fina 2360 fall 2015 fall midterm key

7/26/2019 Fina 2360 Fall 2015 Fall Midterm Key

1/19

Finance 2360

Midterm Exam

Fall 2015

Student Name: Answer Key Sections E F

Student Num!er:

Section:

"otal "ime Allowed: 2#5 $ours

%nstructions:

&lease read t$e 'uestions care(ully)

S$ow your met$odolo*y)

Final answers carry near +ero mar,s#

State any assum-tion t$at you ma,e#

.nly aut$ori+ed calculators are allowed#

/ell -$ones are not allowed in t$e exam room#

No !at$room !rea,s)

% $ae read and understand t$e instructions:

Si*nature:

.r*ani+ation alue Mar,

&art % Multi-le /$oice 2

&art %% "rue4False 12

&art %%% &ro!lems 56 Mar,s

&ro!lem 1 12

&ro!lem 2 11

&ro!lem 3 12

&ro!lem 21

"."A7 includes 2 !onus -oints 82


2/19

&A9" %: M7"%&7E /;.%/E

EA/; reduction

$$. &'A %ill increase. &ayin* o(( de!t# 9educes t$e interest resultin* a $i*$er N%

and a $i*$er return on t$e assets net income4assets

$$$. The current ratio %ill decrease. 9educes cas$ in /A > yesA. 'nly $ is trueB. $ and $$ are true(. $ and $$$ are trueD. $$ and $$$ are trueE# %? %% and %%% are true

). !hen a firm ta#es out a "year ban# loan to pay its suppliers$. The total debt ratio %ill increase. 9ecorded as lon* term de!t# "rue

$$. &'A %ill decrease.@orrowin* will allow N% to increase and 9.A will increase

not decrease# False#

$$$. The current ratio %ill increase. %ncrease in cas$ wit$ not increase in /7# "rueA. 'nly $ is trueB. $ and $$ are true/# % and %%% are true

D. $$ and $$$ are trueE. $, $$ and $$$ are true

Finance 2360 Fall 2015 Midterm 1


3/19

*. The purchase and sale of securities after the original issuance occurs in theA. +rimary mar#etB. Secondary mar,et# Existin* securities are traded in t$e secondary mar,et#(. Dealer mar#et.D. Auction mar#et.

E. iquidation mar#et.

-. (apital structure refers to

A. the amount of inventory held.

B. the amount of cash on hand.

/# t$e mixture o( de!t and e'uity#

D. the accounts receivable policy.

E. the management of long"term investments.

. A current asset

A# $as a li(e o( less t$an one year# .ne year or one !usiness cycle w$ic$eer is less#

B. includes accounts payable.

(. is an illiquid asset.

D. is included in the statement of comprehensive income.

E. is part of shareholders/ equity.

0. (urrent assets minus current liabilities are referred to as

A. Tangible assets.

@# Net wor,in* ca-ital# /urrent assets and current lia!ilities are t$e ca-ital you wor,

wit$#

(. Net income.D. Net assets.

E. Net boo# value.

. The cash generated from a firm/s normal business activities is called

A. 2inancing cash flo%.

B. Net income.

(. 3ross profit.

# .-eratin* cas$ (low# "$is is t$e cas$ (low t$at is *enerated or s-ent in t$e

o-erations o( t$e (irm#

E. 2ree cash flo%.



4/19

8# !hich one of the follo%ing %ill cause cash flo% to stoc#holders to increase, all else

constant4

A. A secondary common stoc# offering

B. A decrease in dividends per share

(. An increase in cash flo% to creditors given no change in cash flo% from assets

D. A decrease in cash flo% from assets given no change in cash flo% to creditors

E# A decrease in cas$ (low to creditors *ien an increase in cas$ (low (rom assets# "$e

decrease in t$e cas$ (lows to creditors lenders or !ond$olders will result in a $i*$er

net income and an increase in t$e cas$ (low (or t$e s$are$olders#

15. A common"si6e statement of comprehensive income is defined as a financial statement

%herein all items are e7pressed as a percentage of

A. their prior year/s value.

B. their pro8ected value.

(. their -"year average value.

D. total assets.

E# sales# %n t$e common si+e income statement? all alues are ex-ressed as a -ercenta*e

o( t$e sales (or t$e -eriod#

11# !hich of the follo%ing is 9are: a source of cash4

$. An increase in accounts payable. An increase in A4& means you $aenBt -aid yet# Source

$$. A reduction in inventory. A decrease in inentory means t$at you $ae sold inentory#

Source

$$$. An increase in retained earnings. "$e net income $as !een added to t$e 94E and t$e

N% is *reater t$an any diidends t$at $ae !een -aid out# Source#

$;. An increase in notes payable. Cou $ae !orrowed additional (unds# SourceA. $$ and $$$ only

B. $ and $; only

(. $, $$ and $;

D. $, $$$, and $; only

E# %? %%? %%%? and %

1. A loan %here the borro%er receives money today and repays a single lump sum at some time

in the future is called a9n:


5/19

%N%/A"E =;E";E9 ";E S"A"EMEN" %S "9E .9 FA7SE 1 MA9K AN

&9.%E AN ED&7ANA"%.N =%"; A" M.S" 2 SEN"EN/ES 2 MA9KS#

9ES"A"%N .9 &A9A&;9AS%N %S N." A SFF%/%EN" ED&7ANA"%.N#

1.The loan amount outstanding for an amorti6ed loan is equal to the future value of all remaining

payments. True or false4 E7plain.

False# "$e loan amount outstandin* is e'ual to t$e -resent alue o( all remainin*

-ayments# "$e amount outstandin* at maturity is +ero (or an amorti+ed loan?

so at eery -oint in time t$e discounted alue o( all remainin* cas$>(lows

-ayments $as to e'ual t$e !alance outstandin*#

. The statement =The time value of money is positive> implies that the future value of a streamof cash"flo%s is al%ays larger than the present value. True or false4 E7plain.

"rue# "$e time alue o( money is -ositie means t$at one dollar today is wort$

more t$an one dollar at any time in t$e (uture# Anot$er way o( ex-ressin*

t$is is to say t$at interest rates are -ositie# "$ere(ore? t$e (uture alue o( a

stream o( cas$>(lows $as to !e lar*er t$an t$e -resent alue o( said stream o(

cas$>(lows#

). !hen o%ners are managers 9such as in a sole proprietorship:, a firm %ill have agency costs.

False# A*ency costs re(er to t$e costs o( t$e con(lict o( interests !etween

s$are$olders and mana*ement# =$en owners are mana*ers? t$ey do not $ae

con(lict o( interests wit$ t$emseles#

*. 3enerally, the more liquid an asset is, the higher the return it gives.

False# sually t$e return on a li'uid asset is lower t$an an illi'uid asset# For

exam-le cas$ $eld at $and is t$e most li'uid? !ut $as +ero return# 9eturns

(rom inestment as (ixed assets are $i*$er#



6/19

&A9" %%% &9.@7EMS

ANS=E9 A77 &9.@7EMS %N ";E S&A/E &9.%E# %F ";E9E %S

%NSFF%/%EN" S&A/E? ASK F.9 S.ME A%"%.NA7 &A&E9#

S;.= C.9 /A7/7A"%.NS /7EA97C#

&9.@7EM 1 12 Mar,s "otal?our great uncle 8ust passed a%ay and left you %ith an inheritance of @55,555. ?our uncle %as#no%n for his cheapness and you decide to follo% his e7ample, since it seemed to have paid offfor him quite %ell. ntil you retire e7actly )- years from no%, you put the full amount of theinheritance into an investment account %hich pays -.- A+& compounded monthly. ?ouestimate you %ill live another years in retirement and live off the money from the investmentaccount. 'nce you retire you shift your investment account to%ards more secure assets at thee7pense of performance causing it to earn only ) A+& compounded monthly.

a. !hat %ill be the value of the inheritance %hen you retire4 9 mar#s: A+& C -.- compounded monthly0 35

& G 200?000 F GH

/alculate t$e interest rate#

EAR=(1+APRm )m

1=(1+ 0.05512)12

1=(1.004583333 )121=0.0564078605.64

EPR=(1+APRm )m

f1=(1+ 0.05512)12

121=(1.004583333 )11=0.0045833330.458333333

sin* EA9

FV=PV(1+r )t=200,000 (1.056407860)35=1,365,013.151,365,013.15

sin* E&9

FV=PV(1+r )t=200,000 (1.004583333)420=1,365,013.151,365,013.15

b. !hat %ill be your monthly %ithdra%als from your investment account during retirement,if your first %ithdra%al %ill be e7actly )- years from no%4 9* mar#s:

A+& C ).50 2I

& G 1?365?013#15

EPR=(1+APRm )m

f1=(1+ 0.0312)12

121=(1.00250 )11=0.00250

First cas$ (low occurs at year 35 J !e*innin* o( t$e mont$ > annuity due



7/19

PV=C[ 1 1

(1+r )t

r ] (1+r ) isolatin* / we $aeC=

PV

[ 1 1

(1+r )t

r ] (1+r )C= 1,365,013.15

[ 1 1

(1.0025 )336

0.0025 ] (1.0025 )

=1,365,013.15

227.7025156=5,994.721430 5,994.72

c. No% assume you %ant to leave your four grandchildren an inheritance of @-,555 each%hen you die. By ho% much %ill your monthly %ithdra%als from the investment accountdecrease4 9 mar#s:%( you want to leae 100?000 to your (our *randc$ildren? you will $ae to set aside

PV= FV(1+r )t= 100,000

(1.0025)336=43,216.33

So you will $ae only 1?365?013#15 J 3?216#33 G 1?321?L86#I2 aaila!le (or your

own retirement# /alculatin* t$e mont$ly wit$drawal li,e in -art !# now *ies us

C= PV r

(1 1(1+r)t)(1+r )=

1,321,796.82 .0025

(1 11.0025336)(1.0025)=5,804.93

#

"$ere(ore? you will only $ae to wit$draw 5?88#L2 J 5?I0#83 G 1I8#L8 dollars less

eac$ mont$ (rom t$e inestment account to $ae 25?000 le(t oer (or eac$ o( your

*randc$ildren w$en you die#

Alternatie met$od !e can find the annuity cash flo% that %ill result in the balance in

the account in the future of @155,555.

sing FV=C[(1+r )t1

r ] (1+r ) %e can isolate ( so

C= FV

[(1+r )

t

1r ] (1+r )

100,000

[(1.0025 )3361

0.0025 ] (1.0025 )=

100,000

526.8899840=189.7929417189.79



8/19



9/19

&9.@7EM 2 Mort*a*e? 11 Mar,s "otal

r. Fmith is ta#ing out a @*55,555 mortgage from a ban# that offers a -"year loan at -.

a. (alculate r. FmithGs monthly payments. 3 mar,s

onthly rate E+& (1+

APR

m

)m

f

=(1+

0.05

2

) 2

12

1=0.004123915 onthly payment

in -H1C)55 months PV=C[1 1

(1+r )t

r ] isolating ( %e have

C= PV

[1 1

(1+r )t

r ]C=

400,000

[1

1

(1.004123915 )300

0.004123915

]

= 400,000

171.9380132=2,326.4198102,326.42

b. At the end of the -thyear, r. Fmith gets a much better 8ob as a (2'. Fo he re"negotiates %ith the ban# and signs a ne% mortgage, under %hich he %ill pay off theremaining balance in 15 years. (alculate r. FmithGs ne% monthly payments, if theinterest rate stays at -. 9- mar#s:"o (ind t$e amount Mr# Smit$ needs to re>ne*otiate (or $is loan? we need to (ind

t$e -resent alue o( $is remainin* -ayments#"$e amount outstandin* at t$e endo( t$e 5t$year: in t$e remainin* 20 years G 2012 G 20 mont$s? still need to

-ay2,326.42

eery mont$? so

PV=C[1 1

(1+r )t

r ]2,326.42[1

1

(1.004123915 )240

0.004123915 ]=354,030.0545354,030.05

An alternatie met$od is to (ind t$e (uture alue o( t$e initial loan alue and t$e

(uture alue o( t$e -ayments t$at $ae !een made#

5 1 -I 5

2?326#2 2?326#2 2?326#2 F G H

& G 00?000 F G H

Future alue o( t$e initial loan

FV=PV(1+r )t=400,000.00 (1.004123915 )60=512,033.8034



10/19

Future alue o( t$e -ayments

FV=C[(1+r )t1

r ]=2,326.42[(1.004123915 )601

0.004123915 ]=158,003.7907And t$e !alance owin* is t$e di((erence 512?033#I03 J 15I?003#L80L G

35?030#012L 35?030#01# "$e di((erence !etween t$e two met$ods is t$e e((ecto( roundin*#

Mr# Smit$ wants to s$orten t$e amorti+ation -eriod to 10 years rat$er t$an t$e

remainin* 20 year# Amorti+e t$is amount in a 10>year -eriod or 120 mont$s# "o

calculate Mr# Smit$Bs new mort*a*e -ayment we use t$e (ollowin*:

PV=C[ 1 1

(1+r )t

r ] isolating C we have C= PV

[1

1

(1+r )t

r

]C=

354,030.05

[1 1

(1.004123915 )120

0.004123915 ]

= 354,030.05

94.50462078=3,746.1665583,746.17

c. $t turns out that r. Fmith loses his 8ob after - years in the position as a (2'. Jo%long %ould it ta#e him to pay off the mortgage, if he could only pay @55 everymonth4 3 mar,s2irst, %e need to #no% ho% much r Fmith o%es %hen 5 payments remain.

PV=C[ 1 1

(1+r )t

r ]3,746.17[ 1

1

(1.004123915 )60

0.004123915 ]=198,759.65

Fetting up the equation, %e have the follo%ing

198,759.65=800.00 [1 1

(1.004123915 )t

0.004123915]



11/19

(( 198,759.65800.00 ) (0.004123915 ))1= 1(1.004123915 )t(1.004123915 )t=

1

((198,759.65

800.00

) (0.004123915 ))

1

ln (1.004123915 )t=ln( 1

(( 198,759.65800.00 )(0.004123915 ))1 )

t=

ln( 1

(( 198,759.65800.00 )(0.004123915 ))1 )ln (1.004123915 )

= undefined

0.004115435

therefore NEVER

An alternate method is to loo# at the amorti6ation schedule

The @55 r. Fmith is %illing to pay %ill not cover the interest payment and the

value of the loan %ill continue to gro% in the future. The loan %ill never be paid off.



12/19


13/19

EAR=(1+APRm )m

1=(1+ 0.02412 )12

1=0.024265768 2.43

You will note that there is NO ROUNDING of the numbers for the

interest rate.

FV=C[(1+r )

t

1r ]=

480

[(1.024265768 )

18

10.024265768 ]=

10,675.20078 10,675.20

Total amount available %ill be -),I0.50 K 15,0-.5 C *,*.0

Alternative>

Fome students calculated the present value

PV=C[ 1 1

(1+r )t

r ]=480[1 1

(1.024265768 )18

0.024265768 ]=6,933.431064

No%, %e need to find the future of the account %hen your daughter turns 1.

FV=PV(1+r )t=6,933.431064 (1.024265768 )18=10,675.2008110,675.20

You will note that there is NO ROUNDING of the numbers until the

nal answer!

c. $f your first contribution is @)55 and your end"of"month contribution gro%s at the rate of5.1 per month, %hat is the total amount 9including government contributions: in your&EF+ account %hen your daughter turns 14 90 mar#s: r C 5. per month C 5.55 per month5 1 1- 1

& /1G 300 * G 0#001 /2G /11O* F au*$ter turns 1I

"$e amount in t$e 9ES& account is t$e (uture alue o( t$e constantly *rowin*

contri!utions to t$e (und -lus t$e annual *oernment contri!ution# =e do not $ae a

(ormula (or t$e (uture alue o( a *rowin* annuityP $oweer? we can (ind t$e -resent

alue o( t$e *rowin* annuity and t$en (ind t$e (uture alue o( t$e lum- sum -resent

alue#

PV=C

[1(1+g1+r)

t

rg

]=300

[1(1.0011.002 )

216

0.0020.001

]=58,201.2009558,201.20

Now (ind t$e (uture alue o( t$is amount#

FV=PV(1+r )t=58,201.20095 (1.002 )216=89,610.6849589,610.68

Now (ind t$e (uture alue o( t$e *oernment contri!ution#



14/19


15/19

&9.@7EM MoeBs @ar? 21 Mar,s "otal

oeGs Bar has reported the follo%ing information for the year ending Feptember )5, 51-, 51*,

and 51).

a. $n the space provided above, complete the common si6e statement for the first three entries

on the asset side of the 51- balance sheet. 9 mar#s:/as$ 1?8004II1?800 G 0#016I85 G 1#6I85 Mar,eta!le Securities L?0004II1?800 G0#00L383LG0#L38 Accounts 9eceia!le 10?I004II1?800 G 0#65I12 G 6#5I

b. (omplete the common si6e income statement for the entries EB$T, Net $ncome, andDividends for 51-. 9 mar#s:

E@%" G 66?55041?605?100 G 0#0162 G #162 Net %ncome 1?10041?605?100 G 0#0006I5 G 0#06I5



16/19

iidends L0?00041?605?100 G 0#03611 G #361 See diidend calculation in t$e cas$ (low

statement#

c. (alculate the follo%ing for 51-# 915 mar#s, 1 per ratio: S$ow your wor,)

i: +rofit argin

Profit Margin=Net IncomeSales = 1,100

1,605,100=0.000685316 0.0685

ii: &eturn on Assets

Returnon Assets=Net Income

otal Assets=

1,100

881,900=0.0012473070.125

iii: &eturn on Equity

Returnon E!uit"=

Net Income

otal E!uit"=

1,100

14,000+238,500=0.0043564360.436

iv: &eceivables Turnover

Receiva#les urnover= Sales

Accounts Receiva#le=

1,605,100

410,800=3.9072541383.907$

v: $nventory Turnover

Inventor" urnover=

Cof%S

Inventor"=

1,258,900

256,600=4.9060795014.906$

vi: (urrent &atio

Current Ratio=

Current Assets

Current &ia#ilities=

694,500

403,600=1.7207631321.7207$

vii: Total Asset Turnover

otal Asset urnover= Sales

otal Assets=

1,605,100

881,900=1.8200476241.82$

viii: Luic# &atio

'uic( Ratio=Current AssetsInventor"

Current &ia#ilities =694,500256,600

403,600 =1.0849851381.08$

i7: Total Debt &atio

otal )e#t Ratio=otal Assetsotal E!uit"

otal Assets =

881,900252,500881,900

=0.71368635971.37



17/19

7: Times $nterest Earned

Interest Earned (IE)= E*I

Interest=

66,550

65,100=1.0222734251.02



18/19

d. Based upon your calculated ratios and the industry averages, %ould you grant oe additional

credit, if he %as applying for a loan4 E7plain %hy or %hy not. A yesMno ans%er is %orth

6ero. 9 mar#s:

!hen %e loo# at the ratios, the return ratios are %ea# because of the lo% income for the

period %hile the turnover ratio are near or e7ceeding the industry averages. The current

ratio and the quic# ratio are at or above the industry average ho%ever, the current and

quic# ratio only loo# at the ability to cover the current liabilities not the long term

liabilities. The lo% income for the year is a result of the high debt amounts thus, increasing

the amount of debt %ill have a serious impact on the companyGs ability to cover its interest

requirement 9Times $nterest Earned:. $t is not recommended that another loan be approved

unless you %ant to lead oeGs Bar to ban#ruptcy.

An additional fact is that oeGs Bar paid @05,555 in dividends in 51- 9cash outflo%: and

no% he needs additional cash. Not one student mentioned this in their analysis.



19/19

e. +rovide a cash flo% statement for oeGs Bar for 51-. 5 mar,s

Fi 2360 F ll 2015 Midt 18

fina 2360 fall 2015 fall midterm key

Documents