MID TERM 1 Financial Management Question No: 1 Last year, you deposited $25,000 into a retirement savings account

at a fixed rate of 7.5 percent. Today, you could earn a fixed rate of 8 percent on a similar type account. However, your rate is fixed and cannot be adjusted. How much less could you have deposited last year if you could have earned a fixed rate of 8 percent and still have the same amount as you currently will when you retire 40 years from today? A) $1,218.46 less B) $1,666.67 less C) $3,628.09 less D) $4,331.30 less

Future value = $25,000 (1 + .075)41 = $484,938.92; Present value = $484,938.92 = $20,668.70; Difference = $25,000.00 $20,668.70 = $4,331.30

[1

(1 + .08)41]

Question No: 2 You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $150,000 today or receive payments of $1,627.89 a month for 10 years. You can earn 7.5 percent on your money. Which option should you take and why? A) You should accept the payments because they are worth $151,291.91 to you today. B) You should accept the payments because they are worth $154,311.12 to you today. C) You should accept the $150,000 because the payments are only worth $137,141.17 to you today. D) You should accept the payments because they are worth $153,417.68 to you today.

Question No: 3 Swenson just decided to save $2,200 a month for the next 6 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 5.5 percent interest compounded monthly. They deposit the first $2,200 today. If the company had wanted to deposit an equivalent lump sum today, how much would they have had to deposit?

A) $130,297.18 B) $135,273.51 C) $138,001.14 D $137,778.92

Question No: 4 Foot Wholesalers has sales of $1,387,400, costs of goods sold of $891,400, inventory of $188,936, and accounts receivable of $94,800. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?

A) 49.8 days B) 53.2 days C) 77.4 days D) 84.1 days

Inventory turnover = $891,400

Question No 5

$188,936 = 4.718; Days in inventory = 365

4.718 = 77.4 days

Some financial data of a company is given below Item Total assets Total equity (all common) Total debt Annual interest Total sales EBIT Earnings available for Common stockholders Accounts $10,000,000 8,000,000 1,000,000 100,000 25,000,000 6,250,000 3,690,000

Part 5.1: Calculate the Debt Ratio: A) 20%

B) 10% C) 25% Debt Ratio: Correct Answer B Debt Ratio = Total Debt / Total Assets = $1,000,000 / $10,000,000 = .10 = 10%

Part 5.2 Calculate the Return on Assets A) 35.7% B) 36.9% C) 33.41% Part 6.2: ROA: Correct Answer B ROA = Net Profit After Tax / Total Assets = $3,690,000 / $10,000,000 = .369 = 36.9% Part 5.3 Calculate the Net Profit Margin A) 35% B) 41% C) 36% NPM = Earnings available for common stockholders / sale = 3,690,000 / 25,000,000 = 14.76% Part 5.4 Calculate the Return On Common Equity. A) 48.52% B) 45.21% C) 46.12% Part 5.4: Correct Answer C Return On Equity= Net Profit After Tax / Stockholders Equity = $3,690,000 / $8,000,000 = .4612 = 46.12%

Question No: 6 Gateway has annual sales of $1.22 million, total debt of $380,000, total equity of $750,000, and a profit margin of 7.45 percent. What is the return on assets?

A) 6.97 percent B) 8.04 percent C) 7.56 percent D) 7.78 percent

Question No: 7 Toyo Company's operating profits are $105,000, interest expense is $35,000, and earnings before taxes are $75,000. What is Toyo's interest coverage ratio? A) B) C) D) 1 time 2 time 4 time 3 time Operating Profit/ Interest Expense 105,000/ 35,000 = 3 times Question No: 7 An analyst has collected the following data about a firm: Receivables turnover = 20 times. Inventory turnover = 16 times. Payables turnover = 24 times.

Interest Coverage Ratio:

What is the cash conversion cycle? A) Not enough information is given. B) 26 days. C) 56 days.

Correct Answer: B Solution:

Cash conversion cycle = receivables collection period + inventory processing period payables payment period. Receivables collection period = (365 / 20) = 18 Inventory processing period = (365 / 16) = 23 Payables payment period = (365 / 24) = 15 Cash conversion cycle = 18 + 23 15 = 26

Question No: 9 It will cost $15,500 a year for 6 years when an 7-year old child is ready for college. How much should be invested today if the child will make the first of six annual withdrawals 12-years from today? The expected rate of return is 7%. A) B) C) D) $73,881.36 $32804.20 $35,101.36 $64,511.72

First, find the present value of the college costs as of the end of year 9. (Remember that the PV of an ordinary annuity is as of time = 0. If the first payment is in year 10, then the present value of the annuity is indexed to the end of year 9). N = 6; I = 7%; PMT = 15,500; CPT PV = $73,881.36. Second, find the present value of this single sum: N = 11; I= 8%; FV = 73,881.36; PMT = 0; CPT PV = 35,101.25 Question No: 10 If $2,500 were put into an account at the end of each of the next 10 years earning 15% annual interest, how much would be in the account at the end of ten years? A) B) C) D) $41,965 $27,461 $50,759 $59,487

Future Value of annuity Correct Answer: C N = 10; I = 15; PMT = 2,500; CPT FV = $50,759

Question No: 11 An investor will receive an annuity of $5,000 a year for seven years. The first payment is to be received 5 years from today. If the annual interest rate is 11.5%, what is the present value of the annuity? A) $15,000

B) $13,453 C) $23,185 D) $25,565 Correct Answer: A PMT = 5,000; N = 7; I = 11.5%; value (at t = 4) = 23,185.175. Therefore, PV (at t = 0) = 23,185.175 / (1.115) 4 = $15,000.68.

Question No: 12 Ali borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments. What will be the interest payment in second year? A) $2,100.00 B) $4,970.34 C) $1,489.61 D) $3,491.88

Correct Ans: C

End of Loan Interest Principal 1 2 $ 6,459.95 $ 6,459.95

Beginning of Payments Principal $15,000.00 10,640.05 $2,100.00 1,489.61

End of Year Year

Payment Year Principal

$4,359.95

$10,640.05

Question No 13 Given the following information about a firm: Net Sales = $1,700, Operating Expenses = $275. Tax Rate = 34%. Gross Profit Margin A) B) C) D) 48.52% 38.23% 54.41% 42.87% Operating Profit Margin 32.35% 48.52% 38.23% 42.01% Cost of Goods Sold = $775. Interest Expenses = $100.

What are the gross and operating profit margins?

Correct Answer: C

Gross profit margin = ($1,700 Net Sales $775 COGS) / $1,700 net sales = 925 / 1,700 = 0.5441 Operating profit margin = ($1,700 Net Sales $775 COGS $275 Operating Expenses) / $1,700 Net Sales = $650 / $1700 = 0.3823

Question No 14 Javaid wishes to determine the future valueat the end of 2 years of a $15,000 deposit made today into an account paying anominal annual rate of 12%. Find the future value of Javaids deposit, assuming that interest is compounded (1) Monthly and (2) Continuously. Monthly $19,046.02 $18,816 $19046.02 $15,842 Continuously $19,068.74 $19,001.55 $19,120.70 $19,420.78

A) B) C) D)

Correct Answer A Monthly: FV = PV x FVIF1%,24 = $15,000 x (1.270) = = $19,046.02 Continuously: FV (Continuously) = PV x ext FV = PV x 2.7183.24 = $15,000 x 1.27125 = $19,068.74

Question No: 15 Whats the effective rate of return on an investment that generates a return of 16%, compounded quarterly? A) B) C) D) 81.06% 14.58% 16.98% 117.61%

Correct Answer C = (1 + 0.16 / 4)4 1 = 1.1698 1 = 0.1698.

Question No 16 Honda Manufacturing Company reported the following selected financial information for 2010: Accounts payable turnover Cost of goods sold Average inventory Average receivables Total liabilities Interest expense Cash conversion cycle 5.0 $30 million $3 million $8 million $35 million $2 million 13.5 days

Assuming 365 days in the calendar year, calculate Honda's sales for the year. A) $52.3 Million B) $57.8 Million C) $58.4 Million

Solution Correct Answer: C Set up the cash conversion cycle formula and solve for the missing variable, sales. Days in payables is equal to 73 [365 / 5 accounts payable turnover]. Days in inventory is equal to 36.5 [365 / ($30 million COGS / $3 million average inventory)]. Given the cash conversion cycle, days in inventory, and days in payables Now calculate days in receivables of 50 [13.5 days cash conversion cycle + 73 days in payables 36.5 days in inventory]. Given days in receivables of 50 and average receivables of $8 million, sales are $58.4 million [($8 million average receivables / 50 days) 365].

Question No 17

Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $50,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. You have decided that one year from today you will begin depositing 2 percent of your annual salary in an account that will earn 10 percent per year. Your salary will increase at 4 percent per year throughout your career. How much money will you have on the date of your retirement 40 years from today? A) B) C) D) $701,276.07 $150,494.64 $650,189.48 $494,561.12

Solution: Since your salary grows at 4 percent per year, your salary next year will be: Next years salary = $50,000 (1 + .04) Next years salary = $52,000 This means your deposit next year will be: Next years deposit = $52,000(.02) Next years deposit = $1,040 Since your salary grows at 4 percent, you deposit will also grow at 4 percent. We can use the present value of a growing perpetuity equation to find the value of your deposits today. Doing so, we find: PV = C {[1/(r g)] [1/(r g)] [(1 + g)/(1 + r)]t} PV = $1,040{[1/(.10 .04)] [1/(.10 .04)] [(1 + .04)/(1 + .10)]40} PV = $15,494.64 Now, we can find the future value of this lump sum in 40 years. We find: FV = PV(1 + r)t FV = $15,494.64(1 + .10)40 FV = $701,276.07 This is the value of your savings in 40 years.

Question No: 18 Calculate the number of years it will take for the initial deposit to grow to equal thefuture amount at the given interest rate. Initial deposit Future amount Interest rate $7,500 $30,000 15% Numbers of years it will take for the initial deposit grow to equal the future amount: A) B) C) D) 8.52 9.92 9.20 7.79

Correct answer B

FV $30,000

= =

PV x (FVIF15%,n yrs.) $7,500 x (FVIF15%,n yrs.)

4.000 9 < n < 10

FVIF15%,n yrs.

Calculator solution: 9.92

Question No 19 In 12 years, what is the value of $100 invested today at an interest rate of 9% per year, compounded monthly? A) B) C) D) $281.26 $109.38 $293.28 $191.72

Solution: Correct answer C N = 12 12 = 144; I/Y = 9/12 = 0.75; PV = 100; PMT = 0; CPT FV = 293.28. Question No 20 You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your 30th birthday, and you decide, starting today and continuing on every birthday up to and including your 65th birthday, that you will put the same amount into a savings account. If the interest rate is 5%, how much must you set aside each year to make sure that you will have $2 million in the account on your 65th birthday?