1 Finance School of Management FINANCE Reviews of Questions and Problems Part I: Chapter 1-3

2 Finance School of Management  Part one which includes Chapter 1 to 3  Performance Excellent homework Unclean and unclear writing Complete homework on time! Complete your homework independently! Team work: good!  Error correcting

3 Finance School of Management Chapter 1: What is Finance?  Finance, as a scientific discipline, is the study of how people allocate scarce resources over time under conditions of uncertainty.  Problems of homework: Express your opinions in terms of finance Keep your work clean and clear The concept of Trade-Off (such as return/risk, consumption/saving, study/work )

4 Finance School of Management Chapter 2: The Financial System  Problems of homework: Understand correctly the concepts of Limited- Liability, Moral-Hazard, Adverse-Selection and Principal-Agent Give examples besides those in book How to determine the investment weight in the S&P-Type indexes Market values in base year

5 Finance School of Management Limited Liability  Common stock has the feature of Limited Liability and also represents a Residual Claim on assets of a corporation. (page 35) You are equity investor and your partner is debt holder, so lenders do share some of the business risk along with the equity investors.

6 Finance School of Management Moral-Hazard, Adverse-Selection and Principal-Agent Moral-Hazard, Adverse-Selection and Principal-Agent  Definitions and examples are given from page 30 to page 32 on book.  Sample answer: Sample answer:

7 Finance School of Management Stock Indexes  Market Weighted Stock Indexes (See appendix on page ): DJI- benchmark portfolio consists of one share of each stock. S&P- holds each stock in proportion to its total market value. DJI-type index will give inaccurate answer in some cases.

8 Finance School of Management Chapter 3: Financial Statements  Question 3.1--deal with following items properly Depreciation/Accumulated Depreciation Note Payable/Accounts Payable/Current Liability Average Total Assets/Receivables Question deal with following items properly Interest Expenses/ Liabilities Change in Retained Earnings/Retained Earnings Additional Financing Needed/Decrease in Short-term debt  Difficult Questions and Problems

9 Finance School of Management a. Machine 21,000(9,000+12,000) Inf c. Less Accumulated depreciation -3,000 Net Machine 18,000 b. Sale Revenue 431,000(115, ,000) Inf f. COGS 250,000 Inf a. Equipment 25,000 Less Accumulated depreciation) -3,750 Net Equipment 21,250 Inf b. Furniture 16,000 Less Accumulated depreciation) -4,000 Net Equipment 12,000 Assignments

10 Finance School of Management e. Rent expenses 43,000 f. Insurance expenses 23,000 g. Utility expenses 6,000(7,500-1,500) h. Wages and salaries 76,000(79,000-3,000) i. Miscellaneous operating expenses 4,000 By transaction c and information i and f, we have Inventory 14,000(57, , ,000) By transaction b, j and information g, we have Accounts receivable 81,000(35, , ,000) By transaction b, j and information h, we have Accounts payable 47,000(65, , ,000)

11 Finance School of Management By transaction a, g and, we have Utilities payable 0 Salary payable 0 Note payable 12,000 k. Interest expense 25,000 inf e. Dividends 1,  Solutions: to refer to Excel

12 Finance School of Management  Percent-of –sales method:  Firstly, to determine some fixed ratios to sales;  Secondly, determine the rate of growth in sales=15%;  Thirdly, forecast those items that are assumed to maintain a constant ratio to sales;  Finally, fill in the missing items in the income statement and balance sheet.  Solutions: to refer to Excel 3.10  Sample Answers Sample Answers Assignments 3.10