Fall 2005 Midterm Solutions

Fall 2005 Midterm Solutions - LAST NAME:_ FIRST NAME:_...

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LAST NAME:_____________________________ FIRST NAME:_____________________________ STUDENT #:______________________________ SECTION:________________________________ McGill University Faculty of Management Introduction to Financial Accounting MGCR 211 Version 1 Mid-Term Examination (Circle your lecturer’s name) Lecturer: Karen Zajdman-Borden Date: October 21, 2005 Gerry LaRocca Jocelyn Perreault Julia Scott Danny Sebag Fred W. Valliant Lei Zhou Instructions: This is a closed book exam. You are allowed translation dictionaries. Only non-text storing calculators are allowed This exam consists of 3 questions and a total of 14 pages. All Questions are to be answered on this examination paper. Answer the question in the space provided. Do not exceed the space allowed. Show your calculations and explain your reasoning. You must return this examination. Question Marks available Grade 1 42 2 18 3 40 Total 100 1
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Question 1 (42 marks – 50 minutes) 2
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Question 1 (42 marks – 50 minutes) (… continued) Required You work for the banker of this corporation, a Québec-based retailer. The corporation should have maintained a 1.5 to 1 current ratio, as a clause of its debt contract. If the current ratio is lower than the 1.5 to 1, you can technically put the corporation in bankruptcy as of today, March 31, 2003. The corporation is asking you to temporarily waive this requirement, to let it continue to operate without repaying the loan. Your superior has asked you to prepare a report outlining your recommendation about the course of action the bank should follow and the reasons supporting your recommendation. In your report, indicate any other relevant information that you would, in a real world situation, like to examine. 3
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Question 1 (42 marks – 50 minutes) (… continued) Introduction 1. The first step in answering such a question is to verify if the corporation is really not respecting the ratio 1 2. Student computed the ratio for 2003: 73,311/76,278 = 0.96 1 3. Student computed the ratio for 2002: 1.35 1 4. It would be interesting to go back to our initial agreement and determine why we wanted the company to maintain this ratio – since it appears to also have not been respected last year 1 5. Is it the second year in a row that it happens? 1 6. Did we make it stricter this year? 1 7. We should put the company in bankruptcy if and only if we are recovering more money by doing so than by allowing the company to continue to operate 2 8. Somehow, we need to compare the amount we can recover by letting the company operate, to the amount we can recover by liquidating the asset 1 9. Our rank as a debtholder will be very important in determining how much we can recover (are we paid first, second, third, last?) 1 10. We also have to consider a mid-level strategy in case of uncertainty – offer a short period and follow the company closely, and keep the option of triggering bankruptcy later 1 11. In our report, we will examine separately the liquidity and cash performance of the company, to assess the option
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Fall 2005 Midterm Solutions - LAST NAME:_ FIRST NAME:_...

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