Midterm Examination Guide for Financial Management 1

COVERAGE and reminders about each chapter

1. Chapter 1 Introduction
Understand what financial management is and its objective
Read more on corporations, corporate responsibility and business ethics
Recognize the roles of the controller and the treasurer
2. Chapter 2 Analysis of Financial Statements
Memorize ALL financial ratios and their categories
Know how to comprehend financial ratios
Be familiarized with the basic financial statements and their content
3. Chapter 3 Financial Planning and Cash Flows
Know how to draft a statement of cash flows using direct and indirect method
Study what items will be included in operating, investing and financing activities
Practice your analyzation skills to help you in drafting a cash budget
4. Chapter 4 Time Vale of Money
Memorize ALL the formula and their uses

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FINANCIAL RATIOS
3-1 Liquidity Ratios You are evaluating the balance sheet for Goodmans Bees Corporation.
From the balance sheet you find the following balances: Cash and marketable securities =
$400,000, Accounts receivable = $1,200,000, Inventory = $2,100,000, Accrued wages and
taxes = $500,000, Accounts payable = $800,000, and Notes payable = $600,000. Calculate
Goodman Bees Current ratio, Quick ratio, and Cash ratio.
3-2 Liquidity Ratios The top part of Ramakrishnan Inc,s 2015 and 2016 balance sheets is
listed below (in millions of dollars).
Current assets:
2015 2016 Current liabilities:
20015
2016
Cash and marketable
Accrued wages and
securities
$ 15 $ 20 taxes
$ 18
$
19
Accounts receivable
75
84 Accounts payable
45
51
Inventory
110
121 Notes payable
40
45
Total
$200 $225 Total
$103
$115
Calculate Ramakrishnan Inc.s Current ratio, Quick ratio, and Cash ratio for 2015 and 2016.
3-3 Asset Management Ratios Tater and Pepper Corp. reported sales for 2016 of $23
million. Tater and Pepper listed $5.6 million of inventory on its balance sheet. Calculate Tater
and Peppers 2016 EBIT. Using a 365 day year, how many days did Tater and Peppers
inventory stay on the premises? How many times per year did Tater and Peppers inventory
turnover?
3-4 Asset Management Ratios Mr. Huskers Tuxedos, Corp. ended the year 2016 with an
average collection period of 32 days. The firms credit sales for 2016 were $33 million. What
is the year-end 2016 balance in accounts receivable for Mr. Huskers Tuxedos?
3-5 Debt Management Ratios Tiggies Dog Toys, Inc. reported a debt-to-equity ratio of
1.75 times at the end of 2016. If the firms total debt at year-end was $25 million, how much
equity does Tiggies have?
3-6 Debt Management Ratios You are considering a stock investment in one of two firms
(LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry.

LotsofDebt, Inc. finances its $25 million in assets with $24 million in debt and $1 million in
equity. LotsofEquity, Inc. finances its $25 million in assets with $1 million in debt and $24
million in equity. Calculate the debt ratio, equity multiplier, and debt-to-equity ratio for the
two firms.
3-7 Profitability Ratios Maggies Skunk Removal, Corp.s 2016 income statement listed net
sales = $12.5 million, EBIT = $5.6 million, net income available to common stockholders =
$3.2 million, and common stock dividends = $1.2 million. The 2016 year-end balance sheet
listed total assets = $52.5 million, and common stockholders equity = $21 million with 2
million shares outstanding. Calculate the profit margin, basic earnings power ratio, ROA,
ROE, and dividend payout ratio.
3-8 Profitability Ratios In 2016, Jakes Jamming Music, Inc. announced an ROA of 8.56%,
ROE of 14.5%, and profit margin of 20.5%. The firm had total assets of $16.5 million at yearend 2016. Calculate the 2016 values of net income available to common stockholders,
common stockholders equity, and net sales for Jakes Jamming Music, Inc.
3-9 Market Value Ratios You are considering an investment in Roxies Bed & Breakfast,
Corp. During the last year the firms income statement listed addition to retained earnings =
$4.8 million and common stock dividends = $2.2 million. Roxies year-end balance sheet
shows common stockholders equity = $35 million with 10 million shares of common stock
outstanding. The common stocks market price per share = $9.00. What is Roxies Bed &
Breakfasts book value per share and earnings per share? Calculate the market-to-book ratio
and PE ratio.
3-10 Market Value Ratios Gambit Golfs market-to-book ratio is currently 2.5 times and PE
ratio is 6.75 times. If Gambit Golfs common stock is currently selling at $12.50 per share,
what is the book value per share and earnings per share?
3-11 DuPont Analysis If Silas 4-Wheeler, Inc. has an ROE = 18%, equity multiplier = 2, a
profit margin of 18.75%, what is the total asset turnover ratio and the capital intensity ratio?
3-12 DuPont Analysis Last year Hassans Madhatter, Inc. had an ROA of 7.5%, a profit
margin of 12%, and sales of $10 million. Calculate Hassans Madhatters total assets.
3-13 Liquidity Ratios Brendas Bar and Grill has current liabilities of $15 million. Cash
makes up 10 percent of the current assets and accounts receivable makes up another 40
percent of current assets. Brendas current ratio = 2.1 times. Calculate the value of
inventory listed on the firms balance sheet.
3-14 Asset Management and Profitability Ratios You have the following information on
Els Putters, Inc.: sales to working capital = 4.6 times, profit margin = 20%, net income
available to common stockholders = $5 million, and current liabilities = $6 million. What is
the firms balance of current assets?
3-15 Debt Management Ratios Tiggies Dog Toys, Inc. reported a debt to equity ratio of
1.75 times at the end of 2016. If the firms total assets at year-end were $25 million, how
much of their assets are financed with debt and how much with equity?
3-16 Debt Management Ratios Calculate the times interest earned ratio for LaTonyas
Flop Shops, Inc. using the following information. Sales = $1 million, cost of goods sold =
$600,000, depreciation expense = $100,000, addition to retained earnings = $97,500,
dividends per share = $1, tax rate = 30%, and number of shares of common stock
outstanding = 60,000. LaTonayas Flop Shops has no preferred stock outstanding.
3-17 Profitability Ratios Ricks Travel Service has asked you to help piece together
financial information on the firm for the most current year. Managers give you the following
information: sales = $4.8 million, total debt = $1.5 million, debt ratio = 40%, ROE = 18%.
Using this information, calculate Ricks ROA.

3-18 Market Value Ratios Leonatti Labs year-end price on its common stock is $35. The
firm has total assets of $50 million, the debt ratio is 65%, no preferred stock, and there are 3
million shares of common stock outstanding. Calculate the market-to-book ratio for Leonatti
Labs.
3-19 DuPont Analysis Last year, Stumble-on-Inn, Inc. reported an ROE = 18%. The firms
debt ratio was 55%, sales were $15 million, and the capital intensity ratio was 1.25 times.
Calculate the net income for Stumble-on-Inn last year.
3-20 DuPont Analysis You are considering investing in Nuran Security Services. You have
been able to locate the following information on the firm: total assets = $16 million,
accounts receivable = $2.2 million, ACP = 25 days, net income = $2.5 million, and debt-toequity ratio = 1.2 times. Calculate the ROE for the firm.

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CASH FLOWS
Changes Included in Cash Flow from Operating Activities (CFO):
Under Indirect Method
The statement of cash flows typically arrives at cash from operations by adding to (or
subtracting from) NET INCOME three types of adjustments:
1. Non-cash expenses
2. Non-cash gains
1. Changes in working capital (current assets current liabilities)

Under Direct Method

Balance Sheet Account
Accounts receivable
Inventories
Prepaid expenses
Accounts payable/Notes payable
Advances from customers
Rent payable
Interest payable
Income tax payable
Deferred income taxes

Cash Flow Description

Cash received from customers
Cash paid for inputs (materials)
Cash expenses
Cash paid for inputs/expenses
Cash received from customers
Cash expenses
Interest paid
Income taxes paid
Income taxes paid

Changes Included in Cash Flow from Investing Activities (CFI):

Balance Sheet Account
Cash Flow Description
Property, plant, and equipment
Capital expenditures
Proceeds from property sales
**When net fixed asset increase or decrease, consider the depreciation expense.
Investment in affiliates
Cash paid for acquisitions and investments

Changes Included in Cash Flow from Financing Activities (CFF):

Balance Sheet Account
Cash Flow Description
Notes payable to banks
Increase or decrease in debt
Short-term debt
Increase or decrease in debt
Long-term debt
Increase or decrease in debt
Bonds payable
Increase or decrease in debt
Common stock
Equity financing or repurchase
Retained earnings
Dividends paid

The relationship between balance sheet changes and cash flows can be summarized as
follows:

Increases (decreases) in assets represent net cash outflows (inflows). If an asset

increases, the firm must have paid cash in exchange.
Increases (decreases) in liabilities represent net cash inflows (outflows). When a
liability increases, the firm must have received cash in exchange.

SAMPLE PROBLEM
(This is the same problem from your recent quiz)
The following financial statements are from the 2016 Annual Report of the Goodluck
Company:
Income Statement for Year Ended December 31, 2016 (in thousands)
Sales
P1,000
Cost of goods sold
(650)
Depreciation expense
(100)
Sales and general expense (100)
Interest expense
(50)
Income tax expense
(40)
Net income
P60
Balance Sheets at December 31, 2015 and 2016 (in thousands)
2015
2016
Cash
P50
P60
Accounts receivable
500
520
Inventory
750
770
Current assets
1,300
1,350
Fixed assets (net)
500
550
Total assets
P1,800
P1,900
Notes payable to banks
Accounts payable
Interest payable
Current liabilities
Long-term debt
Deferred income tax
Share Capital
Retained earnings
Total liabilities & equity

P100
590
10
700
300
300
400
100

P75
615
20
710
350
310
400
130

P1,800

P1,900

Requirement: Prepare the 2016 statement of cash flows for Goodluck using direct and
indirect method.

.
CASH BUDGETTING
The Simmons Company is planning to request a line of credit from its bank. The following
sales forecasts have been made for parts of 2015 and 2016:
May 2015
June
July

P150,000
150,000
300,000

August
September
October

450,000
600,000
300,000

November
300,000
December
75,000
January
P150,000
2016
Collection estimates obtained from the credit and collection department are as follows:
collected within the month of sale, 5 percent; collected the month following the sale, 80
percent; collected the second month following the sale, 15 percent. Payments for labor and

raw materials are typically made during the month following the month in which these costs
are incurred. Total labor and raw materials costs are estimated for each month as follows:
May 2015
June
July
August

P75,000
75,000
105,000
735,000

September
October
November
December

255,000
195,000
135,000
P75,000

General and administrative salaries will amount to approximately P22,500 a month; lease
payments under long-term lease contracts will be P7,500 a month; depreciation charges will
be P30,000 a month; miscellaneous expenses will be P2,250 a month; income tax payments
of P52,500 will be due in both September and December; and a progress payment of
P150,000 on a new research laboratory must be paid in October. Cash on hand on July 1 will
amount to P110,000 and a minimum cash balance of P75,000 will be maintained throughout
the cash budget period.
Prepare a cash budget for the last three months of 2015 with an estimate of required
financing (or excess funds).

TIME VALUE OF MONEY SAMPLE PROBLEMS

1

You are planning to retire in twenty years. You'll live ten years after retirement. You
want to be able to draw out of your savings at the rate of P10,000 per year. How
much would you have to pay in equal annual deposits until retirement to meet your
objectives?
Assume
interest
remains
at
9%.

You can deposit P4000 per year into an account that pays 12% interest. If you deposit
such amounts for 15 years and start drawing money out of the account in equal
annual installments, how much could you draw out each year for 20 years?

What is the value of a P100 perpetuity if interest is 7%?

You deposit P13,000 at the beginning of every year for 10 years. If interest is being
paid at 8%, how much will you have in 10 years?

You are getting payments of P8000 at the beginning of every year and they are to
last another five years. At 6%, what is the value of this annuity?

How much would you have to deposit today to have P10,000 in five years at 6%
interest compounded semiannually?

Construct an amortization schedule for a 3-year loan of P20,000 if interest is 9%.

If you get payments of P15,000 per year for the next ten years and interest is 4%,
how much would that stream of income be worth in present value terms?

Your company must deposit equal annual beginning of year payments into a sinking
fund for an obligation of P800,000 which matures in 15 years. Assuming you can earn
4% interest on the sinking fund, how much must the payments be?

10 If you deposit P45,000 into an account earning 4% interest compounded quarterly,

how much would you have in 5 years?
11 How much would you pay for an investment which will be worth P16,000 in three
years? Assume interest is 5%.
12 You have P100,000 to invest at 4% interest. If you wish to withdraw equal annual
payments for 4 years, how much could you withdraw each year and leave P0 in the
investment account?

13 You are considering the purchase of two different insurance annuities. Annuity A will
pay you P16,000 at the beginning of each year for 8 years. Annuity B will pay you
P12,000 at the end of each year for 12 years. Assuming your money is worth 7%, and
each costs you $75,000 today, which would you prefer?
14 If your company borrows P300,000 at 8% interest and agrees to repay the loan in 10
equal semiannual payments to include principal plus interest, how much would those
payments be?
15 You deposit P17,000 each year for 10 years at 7%. Then you earn 9% after that. If
you leave the money invested for another 5 years how much will you have in the
15th year?