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(a) Ultimate goal of the firm is to maximize the wealth of the shareholders or the owners of the firm. Profit maximization cannot be taken as the decision making criteria, as profit considers the total benefits accruing to the firm and not the risk that the firm is carrying.
(b) Three decisions that a manager takes are:
Each of these decisions are inter related, as all decisions involve cash inflows or outflows, the investment decision made by the firm is based on the assumption of cash inflows from the project, the financing that the company shall avail will be based on the amount of funds required for investment. Similarly, dividends to be paid by the firm shall be derived based on the investing opportunities available with the firm.
Particulars |
Impact on cash |
Amount |
Source/Use |
Increase in accounts payable |
Up |
25,000 |
Source of cash |
Increase in inventory |
Down |
(15,000) |
Use of cash |
Decrease in accounts receivable |
Up |
27,000 |
Source of cash |
Decrease in borrowings |
Down |
(65,000) |
Use of cash |
(28,000) |
(a)
Cash flow |
PVF |
Annuity value |
5,000.00 |
1.00 |
5,000.00 |
5,000.00 |
0.93 |
4,672.90 |
5,000.00 |
0.87 |
4,367.19 |
5,000.00 |
0.82 |
4,081.49 |
5,000.00 |
0.76 |
3,814.48 |
5,000.00 |
0.71 |
3,564.93 |
25,500.99 |
Thus, present value of annuity shall be 25,501.
(b) Monthly repayment = [P*R*(1+R)^N]/[(1+R)^N-1]
[600,000*(0.07/12) + (1+0.07/12) ^240]/[(1.07)^240-1]
= $ 4,688
After two years, we would owe $ 573,517 to the bank.
Interest portion in 25th repayment is $ 3,346.
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