MBAP 6061 – Managerial Finance

Mid-term 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 IBM stock which you intend to sell today. Since you will sell it in the secondary market, IBM will receive no direct cash flows as a consequence of your sale. Why, then, should IBM’s management care about the price you get for your shares?

 

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, long-term debt of a firm is $280 and total debt is $340. At the end of the year, long-term 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 long-term debt of $180 and ending long-term 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 long-term 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        Long-term 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 non-cash 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

Long-term 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 common-size 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 price-earnings 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 price-earnings 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 debt-equity 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 semi-annually

                                    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.   Nu-Tek, 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.   Doctors-On-Call, 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.