Capital gains taxes Perkins Manufacturing is considering the sale of two nondepreciable

assets, X and Y. Asset X was purchased for $2,000 and will be sold today for

$2,250. Asset Y was purchased for $30,000 and will be sold today for $35,000. The

firm is subject to a 40% tax rate on capital gains.

a. Calculate the amount of capital gain, if any, realized on each of the assets.

b. Calculate the tax on the sale of each asset.

Integrative Case 1

Option 1: Merit could approach JPMorgan Chase, a bank that had served Merit well for many years with seasonal credit lines as well as medium-term loans. Lehn believed that JPMorgan was unlikely to make a $4 billion loan to Merit on its own, but it could probably gather a group of banks together to make a loan of this magnitude. However, the banks would undoubtedly demand that Merit limit further borrowing and provide JPMorgan with periodic financial disclosures so that it could monitor Merit’s financial condition as Merit expanded its operations.

Option 2: Merit could convert to public ownership, issuing stock to the public in the primary market. With Merit’s excellent financial performance in recent years, Sara thought that its stock could command a high price in the market and that many investors would want to participate in any stock offering that Merit conducted.

a. Discuss the pros and cons of option 1, and prioritize your thoughts. What are the most positive aspects of this option, and what are the biggest drawbacks?

b. Do the same for option 2.

c. Which option do you think that Sara should recommend to the board, and why?

Complete the following problems from the textbook:

Chapter 1, P1-2
Chapter 2, P2-4, P2-6, and Integrative Case 1
Follow these instructions for completing and submitting your assignment:

Do all work in Excel. Do not submit Word files or *.pdf files.
Submit a single spreadsheet file for this assignment. Do not submit multiple files.
Place each problem on a separate spreadsheet tab.
Label all inputs and outputs and highlight your final answer.
Follow the directions in “Guidelines for Developing Spreadsheets.”

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