SCHOOL OF SLAVONIC AND EAST EUROPEAN

STUDIES
SESS3005: Topics in Financial Management
Week 2 Tutorial
Dr. Eugene Nivorozhkin

Problem 1
Family A and family B both consist of a father, mother and
two children of school age. In family A both spouses have
jobs outside the home and earn a combined income of
$100,000 per year. In family B, only one spouse works
outside the home and earns $100,000 per year. How do
the financial circumstances and decisions faced by the two
families differ?

Problem 1 - Solution
With two wage earners, there is less risk of a total
loss of family income due to unemployment or
disability than there is in a single wage earning
household.
The single wage earning family will probably want
more disability and life insurance than the two
wage earning family.
On the flip side, however, the two wage earning
family may need to spend extra money on child
care expenses if they need to pay someone to
watch the children after school.
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Problem 2

Suppose you invest in a real-estate development

deal. The total investment is $100,000. You invest
$20,000 of your own money and borrow the other
$80,000 from the bank. Who bears the risk of this
venture and why?

Problem 2 - Solution
The $20,000 of my own money is considered the equity
capital and the $80,000 is debt financing.
In general it is the equity investors who absorb the primary
risk of business failure. This is because if the business
goes bankrupt, I will unlikely get any or my money back as
the debt holders get paid back before I do.
However, the debtholder also faces some risk that it will
not even get back all its principal and interest. So lenders
do share some of the business risk along with the equity
investors.
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Problem 3
Assume there are only two stocks traded in the stock
market, and you are trying to construct an index to show
what has happened to stock prices. Let us say that in the
base year the prices were $20 per share for stock 1 with
100 million shares outstanding and $10 for stock 2 with 50
million shares outstanding. A year later, the prices are $30
per share for stock 1 and $2 per share for stock 2. Using
the two different methods explained in the chapter,
compute stock indexes showing what has happened to the
overall stock market. Which of the two methods do you
prefer and why?
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Problem 3 - Solution
DJI-Type Index = Average of Current Prices/Average of
Base Prices * 100 = 106.67
S&P-Type Index = (Weight of Stock 1 * Current Price of
Stock 1 / Base Price of Stock 1 + Weight of Stock 2 *
Current Price of Stock 2/Base Price of Stock 2) * 100 = 124
The S&P-Type Index accurately reflects what has
happened to the total market value of all stocks.

Problem 4
The Ruffy Stuffed Toy Companys balance sheet at the end of 19x7 was as follows:

Assets
Cash
Accounts Receivable
Inventory
Total Current Assets
Property, Plant, and Equipment
Equipment
Less Accumulated Depreciation
Net Equipment
Furniture
Less Accumulated Depreciation
Net Furniture
Total Prop, Plant, Equip
Total Assets

27,300
35,000
57,000
119,300
25,000
<2,500>
22,500
16,000
<2,000>
14,000
36,500
155,800
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Liabilities and Shareholders Equity

Payables
Accounts Payable
65,000
Salary Payable
3,000
Utilities Payable
1,500
Loans (Long-term debt)
25,000
Total Liabilities
94,500
Common Stock
45,000
Retained Earnings
16,300
Total Shareholders Equity
61,300
Total Liabilities
& Shareholders Equity
155,800

During 19x8, the Ruffy Stuffed Toy Company recorded the following transactions:
a. Early in the year, purchased a new toy stuffing machine for $9,000 cash and
signed a 3-year note for the balance of $12,000.
b. Had cash sales of $115,000 and sales on credit of $316,000.
c. Purchased raw materials from suppliers for $207,000.
d. Made payments of $225,000 to its raw materials suppliers.
e. Paid rent expenses totaling $43,000.
f. Paid insurance expenses totaling $23,000.
g. Paid utility bills totaling $7,500; $1,500 of this amount reversed the existing
payable from 19x7.
h. Paid wages and salaries totaling $79,000; $3,000 of this amount reversed the
payable from 19x7.
i. Paid other miscellaneous operating expenses totaling $4,000.
j. Collected $270,000 from its customers who made purchases on credit.
k. The interest rate on the Loan Payable is 10% per year. Interest was paid on
12/31/19x8.
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1. Construct the balance sheet for the Ruffy Stuffed Toy Company as of
12/31/19x8.
2. Construct the income statement for operations during the year 19x8.
3. Construct a cash flow statement for the year 19x8.
4. Calculate the following Profitability Ratios: Return on Sales, Return on
Assets, Return on Equity.
5. Calculate the following Asset Turnover Ratios: Receivables turnover,
Inventory turnover, Asset turnover
6. Calculate the following Financial Leverage and Liquidity Ratios: debt,
times interest earned, current ratio, quick (acid) test
7. What is the Ruffys book value per share at the end of 19x8?
8. Calculate the firms price-to-earnings ratio and the ratio of its market
share price to its book value per share.

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BALANCE SHEETS

19x7

19x8

Assets
Cash
27,300 10,896.25
Accounts Receivable
35,000
81,000 =35+316-270
Inventory
57,000
14,000 =57+207-250
Total Current Assets 119,300105,896.25
Property, Plant, and Equipment
Equipment
25,000
25,000
Less Accumulated Depreciation
(2500)
(3,750)=3*(25,000/20)
Net Equipment
22,500
21,250
Furniture
16,000
16,000
Less Accumulated Depreciation
(2000)
(4,000) =2*(16,000/8)
Net
14000
12,000
Furniture
Machine
21,000
=12+9
Less Accumulated Depreciation
(3,000)
=21,000/7
Net
18,000
Machine
Total Prop, Plant, Equip36,500
51,250
Total Assets

155,800157,146.25

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Liabilities and Shareholders Equity

Payables
Accounts Payable
Salary Payable
Utilities Payable
Note payable
Loans (Long-term Debt)
Total Liabilities
Common Stock
Retained Earnings
Total Shareholders Equity

65,000 47,000 =65+207-225

3,000
0
1,500
0
0
12000
25,000 25,000
94,500 84,000
45,000 45,000
16,30028,146.25=16,300+11,846.25
61,30073,146.25

Total Liabilities and Shareholders 155,800

Equity

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INCOME STATEMENT
431,000
250,000
181,000

Sales Revenue
COGS
Gross Margin
Expenses
Wages and Salaries Expense
Rent Expense
Insurance Expense
Utility Expense
Miscellaneous Operating Expense
Depreciation Expense

181,000
Income Before Interest and Tax
Interest Expense
Taxable Income
Taxes (0.35)

22,750
2,500
20,250
7,087.50

Net Income
Dividends (0.1)

13,162.50
1,316.25

Income after Dividends

11,846.25

76,000
43,000
23,000
6,000
4,000
6,250
158,250

=115+316
See (f)

=79-3
See (e)
See (f)
=7.5-1.5
See (i)
=1.25+2+3

=25,000*0.1

See (e)

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CASH FLOW STATEMENT

Net Income
+Dep
- A/R increase
+ Inventory decrease
- A/P decrease
Total Cash Flow from Operations
- Investment in PPE
Total cash from investing activities
- Dividends
+ Increase in Notes Payable
Total cash from financing activities
Change in Cash Flow

35000
57000
69500

81000
14000
47000

13162.5
6,250
(46,000)
43,000
(22,500)
6087.5
21000
21000
1316.25
+12000
+10683.75
16403.75

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RATIOS:
ROS
ROA
ROE
Receivables
Turnover
Inventory Turnover
Asset Turnover
Debt
Times Interest Earned
Current
Quick
P/E
Mkt to Book

22750
22750
13162.5
431000

431000
156473.13
67223.13
58000

0.0528
0.1454
0.1958
7.4310

250000
431000
84000
22750
105896.25
91,896.25
4.625
4.625

35500
156473.13
157146.25
2500
47000
47000
0.6581
3.6573

7.0423
2.7545
0.5345
9.1000
2.2531
1.9552
7.0278
1.2646

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