of Foundations Financial Management Midterm Examination, SIFT
Fall 2003
Chinese name ___________ Register number _______________ Marks ___________ Attention: Exam time: 120 minutes. Show all your work, all the formulas. Marks will only be assigned for problems for which complete methodology, formulas, and the process is shown. Peeking, copying or duplicating others' work will be considered as "cheating" And such students will be asked to leave the examination room immediately. 1.Match the following: (12 marks) a. balance sheet i. marginal corporate tax rate b. current cost accounting j. net worth or book value c. earnings per share k. P/E ratio d. historical cost accounting l. shareholders' equity e. income statement m statement of changes in financial position f. liquidity n. cash flows from operation . g. cash flow from financing o. cash flows from investing h. amortization p. free cash flow ____ 1) All the assets of the firm minus the liabilities and preferred stock ____ 2) A financial statement that indicates what the firms owns, and how these assets are financed in the form of liabilities or ownership interest. ____ 3) Changes accrual-based information from income statement and balance sheet to cash based information ____ 4) The relative convertibility of short-term assets into cash. ____ 5) The tax expressed as a percentage that applies to each new dollar of taxable income ____ 6 ) The multiplier applied to income per share to determine current value. ____ 7) The income available to common shareholders divided by the number of common shares outstanding. ____ 8) A financial statement that measures the profitability of the firm over a period of time. ____ 9) Represents the net cash flow that results from changes in the amount of a firm's long-term assets. ____ 10) The total ownership position of preferred and common shareholders. ____ 11) Traditional method of accounting using original costs minus amortization. ____ 12) Represents the net cash flow that results from a firm's production and sales activities. ____ 13) One method of inflation-adjusted accounting where statements are adjusted to the present using current cost date. ____ 14) Cash flow that is generated ( or reduced ) from the sale or repurchase of securities or the payment of dividends. ____ 15) The allocation of the initial cost of an asset over its useful life. ____ 16) Cash flows from operations minus working capital minus dividends payments
1
2.Identify each of the following as increasing ( + ) or decreasing ( -- ) cash flows from operating activities ( O ), investing activities ( I ), or financing activities ( F ). (EXAMPLE: the sale of plant and equipment would increase cash flows from investing activities, and the correct answer would be ( +I ). (12 marks ) ___ 1) Decrease in accounts receivable ___ 2) Decrease in inventory ___ 3) Net income from operations ___ 4) Payment of dividends ___ 5) Sale of preferred stock ___ 6) Increase in accrued expenses ___ 7) Purchase of new equipment ___ 8) Increase in accounts receivable ___ 9) Decrease in notes payable ___ 10) Increase in long-term liabilities ___ 11) Increase in investments ___ 12) Decrease in marketable securities ___ 13) Repurchase of common share outstanding ___ 14) Increase in prepaid expense ___ 15) Decrease in income tax payable ___ 16) Retirement of long-term bonds payable 3.The following is the December 31,1998 balance sheet for the Epic corporation. Assets Liabilities 100,000 120,000 300,000 520,000
Cash 70,000 Accounts payable Accounts receivable 150,000 Notes payable Inventory 280,000 Bonds payable Total current assets 500,000 Total liabilities Plant and equipment Less: Accum. Amort. Net plant and equipment
1,250,000 Equity 250,000 Common stock 1,000,000 Retained earnings Total equity 980,000 Total Liab. & Equity
500,000 480,000
Total assets
1,500,000
1,500,000
Sales for 1999 were $2,000,000, with the cost of goods sold being 55% of sales. Amortization Expense was 10% of the gross plant and equipment at the beginning the year. Interest expense was 9% on the notes and payable 11% on the bonds payable. Selling, general and administrative expenses were $200,000 and the firm's tax rate is 40%. a) Prepare an income statement. ( 7 marks ) b) If the dividend payout ratio for Epics is 35%, what is the value of the retained earnings Account on December 31, 1999 ( 3 marks )
2
4.The following is the balance sheet for 1999 for Marbell Inc. Assets Liabilities & Shareholder's Equity 90,000 30,000 7,500 127,500 75,000 22,500
Cash 15,000 Accounts payable Accounts receivable 90,000 Notes payable Inventory 60,000 Accrued expenses Current assets 165,000 Current liabilities Capital assets 60,000 Common stock Retained earnings
Total assets 225,000 Total Liab. & Equity 225,000 Sales for 1999 were $300,000. Sales for 2000 have been projected to increase by 20%. Assuming That Marbell Inc. is operating below capacity ,calculate the amount of new funds required to finance this growth. Marbell has an 8% return on sales and 70% is paid out as dividends.(8 marks)
5.Complete the following balance sheet for the Range Company using the following information: Sales = 1,625,000 Debt to Assets = 60 percent Quick Ratio = 1.1 Assets Turnover = 5 x Capital Assets Turnover = 12 .037 x
3
Current Ratio = 2 Average Collection Period = 17.0708 days Cash Receivables Inventory Total current assets Plant and equipment Total assets Current liabilities Bonds payable Total liabilities Net worth
(11 marks )
Total liabilities & net worth
6. Heister Corporation produces class rings to sell to college and high school students. These Rings sell for $75 each, and cost $35 each to produce. Heister has fixed costs of $50,000. a) Calculate Heister's break-even point. (4 marks ) b) How much profit ( loss ) will Heister have if it sells 1,000 rings? 8,000 rings ?(4marks) c) Heister's president, J.R. D'Angelo, expects an annual profit of $100,000. How many Rings must be sold to attain this profit? ( 4marks )
7. Christensen & Assoc. Is developing an asset financing plan. Christensen has $500,000 In current assets, of which 15% are permanent, and $700,000 in fixed assets. The current long-term rate is 11%, and the current short-term rate is 8.5%. Christensen 's tax rate is 40%. (16 marks ) a) construct two financing plans----one conservative, with 80 of assets financed by long-term sources, and the other aggressive, with only 60% of asstes financed by long-term sources. b) If Christensen 's earnings before interest and taxes are $235,000, calculate net income Under each alternative. c) what are some of the risks associated with each plan ? d) Which plan would you recommend to Christensen ? Why ?
4
8.
The Milling Corp. has developed a new type of widget. The local distributor expects to Increase his sales by 20% over the past year due to this new development. Last year's sales Were $50,000 at a selling price of $100 per unit. The manager would like to cut costs as Much as possible and comes to you for advice. (12 marks ) Relevant cost information includes: Warehouse space $2.50 / unit Material handling expense $1.50 / unit Insurance premium $1.00 / unit Total ordering cost $100.00 / per order a) What is the economic order quantity ? b) What is the amount of average inventory ? c) How many orders will be made per year ? d) What is the total cost of this inventory decision?
9.
Mountain Home Systems Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of telecommunications devices. The firm is currently debating whether to expand its sales to car-telephone manufacturers. While the firm expects an extra $2 million in sales if it enters this market, it also knows that 15% of its sales will ultimately be uncollectible. In addition, collection costs will be 2% on all new sales and the firm's production costs are 72% of sales. Selling expenses are 8% of sales and Mountain Home has an opportunity cost of funds ( before tax ) of 20%. Mountain Home can turn is receivables 4
5
times per year. Should Mountain Home Systems Co. Enter the car-telephone manufacturer market ? ( 7 marks )
6