fina 2360 fall 2015 fall midterm key
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7/26/2019 Fina 2360 Fall 2015 Fall Midterm Key
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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
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&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
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*. 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%.
Finance 2360 Fall 2015 Midterm 2
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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 $; only
E# %? %%? %%%? and %
1. A loan %here the borro%er receives money today and repays a single lump sum at some time
in the future is called a9n:
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%N%/A"E =;E";E9 ";E S"A"EMEN" %S "9E .9 FA7SE 1 MA9K AN
&9.%E AN ED&7ANA"%.N =%"; A" M.S" 2 SEN"EN/ES 2 MA9KS#
9ES"A"%N .9 &A9A&;9AS%N %S N." A SFF%/%EN" ED&7ANA"%.N#
1.The loan amount outstanding for an amorti6ed loan is equal to the future value of all remaining
payments. True or false4 E7plain.
False# "$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#
Finance 2360 Fall 2015 Midterm 4
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&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
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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$od !e can find the annuity cash flo% that %ill result in the balance in
the account in the future of @155,555.
sing FV=C[(1+r )t1
r ] (1+r ) %e can isolate ( so
C= FV
[(1+r )
t
1r ] (1+r )
100,000
[(1.0025 )3361
0.0025 ] (1.0025 )=
100,000
526.8899840=189.7929417189.79
Finance 2360 Fall 2015 Midterm 6
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Finance 2360 Fall 2015 Midterm 7
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&9.@7EM 2 Mort*a*e? 11 Mar,s "otal
r. Fmith is ta#ing out a @*55,555 mortgage from a ban# that offers a -"year loan at -.
a. (alculate r. FmithGs monthly payments. 3 mar,s
onthly rate E+& (1+
APR
m
)m
f
=(1+
0.05
2
) 2
12
1=0.004123915 onthly payment
in -H1C)55 months PV=C[1 1
(1+r )t
r ] isolating ( %e have
C= PV
[1 1
(1+r )t
r ]C=
400,000
[1
1
(1.004123915 )300
0.004123915
]
= 400,000
171.9380132=2,326.4198102,326.42
b. At the end of the -thyear, r. Fmith gets a much better 8ob as a (2'. Fo he re"negotiates %ith the ban# and signs a ne% mortgage, under %hich he %ill pay off theremaining balance in 15 years. (alculate r. FmithGs ne% monthly payments, if theinterest rate stays at -. 9- mar#s:"o (ind t$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
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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]
Finance 2360 Fall 2015 Midterm 9
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(( 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.
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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#
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&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 $ncome, andDividends for 51-. 9 mar#s:
E@%" G 66?55041?605?100 G 0#0162 G #162 Net %ncome 1?10041?605?100 G 0#0006I5 G 0#06I5
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iidends L0?00041?605?100 G 0#03611 G #361 See diidend calculation in t$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
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7: Times $nterest Earned
Interest Earned (IE)= E*I
Interest=
66,550
65,100=1.0222734251.02
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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.
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e. +rovide a cash flo% statement for oeGs Bar for 51-. 5 mar,s
Fi 2360 F ll 2015 Midt 18