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Tutorials Corporate Finance
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Tutorials (aka exercises) of the course Corporate Finance
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Tutorials Corporate Finance10 september 2018
Managers should not focus on the current equity value because doing so will lead to an overemphasis on short-
term profits at the expense of long-term profits false
Presumably, the current equity value reflects the risk, timing, and magnitude of all future cash flows,
both short-term and long-term.
If this is correct, then the statement is false.
Would our goal of maximizing equity value be different if we were thinking about financial management in a
foreign country it would be the same.
the goal would be the same, but the best course of action toward that goal may be different because of
differing social, political, and economic institutions.
What is the return on equity (ROE) for McBig?
You are given the following information about McBig counseling service:
Total assets: €40.000
Total liabilities: €20.000
Total sales: €12.500
Profit margin: 0.32 ROE is 20%
Net income
ROE= ; Net income=profit margin x sales ;
Total equity
Assets=liabilities +equity →equity =assets−liabilities
4.000
Net income=0.32 x 12.500=4.000→ ROE= =0.2→ 20 %
20000
What is the return on equity (ROE) for McBig in this new situation – using the Du Pont Identity?
You are given the following information about McBig counseling service:
Total assets: €40.000
Total liabilities: €20.000
Total sales: €12.250
Net income: €4.000
Profit Margin = Net income / Sales = 4..250 = 0.3265 32.65%
Total asset turnover = sales / total assets = 12.250/40.000 = 0.3065 times
Equity multiplier = 1+D/E = 1+1 =2
ROE = (0.3265)(0.3065)(2) = 0.2 = 20%
You are given the following information about McGraw counselling services:
Total assets = €31.483
Total liabilities = €18.679
Total sales = €17.193
Net income = €2.026
Profit margin = Net income/sales = 2.026/17.193 = 0.1178 11.78%
Total assets turnover = sales/total assets = 17.193/31.483 = 0.55 times
Equity multiplier = 1+D/E = 1 + 1.46 = 2.46
DuPont Identity: ROE = (PM)(TAT)(EM) = (0.1178)(0.55)(2.46) = 0.1594 15.94%
GNR plc. has a total debt of 0.43
What is its debt-equity ratio?
Total debt ratio = 0.43 = TD/TA
TA = TD + TE 0.43 = TD/(TD+TE)
0.43 (TE) = 0.57 (TD)
debt/equity ratio = TD/TE = 0.43/0.57 = 0.75
debt ratio + equity ratio must always be 1
What is its equity multiplier?
, EM = 1+D/E = 1+0.75 = 1.75
GNR plc. has an equity-multiplier of 1.5
What is the debt-equity ratio?
Equity multiplier = 1.5 = 1+D/E D/E = 0.5
What is the total debt ratio?
Total equity ratio = 1 – total debt ratio 1-0.67 = 0.33
Total equity ratio = total equity/total assets = 1/Equity multiplier = 1/1.5 = 0.67
Equity multiplier = total assets/total equity
Daimler AG had sales of €200.654, total assets if €271.764, and total debt of €89.197
If the profit margin is 4.867 per cent, what was net income?
Net income = (0.04867)(€200.654) = €9.765,83
What was return on assets (ROA)?
ROA = net income/total assets
ROA = 9.765,83/271.764 = 0.0359 3.59%
Volkswagen AG had sales of €113.808, total assets of €167.919, and total debt of €69.380
If the profit margin is 4.173 per cent, what was net income?
Net income = (0.04173)(113.808) = €4.749,21
What was ROA?
ROA = Net income / Total assets = 4.749,.919 = 0.0283 2.83%
You invest €2500 today for 30 years with an annual return of 6.5%. To what amount will your investment grow
in the case of simple interest?
2500 + 30 x 0.065 x 2500 = €7.375
Spanish World Ltd. Pays €100.000 in 30 years for an investment of €24.099. What rate of return does Spanish
World Ltd. Pay?
100.000
=24.099
( 1+ r )30
10.000
( 1+r )30=
24.099
100.000 301
1+r = ( 24.099) =1,04858
r =0,04858→ r =4.86 %
Solve for the unknown interest rate in each of the following.
Present value Years Interest rate Future value
240 3 7.36% 297
360 11 10.50% 1.080
39.000 12 13.87% 185.382
38.261 50 5.40% 531.618
1
FV FV
PV =
( 1+ r ) t
→r= ( ) −1
PV
t
solve for the unknown number of years
Present value Years Interest Rate Future Value
NKr 560 ? 10% NKr 1.284
, t=
ln ( FV
PV ) → t=
ln (
1.284
560 )
=8.71 years
ln ( 1+r ) ln ( 1+0.1 )
You have just received notification that you have won the €1 million first prize in the Euro Lottery. However,
the prize will be awarded on your 100th birthday (assuming you’re around to collect), 80 years from now.
What is the present value of your windfall if the appropriate discount rate is 12 per cent?
FV 1.000 .000
PV = = =€ 115,49
( 1+ r ) ( 1+0,12 )80
t
Imprudential plc has an unfunded pension liability of £800 million that must be paid in 20 years. To assess the
value of the firm’s equity, financial analysts want to discount this liability back to the present.
Required: if the relevant discount rate is 7 per cent, what is the present value of this liability?
FV 800.000
PV = = =206.735,20
( 1+ r ) ( 1+0,07 )20
t
ten years ago RED B.V> borrowed 10.5m € and since then has been paying interest on it until now. The nominal
annual interest rate on this loan is 6.0%. Interest is paid on a monthly basis. RED B.V. has not paid back any
debt so far. What is the total outstanding debt amount?
t 120
FV =PV x ( 1+r ) =10.500.000 x ( 1+ 0.005 ) ≈ 19.1 m€
Interest is paid on monthly basis 0.06/12 = 0.005 and 10 x 12 months = 120 months
A non-cash item is…..?
A financial statement item used to compute a firm’s net income on an accrual basis, but which does
not affect the cash flow statement.
On a statement of financial position, total assets must always equal total liabilities plus…?
Shareholders’ equity
Alder Inc. has net income of $403.000, operating earnings of $640.000, sales of $1.23 million, equity of
$148.000, and an equity multiplier of 10. What is the return on assets?
Equity multiplier = total assets/total equity
total assets = equity multiplier x total equity = 10 x 148.000 = $1.480.000
ROA = net income/total assets = $403.000/$1.480.000 = 0,2723 ROA = 27,23%
What does a statement of financial position reflect about a firm?
Accounting value on a specific date
Statement of financial position is another word for balance sheet.
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