What is more important for a company – to maximize profits or maximize shareholders’ wealth?

What is more important for a company – to maximize profits or maximize shareholders’ wealth?


1-Peter Drucker, CFO of Apple Ltd, plans to have the company issue $700 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?

  • The company would have to pay less taxes.
  • The company’s taxable income would fall.
  • The company ‘s interest expanse would remain constant
  • The company would have less common equity than before
  • The company’s net income would increase

2- What is more important for a company – to maximize profits or maximize shareholders’ wealth? Discuss with details. (300 words)

3- If you plan to invest $15,000 annually for 4 years and the discount rate is 12%.

Required: i) Calculate what is the future value ?

  1. ii) Briefly explain the time value of money.

4- Read the following case and answer the question that follows.

If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant. Justify your response.


A.The division’s DSO (days’ sales outstanding) is 68, whereas the average for its competitors is 58.


B.The division’s basic earning power ratio is above the average of other firms in its industry.

C.The division’s total assets turnover ratio is below the average for other firms in its industry.

D.The division’s debt ratio is below the average for other firms in the industry.

E.The division’s inventory turnover is 6, whereas the average for its competitors is 8


5. Explain the importance of analyzing Financial Statements through Ratio Analysis. (300 words)


6.Lincoln Industries’ current ratio is 0.5. Considered alone, which of the following actions would increase the company’s current ratio? Explain your choice.


A. Use cash to reduce long-term bonds outstanding.

B. Borrow using short-term notes payable and use the cash to increase inventories.

C. Use cash to reduce accounts payable.

D. Use cash to reduce short-term notes payable.







Answer any FIVE of the following questions.

Exercise 1

Consider the balance sheet of Wikileaks Industries as shown below. Because Wikileaks has $900,000 of retained earnings, do you think that the company would be able to pay cash to buy an asset with a cost of $300,000? Why or why not? Give logical arguments to support your answer.


Cash $ 50,000 Accounts payable $ 100,000
Inventory 200,000 Accruals 100,000
Accounts receivable 250,000 Total CL $ 200,000
Total CA $ 500,000 Debt 100,000
Net fixed assets $ 900,000 Common stock 200,000
_________ Retained earnings 900,000
Total assets $1,400,000 Total L & E $1,400,000












Exercise 2

Following is the key financial data:



Income Statement, Dreamscape, Inc.

For the Year Ended December 31, 2013


Evaluate the company’s performance against industry average ratios and against last year’s results. Show all computations.

Exercise 3


Following information is given of XYZ Ltd.


Cash Outflow $185,000


Annual Cash inflow


First 4 years $35,000


Next 6 years $15,000


Estimated life 10 years


Required: Calculate

Payback period


Exercise 4

Kay Company has the following Capital structure as at 31st March, 2020.

Based on Book Value              Based on Market Value                  % Costs

Debentures      300,000                                       350,000                                          7

Preference       100,000                                     130,000                                            9

Equity             1,500,000                                  1,750,000                                        15

Debt                200,000                                     170,000                                           10




Determine the Weighted Average cost of capital using:



  1. Book Value weights


  1. Market Value weights


  1. What are the factors affecting Cost of Capital?



Exercise 5

Use the following information to answer the questions that follow:





  1. What is the cash flow from assets for 2011?
  2. Based on your answer in part (a) above, evaluate the cash management


Exercise 6


Connolly Co.’s expected year-end dividend is D1 = $2.60, its required return is rs = 12.00%, its dividend yield is 8.00%, and its growth rate is expected to be constant in the future. What is Connolly’s expected stock price in 2 years? What could be the possible causes of rise in stock price? Discuss.