Managerial Finance Mid Term Take Home Exam.

30 Marks

Name: Registration No:

Question# 1 Multiple Choice Questions 20 Marks

Question Answ
# er
1  A
2  B
3  C
4  C
5  E
6  A
7  E
8  E
9  C
10  A
11 D
12  C
13  D
14  C
15  B
16  B
17  A
18  E
19 C
20  E

1. Neal's Nails has an 11% return on assets and a 30% dividend payout ratio. What is the internal growth rate?

 A. 8.34% B. 7.70% C. 8.46% D. 11.99% E. 7.11%

 2. Abusiness created as a distinct legal entity composed of one or more individuals or entities is called a:
 
A. general partnership. B. corporation. C. limited partnership. D. unlimited liability company. E. sole
proprietorship.
 
3. Accounting profits and cash flows are:

A. generally the same since they reflect current laws and accounting standards. B. generally the same since
accounting profits reflect when the cash flows are received. C. generally not the same since GAAP allows for
revenue recognition separate from the receipt of cash flows. D. generally not the same because cash inflows
occur before revenue recognition. E. Both c and d.

 4. Afirm has 5,000 shares of stock outstanding, sales of $6,000, net income of $800, a price-ratio of 10, and a
book value per share of $.50. What is the market-to-book ratio? 

A. 1.6 B. 3.6 C. 3.2 D. 2.4 E. 3.0

5. The person generally directly responsible for overseeing the cash and credit functions, financial planning, and
capital expenditures is the:

A. controller. B. chairman of the board. C. chief operations officer. D. director. E. treasurer.

 6. Financial managers should strive to maximize the current value per share of the existing stock because: 

A. the current stockholders are the owners of the corporation. B. the managers often receive shares of stock as
part of their compensation. C. doing so guarantees the company will grow in size at the maximum possible rate.
D. doing so means the firm is growing in size faster than its competitors. E. doing so increases the salaries of all
the employees.
 

7. A banker considering loaning a firm money for ten years would most likely prefer the firm have a debt ratio
of _____ and a times interest earned ratio of _____.

 A. .45; 1.75 B. .50; 1.00 C. .40; 2.50 D. .75; .75 E. .35; 3.00

8. The Sarbanes Oxley Act of 2002 is intended to:

 A. reduce corporate revenues. B. decrease audit costs for U.S. firms. C. not have any effect on foreign
companies. D. protect financial managers from investors. E. protect investors from corporate abuses.

9. Working capital management includes decisions concerning which of the following? I. accounts payable II.
long-term debt III. accounts receivable IV. Inventory.

A. I and III only B. I, II, and III only C. I, III, and IV only D. II and IV only E. I and II only
10. A firm has a total debt ratio of .47. This means that that firm has 47 cents in debt for every: 

A. $.53 in equity. B. $1 in current assets. C. $.53 in total assets. D. $1 in total sales. E. $1 in equity.

11. The process of planning and managing a firm's long-term investments is called: 

A. financial depreciation. B. capital structure. C. agency cost analysis. D. capital budgeting. E. working capital
management.

12. Which of the following help convince managers to work in the best interest of the stockholders?

I. compensation based on the value of the stock. II. stock option plans. III. threat of a proxy fight. IV. threat of
conversion to a partnership.

A. I and II only B. II and III only C. I, II and III only D. I and III only E. I, II, III, and IV

13. Which of the following are advantages of the corporate form of business ownership?

I. limited liability for firm debt. II. double taxation. III. ability to raise capital. IV. unlimited firm life.

A. I and II only. B. I, II, and III only. C. II, III, and IV only. D. I, III, and IV only. E. III and IV only
 

14. Samuelson's has a debt-equity ratio of 40%, sales of $8,000, net income of $600, and total debt of $2,400.
What is the return on equity? 

A. 6.25% B. 7.50% C. 10.00% D. 11.25% E. 9.75%

15. 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?

A. 6.7% B. 11.2% C. 19.6% D. 8.4% E. 14.6%

A. 96.9 days B. 86.9 days C. 65.2 days D. 117.3 days E. 85.2 days

17. 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?

A. .55 B. .30 C. 1.30 D. 1.82 E. .77

18. Which one of the following actions by a financial manager creates an agency problem?

A. agreeing to pay bonuses based on the book value of the company stock. B. refusing to lower selling prices if
doing so will reduce the net profits. C. increasing current costs in order to increase the market value of the
stockholders' equity. D. refusing to borrow money when doing so will create losses for the firm. E. agreeing to
expand the company at the expense of stockholders' value

 19. The Green Giant has a 5% profit margin and a 40% dividend payout ratio. The total asset turnover is 1.40
and the equity multiplier is 1.50. What is the sustainable rate of growth?

A. 6.80% B. 6.83% C. 6.72% D. 6.30% E. 6.53%

20. The percentage of sales method: 

A. requires that all accounts grow at the same rate. B. separates accounts that vary with sales and those that do
not vary with sales. C. allows the analyst to calculate how much financing the firm will need to support the
predicted sales level. D. Both A and B. E. Both B and C.
 Question # 2 Essay 10 Marks

1. A firm has days' sales in inventory of 105 days, an average collection period of 35 days, and takes 42 days,
on average, to pay its accounts payable. Taken together, what do these three figures imply about the firm's
operations and its cash flows? 

Day’s Sales in Inventory = 105 Days.

Cash Conversion Cycle (CCC) = Avg. Collection period + Days Inventory held - Days payable outstanding
= 35 + 105 - 42 = 98 Days

Interpretation: Assuming normal operation with no extraordinary/unknown events

1- Inventory Management Policy should be reviewed, 105 Days seems to be a big duration for inventory, but this -of
course- depends on the type of industry that the company specializes in (Inventory type), A benchmark or peer company
should be used as a reference for comparison.

2- Payable Outstanding duration is not a concern and suppliers should feel ease with such short period.

3- Avg. Collection Period is very good considering that credit sales are typically paid within 30 days.

4- Cash Cycle measures the amount of days between paying the vendor for the inventory and receiving the cash from the
customer, it shows how quickly and efficiently a company can buy, sell, and collect on its inventory.
In our case, CCC is too long (Above 3 months) which means recession, high market competition or that the company has
a slow-moving inventory by nature.
A small conversion cycle means that a company’s money is tied up in inventory for less time. In other words, a company
with a small conversion cycle can buy inventory, sell it, and receive cash from customers in less time.
In many companies, Cash cycle is negative which indicates they can collect cash from investments even before they pay
for their expenses (Payable Accounts).

 2. Doyou think agency problems arise in sole proprietorships and/or partnerships in comparison to
corporations? 

Agency problems arise when there is a separation of ownership and management in a business.
In a sole proprietorship and a small partnerships, such separation is not likely to exist to the degree it does in a
corporation. However, there is still potential for agency conflicts.

Agency problems in limited partnership firms could arise between the unlimited and limited partners.
Also, in partnerships, if partners agreed to hire a manager (employee) to run the business for them, agency problems could
happen.

Generally speaking, Agency problems always happens in corporations due to the dispersion of ownership which means
that management effectively controls the firm.