Business Administration - Management FIS403 Study Guide - Summer 2018, Comprehensive Midterm Notes - Retained Earnings, Common Stock, Accounts Receivable
12 Oct 2018
School
Department
Professor
Business
Administration -
Management FIS403
MIDTERM EXAM
STUDY GUIDE
Fall 2018
The Financial Markets
Primary vs. Secondary
Auction vs. Dealer
Investment Instruments and Capital Structure
What is a Capital Structure and how are companies financed?
Bonds
Preferred Shares
Common shares
Question 1
Company X started business with shareholder investments of
$40,000. Calculate the equity section of the Balance Sheet for
the 3 years described below.
a) For year 1, the company had a net loss of $7,000
b) For year 2, the company earned income of $15,000 and paid a
dividend of $6,000
c) For year 3, the company sold additional shares of $20,000,
earned income of $12,000 and paid a $6,000 dividend
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Solutions
a) Common stock (contributed capital)
$40,000
Retained earnings (deficit)
(7,000)
$33,000
Solutions
b) Common stock $40,000
Retained earnings 2,000
$42,000
c) Common stock $60,000
Retained earnings 8,000
$68,000
Question 2
Company B has expected earnings per share of $2.00 for year 1,
$4.00 for year 2, and then $10.00 per year for many more years.
Company C has expected earnings of $10.00 per share for 3 years
only.
Which company would you value higher? Why?
Solutions
Company C would be expected to have the higher valuation
because the $10 earnings per share (although achieved later) is
expected to be sustained for a much longer period of time.
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Document Summary
Company x started business with shareholder investments of. Calculate the equity section of the balance sheet for the 3 years described below. Company b has expected earnings per share of . 00 for year 1, . 00 for year 2, and then . 00 per year for many more years. Company c has expected earnings of . 00 per share for 3 years only. Company c would be expected to have the higher valuation because the earnings per share (although achieved later) is expected to be sustained for a much longer period of time. Building earnings for longer term sustainability is more valuable than quick returns that run out. Rotor project maximizes eps in year 1 and 2, but not year 3. Valve project maximizes eps over 3 years. Gain the loyalty and respect of all stakeholders. The expected result of such programs is to positively affect the firm"s share price. Assume a current share price of per share.
