Assignment 1 Fin 101 Course Name Principles Of Finance Stude

Assignment 1 Fin101course Name Principles Of Financestudents Nameco

This assignment involves financial calculations and conceptual explanations based on provided financial data. The tasks include calculating interest expenses, preparing financial statements, and explaining the importance of secondary markets in capital raising. Specifically, you are asked to determine the interest expense of Altamimi Company using its net income, EBITDA, depreciation, and tax rate, and then prepare a common-sized income statement. Additionally, you will create a balance sheet and income statement for Malak Company based on given account balances, and explain why secondary markets are crucial for raising capital.

Paper For Above instruction

Part 1: Calculating Interest Expense and Preparing a Common-Sized Income Statement for Altamimi Company

To determine the interest expense for Altamimi Company, we start by analyzing the given data: net income of $3,700,214, EBITDA of $10,125,300, depreciation and amortization expenses totaling $2,543,790, and a tax rate of 35%. The fundamental relationship connecting these figures is:

Net income = (EBIT - interest) * (1 - tax rate)

Rearranged, this becomes:

Interest = EBITDA - EBIT - Depreciation - Amortization

However, since depreciation and amortization are already included in EBITDA, and EBIT can be derived from EBIT = Net Income / (1 - Tax Rate) + Interest. The following step-by-step approach provides clarity:

1. Calculate EBIT (Earnings Before Interest and Taxes):

Net Income = (EBIT - Interest) * (1 - Tax Rate)

Rearranged:

EBIT = Net Income / (1 - Tax Rate) + Interest

But since interest is unknown, another approach is to estimate EBIT as:

EBIT = EBITDA - Depreciation & Amortization

= $10,125,300 - $2,543,790 = $7,581,510

2. Use the tax rate to find net income from EBIT and interest:

Net Income = (EBIT - interest) * (1 - 0.35)

3. Rearrange the formula to solve for interest:

Interest = EBITDA - EBIT - Depreciation & Amortization

Given that EBITDA already accounts for earnings before interest, taxes, depreciation, and amortization, and interest expenses are deducted after EBITDA, we can approximate interest expenses by rearranging similar to the following:

Interest Expenses = (EBITDA - EBIT) - (Net income / (1 - tax rate))

But the most straightforward approach is to recognize that the net income is after interest and taxes, so:

Net Income = (EBIT - interest) * (1 - tax rate)

Substituting values:

3,700,214 = (EBIT - interest) * 0.65

And EBIT = EBITDA - Depreciation & Amortization = 7,581,510

So,

3,700,214 = (7,581,510 - interest) * 0.65

Divide both sides by 0.65:

(7,581,510 - interest) = 3,700,214 / 0.65 ≈ 5,697,259

Then, solve for interest:

interest = 7,581,510 - 5,697,259 ≈ 1,884,251

Answer: The interest expense for Altamimi Company is approximately $1,884,251.

Part 2: Prepare a Common-Sized Income Statement for Altamimi Company

Given sales of $12,000,000, the common-sized income statement displays each line item as a percentage of sales.

Revenues = 100%

EBITDA = $10,125,300 / $12,000,000 ≈ 84.39%

Depreciation and amortization = $2,543,790 / $12,000,000 ≈ 21.20%

Net income = $3,700,214 / $12,000,000 ≈ 30.84%

Interest expense = $1,884,251 / $12,000,000 ≈ 15.70%

These percentages help in analyzing the company's cost structure relative to its sales.

Part 3: Preparing Financial Statements for Malak Company

Using the provided data, we can develop the balance sheet and income statement for Malak Company.

Balance Sheet (in thousands):

  • Assets:
  • Cash & Cash Equivalents: $97,000
  • Accounts Receivable: $3,000,000
  • Net Property and Equipment: $2,000,000
  • Total Assets: $97,000 + $3,000,000 + $2,000,000 = $5,097,000
  • Liabilities and Equity:
  • Notes Payable: $37,000,000
  • Long-term Debt: $3,500,000
  • Stockholders’ Equity: $61,500,000

Income Statement (in thousands):

  • Revenues: $983,000
  • Supply Expenses: $255,000
  • Labor Expenses: $300,000
  • Depreciation Expenses: $35,000
  • Interest Expenses: $11,000

Total expenses (excluding interest): $255,000 + $300,000 + $35,000 = $590,000

Operating income before interest and taxes: $983,000 - $590,000 = $393,000

Net income after interest (assuming tax rate of 35%):

Calculating taxable income:

Taxable income = Operating income - Interest = $393,000 - $11,000 = $382,000

Taxes = 35% of $382,000 = $133,700

Net income = $382,000 - $133,700 = $248,300

These statements provide snapshots of Malak Company’s financial health, liquidity, and profitability for 2018.

Part 4: Importance of Secondary Markets in Raising Capital

Secondary markets play a vital role in capital formation and financial liquidity. They provide investors with the opportunity to buy and sell existing securities, which enhances liquidity and reduces the risk associated with investing in equities and bonds. This liquidity enables investors to easily convert their holdings into cash, encouraging more investment in primary markets where new securities are issued. Additionally, secondary markets facilitate price discovery and transparency, allowing investors to assess the fair value of securities based on current market conditions (Brealey, Myers, & Allen, 2019). The ability to trade securities on established exchanges reduces capital costs for companies issuing new securities, as investors are more willing to invest if they know they can sell their holdings easily later. Moreover, secondary markets support the efficient allocation of resources within the economy, as they enable capital to flow to its most productive uses, fostering economic growth. Overall, secondary markets are indispensable for maintaining market stability, encouraging investment, and supporting the continuous flow of capital into productive ventures (Mishkin & Eakins, 2018).

References

  • Brealey, R. A., Myers, S. C., & Allen, F. (2019). Principles of Corporate Finance (13th ed.). McGraw-Hill Education.
  • Mishkin, F. S., & Eakins, S. G. (2018). Financial Markets and Institutions (9th ed.). Pearson.
  • Fabozzi, F. J., & Modigliani, F. (2009). Capital Markets: Institutions and Instruments. Pearson.
  • Ross, S. A., Westerfield, R. W., & Jaffe, J. (2016). Corporate Finance (11th ed.). McGraw-Hill.
  • Levine, R. (2002). Bank, Financial Intermediation, and Economic Growth. Journal of Economic Perspectives, 12(4), 87–105.
  • Allen, F., & Gale, D. (2007). Understanding Financial Crises. Oxford University Press.
  • Hong, H., & Stein, J. C. (2003). Divergence of Opinion in Financial Markets. Journal of Political Economy, 111(3), 603–641.
  • Shleifer, A., & Vishny, R. (1997). The Limits of Arbitrage. The Journal of Finance, 52(1), 35–55.
  • Yuan, K., & Zhang, L. (2012). Stock Market Liquidity and Economic Growth. Financial Management, 41(4), 787–818.
  • Amihud, Y., & Mendelson, H. (1986). Asset Pricing and the Bid-Ask Spread. Journal of Financial Economics, 17(2), 223–249.

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