End-of-term exam (2010/2011) Question 1: (20 marks)

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1

End
-
of
-
term exam (
2010
/
2011
)


Name………………………………………….…… Student No……..………………


Question
1
:








(20 m
arks)

Use the information below to
:

a.

Calcu
lat
e the firm’s 2010 financial ratios; and

b.

Analyze the firm’s current financial position from both a cross
-
sectional and a
time
-
series viewpoint;

(all figures are in US$)

Beach Camp Manufacturing Company

Income Stat
ement

For the year ended December 31, 2010

Sales revenue



5,075,000

Less cost of goods sold

3,704,000

Gross Profit



1,371,000

Less operating expenses

1,218,000

Operating profits



153,000

Less: Interest expense



93,000

Net profit before taxes



60,000

Less: Taxes




24,000

Net profit after taxes



36,000

Less Preferred stock dividends

3,000

Retained earnings



33,000













=======

Beach Camp Manufacturing Company

Balance Sheet

As at December 31, 2010

Assets






Liabilities

C
ash





25,000

Accounts Payable

230,000

Accounts Receivable



805,556

Notes Payable


311,000

Inventories*




700,625

Accruals




75,000

Total Current Assets



1,531,181

Total



616,000

Fixed Assets



1,593,819

Long Term Debt
1
,165,250







Shareholder

Equity







Preferred Stock








(2500 shares)


50,000







Ordinary Stock







(100,000 shares) 400,000







Retained Earnings

893,750


Total




3,125,000

Total


3,125,000







=======

=======

*Inventories on January 1, 2010 amounted to $763,445





Financial Management


The Islamic University of Gaza

Teacher: Ramadan Al
-
Omari

Faculty of Commerce

Time : Two hours

Department of Accounting


2

Historical and Industry Average Ratios






Actual

Actual

Actual


Industry Average



Ratio





2008

2009

2010




2010

Current Ratio




1.7

1.8

……..


1.5

Qu
ick Ratio




1.0

0.9

……..


1.2

Inventory Turnover



5.2

5.0

………

10.2

Average Collection Period


50.7

55.8

………

46.0

Total Assets Turnover


1.5

1.5

………

2.0

Debt Ratio (%)



45.8

54.3

………

24.5

Gross Profit Margin (%)


27.5

28.0

……….

26.0

Return on Total Asse
ts (%)


1.7

1.5

……….

2.4

Earnings per share (EPS)


0.50

0.49

……….

0.30


Question
2
:











(
20

marks)

Use the information below to prepare a cash flow forecast for the months March to May 2011,
noting that the business was started on 1 March 2011. Us
e the following table:


Details

March

April

May

Opening cash
balance

2,000



Cash from Sales




Cash from Other
Income




5
-
year Loan




Total Receipts




Purchases




Payment for Rent




Wages and Salaries




Purchase of
equipment




Total
Disbu
rsements




Closing cash
balance




a.

On 1 March the firm will have an opening cash balance of US$ 2,000.

b.

A 5
-
year loan of $ 10,000 from the Success Bank will be deposited in the firm’s bank
account in April 2011.

c.

Sales forecast for the months March to May

will be $ 60,000, $ 80,000, and $ 100,000
respectively. The terms of payment for sales will be 40% for cash, 30% will be collected
in the next month, and the remaining 30% will be collected in the following month.

d.

The firm is expected to receive other in
come of $ 3,000 each month.

e.

The firm’s purchases are expected to be $ 40,000, $ 60,000, and $ 70,000 respectively for
the months March to May. Payments for purchases will be made in full at the end of the
following month.

f.

Rent payable will be $ 5000 per m
onth.

g.

Wages and Salaries will be 10% of the previous month’s sales. The wages and salaries
for March 2011 are expected to be $ 6,000.

h.

A cash purchase of equipment costing $ 4,000 is scheduled during May 2011.




3

Question 3
: Mark the correct answer






(20

marks)

1.
The bond’s
current yield
is the

a.

interest on a 90
-
day Treasury bill.

b.

annual interest divided by the current price of the security.

c.

annual interest divided by the par value of a security.

d.

none of the above.

2.
The concept of
correlation

is esse
ntial to developing an efficient portfolio because

a.


higher correlation between asset returns,
results in

greater diversification of risk.

b.

the lower the correlation between asset returns, the greater the diversification of risk
.

c.


higher
correlation between
asset returns,
results in

lower diversification of risk.

d.

lower the correlation between asst returns,
results in

lower
diver
sification of risk.

3.
Whi
ch of the following is the
correct

statement?

a.

Managerial Finance is concerned with the

manage
ment of

the f
inancial affairs of
large public companies only.

b.

A
ccounting is primarily concerned with the presentation of financial

data
.

F
inancial
manager
s are

primarily concerned with
analyzing and interpreting

this information
.

c.

The financial manager is not interest
ed in issues regarding the economic conditions.

d.

The financial decision making process is not concerned with the global market
conditions
.

4
.
The bond
coupon rate

is
the

a.

current yield of a bond.



d
. market value of a bond.

b.

difference between the par valu
e and the market value of a bond.

c.

specified interest rate that must be periodically paid.

5.
Combining
un
-
correlated

assets

a.

can increase risk.



c. produces an inefficient portfolio.

b.

has no effect on risk.


d. can reduce risk.

6
.
Beta

is a risk coeffic
ient which measures

the

a.

sensitivity of the particular stock’s return to changes in market conditions.

b.

sensitivity of a

st
ock’s return to the coupon rate o
f

a 90
-
day Treasury bill.

c.

risk premium on a particular stock.

d.

dividend earned on a particular stock.

7
.
To adjust the income statement to show
cash flows from operations

a.

all non
-
cash charges

should be added back to net profit after taxes.

b.

amounts paid as dividends to shareholders should be added back to net profit .

c.

amounts paid to suppliers should be add
ed back to net profit after taxes.

d.

amounts received from customers should be added back to net profit
.

8.
Corporate Governance

is the

a.

Accounting standards that govern the preparation of the financial statements.

b.

The group of stakeholders that is concerne
d with the Company’s operations.

c.

S
ystem used to direct and control a corporation.

d.

None of the above.

9
.
Investors will hold
portfolios

because

a.

they will diversify

away a portion of the risk
.

b.

portfolios are less risky than single assets.

c.

investors are gene
ral speaking risk averse.

d.

all of the above






4

10
.
Calculating and interpreting
financial ratios

is essential to

a.

assess a firm’s financial condition and performance.

b.

the shareholders, creditors, and the firm’s own management.

c.

prospective investors and pro
spective lenders of funds.


d. all the above.

1
1
. Which of the following is the
incorrect

statement?

a.

Finance is concerned with the process, institutions, markets, and instruments involved
in the transfer of money among individuals, businesses,
etc.

b.

Finan
cial Services

is the area of finance concerned with the design and delivery of
advice and fin
ancial products to
businesses, and government.

c.

Stakeholders include all groups of individuals who have a direct economic link to the
firm including employees, cust
omers, suppliers, creditors,

and

owners
.

d.

The main function of financial management is the preparation of the financial
statements. The Board of Directors
interprets and analyzes
this financial information.

12. If investors are rational and therefore
ris
k averse
, they will choose to invest in

a.

single assets rather than portfolios.

c. bonds only.

b.

portfolios rather than single assets.

d. equities only.

13. In the context of business and finance,
risk
is defined as

a.

the chance of suffering a financial loss
.

c. the possibility of losing one’s money.

b.

the uncertainty of making profits.


d. all of the above.

14. Borrowers are willing to pay a higher
rate of interest

for long
-
term funds because

a.

long term debt is not allowed by governments.

b.

borrowing money for

long periods is not common practice.

c.

banks prefer short term debt.

d.

such a rate could be locked in for a longer period of time.

15. The
correlation coefficient

for correlated assets is

a.

close to zero.


c. equal to minus one.

b.

equal to one.


d. any value
between minus one and zero.

16. If two
series

move in the same direction, they are

a.

negatively correlated.

c. not correlated.

b.

positively correlated.

d. none of the above.

17. The
risk
-
free rate of interest
, RF, compensates investors

a.

for the real rate

of return and

for the expected rate of inflation.

b.

for the risk involved in investing in bonds.

c.

for the risk involved in investing in equity.

d.

for the expected rate of inflation only.

18. A firm can have a
net loss

and still have
positive cash

flow from ope
rations when

a.

depreciation and other non
-
cash charges are greater than the net loss.

b.

the firm decides not to pay dividends to its stockholders.

c.

non
-
cash charges are less than the net loss.


d. none of the above.

19.
Ratio Analysis

directs attention to

a.

po
tential areas of concern in an entity’s performance.

b.

a problem in its board of directors.

c.

deterioration in the market value of its stock.

d.

bad investment decisions.

20
.
If an investor is willing to invest in a
high risk investment
, he or she is considered


a.

risk
-
averse




c. risk
-
seeking.


b.

risk
-
indifferent



d. none of the above.


G

O O D L U C K