MBAP
6061 – Managerial Finance
Midterm
Exam
Thursday,
October 30, 2008
Dr. William
A. Dowling Name
______________________
You are to
provide answers to the following questions.
1. What advantages does the corporate form of organization
have over sole proprietorships or partnerships?
2. If the corporate form of business
organization has so many advantages over the sole proprietorship, why is it so
common for small businesses to initially be formed as sole proprietorships?
3. What
should be the goal of the financial manager of a corporation? Why?
4. Do
you think agency problems arise in sole proprietorships and/or partnerships?
5. Assume for a moment that the stockholders
in a corporation have unlimited liability for corporate debts. If so, what
impact would this have on the functioning of primary and secondary markets for
common stock?
6. Suppose you own 100 shares of
7. One thing lenders sometimes require when
loaning money to a small corporation is an assignment of the common stock as collateral
on the loan. Then, if the business fails to repay its loan, the ownership of
the stock certificates can be transferred directly to the lender. Why might a
lender want such an assignment? What advantage of the corporate form of
organization comes into play here?
8. Why might a corporation wish to list its
shares on a national exchange such as the NYSE as opposed to a regional
exchange or NASDAQ?
9. Given the tax rates as shown, what is the
average tax rate for a firm with taxable income of $126,500?
Taxable Income 
Tax Rate 
$0  50,000 
15% 
50,001  75,000 
25% 
75,001  100,000 
34% 
100,001  335,000 
39% 
10. The tax rates are as shown. Your firm
currently has taxable income of $79,400. How much additional tax will you owe if
you increase your taxable income by $21,000?
Taxable Income 
Tax Rate 
$ 0  50,000 
15% 
50,001  75,000 
25% 
75,001  100,000 
34% 
100,001  335,000 
39% 
11. Your firm has net income of $198 on total sales
of $1,200. Costs are $715 and depreciation is $145. The tax rate is 34%. The
firm does not have interest expenses. What is the operating cash flow?
12. Teddy’s Pillows has beginning net fixed assets
of $480 and ending net fixed assets of $530. Assets valued at $300 were sold
during the year. Depreciation was $40. What is the amount of capital spending?
13. At the beginning of the year, a firm has
current assets of $380 and current liabilities of $210. At the end of the year,
the current assets are $410 and the current liabilities are $250. What is the
change in net working capital?
14. At the beginning of the year, longterm debt
of a firm is $280 and total debt is $340. At the end of the year, longterm
debt is $260 and total debt is $350. The interest paid is $30. What is the
amount of the cash flow to creditors?
15. Pete’s Boats has beginning longterm debt of
$180 and ending longterm debt of $210. The beginning and ending total debt
balances are $340 and $360, respectively. The interest paid is $20. What is the
amount of the cash flow to creditors?
16. Peggy Grey’s Cookies has net income of $360.
The firm pays out 40% of the net income to its shareholders as dividends.
During the year, the company sold $80 worth of common stock. What is the cash
flow to stockholders?
17. Thompson’s Jet Skis has operating cash flow
of $218. Depreciation is $45 and interest paid is $35. A net total of $69 was
paid on longterm debt. The firm spent $180 on fixed assets and increased net
working capital by $38. What is the amount of the cash flow to stockholders?
The following
information should be used for problems #18  24:
Nabors, Inc.
2006 Income Statement
($ in millions)
Net
sales $9,610
Less:
Cost of goods sold 6,310
Less:
Depreciation 1,370
Earnings
before interest and taxes 1,930
Less:
Interest paid 630
Taxable
Income $1,300
Less:
Taxes 455
Net
income $ 845
Nabors, Inc.
2005 and 2006 Balance Sheets
($ in millions)
2005 2006 2005 2006
Cash $ 310
$ 405 Accounts payable $ 2,720
$ 2,570
Accounts
rec. 2,640
3,055 Notes payable 100 0
Inventory 3,275
3,850 Total $ 2,820
$ 2,570
Total $ 6,225
$ 7,310 Longterm debt
7,875 8,100
Net
fixed assets 10,960
10,670 Common stock
5,000 5,250
Retained
earnings 1,490 2,060
Total
assets $17,185 $17,980 Total liab.& equity $17,185 $17,980
18. What is the change in the net working capital
from 2005 to 2006?
19. What is the amount of the noncash expenses
for 2006?
20. What is the amount of the net capital
spending for 2006?
21. What is the operating cash flow for 2006?
22. What is the cash flow of the firm for 2006?
23. What is the amount of net new borrowing for
2006?
24. What is the cash flow to creditors for 2006?
The following
information should be used for problems #25  33:
Knickerdoodles, Inc.

2005 
2006 
Sales 
$ 740 
$ 785 
COGS 
430 
460 
Interest 
33 
35 
Dividends 
16 
17 
Depreciation 
250 
210 
Cash 
70 
75 
Accounts receivables 
563 
502 
Current liabilities 
390 
405 
Inventory 
662 
640 
Longterm debt 
340 
410 
Net fixed assets 
1,680 
1,413 
Common stock 
700 
235 
Tax rate 
35% 
35% 
26. What is the net working capital for 2006?
27. What is the change in net working capital from
2005 to 2006?
28. What is net capital spending for 2006?
29. What is the operating cash flow for 2006?
30. What is the cash flow of the firm for 2006?
31. What is net new borrowing for 2006?
32. What is the cash flow to creditors for 2006?
33. What is the cash flow to stockholders for
2006?
The following
information should be used for problems #34  37:

2006 
Cost of goods sold 
$3,210 
Interest 
$215 
Dividends 
$160 
Depreciation 
$375 
Change in retained earnings 
$360 
Tax rate 
35% 
35. What
is the taxable income for 2006?
36. What
is the operating cash flow for 2006?
37. What
are the sales for 2006?
38. Calculate net
income based on the following information. Sales are $250, cost of goods sold
is $160, depreciation expense is $35, interest paid is $20, and the tax rate is
34%.
39. What is a liquid asset and why is it necessary
for a firm to maintain a reasonable level of liquid assets?
40. Why is interest expense
excluded from the operating cash flow calculation?
41. Explain why the income
statement is not a good representation of cash flow.
42. Discuss the difference
between book values and market values on the balance sheet and explain which is
more important to the financial manager and why.
43. A firm has sales of $1,500, net income of $100, total assets of
$1,000, and total equity of $700. Interest expense is $50. What is the
commonsize statement value of the interest expense?
44. Jessica’s Boutique has cash of $50, accounts
receivable of $60, accounts payable of $200, and inventory of $150. What is the
value of the quick
ratio?
45. A firm has sales of $3,600, costs of $2,800, interest paid of
$100, and depreciation of $400. The tax rate is 34%. What is the value of the
cash coverage ratio?
46. Syed’s Industries has accounts receivable of $700, inventory of $1,200,
sales of $4,200, and cost of goods sold of $3,400. How long does it take Syed’s
to both sell its inventory and then collect the payment on the sale?
47. Lee Sun’s has sales of $3,000, total assets of $2,500, and a
profit margin of 5%. The firm has a total debt ratio of 40%. What is the return
on equity?
48. Patti’s has net income of $1,800, a priceearnings ratio of 12,
and earnings per share of $1.20. How many shares of stock are outstanding?
49. Frederico’s has a profit margin of 6%, a return on assets of 8%,
and an equity multiplier of 1.4. What is the return on equity?
50. Windswept, Inc. has 90 million shares of
stock outstanding. Its priceearnings ratio for 2006 is 12. What is the market
price per share of stock?
51. Katelyn’s
Kites has net income of $240 and total equity of $2,000. The debtequity ratio
is 1.0 and the plowback ratio is 40%. What is the internal growth rate?
52. You have some property for sale and have
received two offers. The first offer is for $189,000 today in cash. The second
offer is the payment of $100,000 today and an additional $100,000 two years
from today. If the applicable discount rate is 8.75%, which offer should you
accept and why?
53. You have $2,500 that you want to use to open
a savings account. You have found five different accounts that are acceptable
to you. All you have to do now is determine which account you want to use such
that you can earn the highest rate of interest possible. Which account should
you use based upon the annual percentage rates quoted by each bank?
Account A: 3.75%, compounded annually
Account B: 3.70%, compounded monthly
Account C: 3.70%, compounded semiannually
Account D: 3.65%, compounded continuously
Account E: 3.66%, compounded quarterly
54. You are going to loan your friend $1,000 for
one year at a 5% rate of interest. How much additional interest can you earn if
you compound the rate continuously rather than annually?
55. Today you earn a salary of $28,500. What will be your annual salary
fifteen years from now if you earn annual raises of 3.5%?
56. You hope to buy your dream house six years from now. Today your
dream house costs $189,900. You expect housing prices to rise by an average of
4.5% per year over the next six years. How much will your dream house cost by
the time you are ready to buy.
57. Your grandmother invested one lump sum 17 years ago at 4.25%
interest. Today, she gave you the proceeds of that investment which totaled
$5,539.92. How much did your grandmother originally invest?
58. An S&L provides a loan with 15 yearly repayments of $8,000
with the first payment beginning immediately. Which of the following amounts
comes closest to the present value of the loan if the interest rate is 7%?
59. The common
stock of Eddie’s Engines, Inc. sells for $25.71 a share. The stock is expected
to pay $1.80 per share next month when the annual dividend is distributed.
Eddie’s has established a pattern of increasing its dividends by 4% annually
and expects to continue doing so. What is the market rate of return on this
stock?
60. Shares of common stock of the Samson Co.
offer an expected total return of 12%. The dividend is increasing at a constant
8% per year. The dividend yield must be:
61. The
common stock of Grady Co. had an 11.25% rate of return last year. The dividend
amount was $.70 a share which equated to a dividend yield of 1.5%. What was the
rate of price appreciation on the stock?
62. Wilbert’s Clothing
Stores just paid a $1.20 annual dividend. The company has a policy whereby the
dividend increases by 2.5% annually. You would like to purchase 100 shares of
stock in this firm but realize that you will not have the funds to do so for
another three years. If you desire a 10% rate of return, how much should you
expect to pay for 100 shares when you can afford to buy this stock? Ignore
trading costs.
63. The
Merriweather Co. just announced that it will pay a dividend next year of $1.60
and is establishing a policy whereby the dividend will increase by 3.5%
annually thereafter. How much will one share be worth five years from now if
the required rate of return is 12%?
64. The Bell
Weather Co. is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 20% a year for the next four
years and then decreasing the growth rate to 5% per year. The company just paid
its annual dividend in the amount of $1.00 per share. What is the current value
of one share if the required rate of return is 9.25%?
65. NuTek, Inc. is expecting a period of intense
growth and has decided to retain more of its earnings to help finance that
growth. As a result it is going to reduce its annual dividend by 10% a year for
the next three years. After that, it will maintain a constant dividend of $.70
a share. Last month, the company paid $1.80 per share. What is the value of
this stock if the required rate of return is 13%?
66. The Lory Company had net earnings of $127,000
this past year. Dividends were paid of $38,100 on the company's equity of
$1,587,500. If Lory has 100,000 shares outstanding with a current market price
of $11.625 per share, what is the required rate of return?
67. DoctorsOnCall, a newly formed medical
group, just paid a dividend of $.50. The company’s dividend is expected to grow
at a 20% rate for the next 5 years and at a 3% rate thereafter. What is the
value of the stock if the appropriate discount rate is 12%?
68. Calculate the
YTM on a bond priced at $1,036 which has 2 years to maturity, a 10% annual coupon
rate, and a return of $1,000 at maturity.