Student’s Name:
Answer Key
_(in full)
Student’s ID Number: ____________________________
Date / Start Time
14 February 2017 / 7:00pm-8.00am
Course
FNCE101: Introduction to Managerial Finance
Groups
G6, G7, G8,G9
Instructor
Asst Prof. Aurobindo Ghosh
Total number of pages
(including this instruction sheet)
4
INSTRUCTIONS TO CANDIDATES: All the Best!
1
Write your name in the question/answer booklet and bubble sheet.
2
Shade your ID number on the bubble sheet, using pencil.
3
The examination is closed book and notes. All you need is a financial/scientific
calculator, a pencil and an eraser. Every MCQ has only one best answer.
4
Answer the short answer questions in the space provided.
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You are allowed a two-sided A4 sized sheet of formula sheet/brief notes.
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PLEASE SWITCH OFF ALL MOBILE PHONES, YOU CANNOT USE ANY
WIRED/WIRELESS TRANSMITTING OR RECEIVING DEVICE DURING THE EXAM.
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This paper consists of _____ printed pages including this cover page.
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The examination has a 20% component in the course assessment. It is marked
out of 100 marks. There are two parts in the paper
Part I: Multiple choice questions. Complete all fifteen questions (30 points).
Part II: Writing and calculation component (70 points). Read the instructions carefully.
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You have two hours to complete the paper. Should you finish the paper and wish
to leave the room, raise your hand and the invigilator will collect ALL the papers, including
the question booklet. Please leave the room quietly.
Prof. A. Ghosh
LKCSB: FNCE 101
Part I
(Instructions: Multiple Choice Questions with one best answer. Please read all options
carefully before selection. Each question is worth 1.5 points, no penalties for guessing)
1. 1B 30. The articles of incorporation:
I. describe the purpose of the firm.
II. are amended periodically.
III. set forth the number of shares of stock that can be issued.
IV. detail the method that will be used to elect corporate directors.
A. I and III only
B. I and IV only
C. II and III only
D. II and IV only
E. I, III, and IV only
2. 1A 43. Which one of the following actions by a financial manager is most apt to
create an agency problem?
A. refusing to borrow money when doing so will create losses for the firm
B. refusing to lower selling prices if doing so will reduce the net profits
C. refusing to expand the company if doing so will lower the value of the equity
D. agreeing to pay bonuses based on the market value of the company stock
rather than on the firm's level of sales
E. increasing current profits when doing so lowers the value of the firm's equity
3. 2B 35. Depreciation:
A. reduces both taxes and net income.
B. increases the net fixed assets as shown on the balance sheet.
C. reduces both the net fixed assets and the costs of a firm.
D. is a noncash expense which increases the net income.
E. decreases net fixed assets, net income, and operating cash flows.
4. 2A 36. Which one of the following statements related to an income statement is
correct?
A. Interest expense increases the amount of tax due.
B. Depreciation does not affect taxes since it is a non-cash expense.
C. Net income is distributed to dividends and paid-in surplus.
D. Taxes reduce both net income and operating cash flow.
E. Interest expense is included in operating cash flow.
5.
3A 47. A firm has net working capital of $640. Long-term debt is $4,180, total
assets are $6,230, and fixed assets are $3,910. What is the amount of the total
liabilities?
A. $2,050
B. $2,690
C. $4,130
D. $5,590
E. $5,860
6. 3B 48. A firm has common stock of $6,200, paid-in surplus of $9,100, total
liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is
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Prof. A. Ghosh
LKCSB: FNCE 101
the amount of the shareholders' equity?
A. $6,900
B. $15,300
C. $18,700
D. $23,700
E. $35,500
7. 4A 65. The Lakeside Inn had operating cash flow of $48,450. Depreciation was
$6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term
debt. The firm spent $24,000 on fixed assets and decreased net working capital
by $1,330. What is the amount of the cash flow to stockholders?
A. $5,100
B. $7,830
C. $18,020
D. $19,998
E. $20,680
8. 4B 98. Suppose you are given the following information for Bayside Bakery:
sales = $30,000; costs = $15,000; addition to retained earnings = $4,221;
dividends paid = $469; interest expense = $1,300; tax rate = 30 percent. What is
the amount of the depreciation expense?
A. $4,820
B. $5,500
C. $7,000
D. $8,180
E. $9,500
9. 5A/B 31. Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover
rate of 0.91. Sam's has a fixed asset turnover rate of 1.15 and a total asset
turnover rate of 0.88. Both companies have similar operations. Based on this
information, Dee's must be doing which one of the following?
A. utilizing its fixed assets more efficiently than Sam's
B. utilizing its total assets more efficiently than Sam's
C. generating $1 in sales for every $1.12 in net fixed assets
D. generating $1.12 in net income for every $1 in net fixed assets
E. maintaining the same level of current assets as Sam's
10. 6A 68. A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net
income of $126,400, a price-earnings ratio of 18.7, and a book value per share of
$9.12. What is the market-to-book ratio?
A. 1.62
B. 1.84
C. 2.23
D. 2.45
E. 2.57
11. 6B 108. Canine Supply has sales of $2,200, total assets of $1,400, and a debtequity ratio of 0.3. Its return on equity is 15 percent. What is the net income?
A. $138.16
B. $141.41
C. $152.09
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Prof. A. Ghosh
LKCSB: FNCE 101
D. $156.67
E. $161.54
12. 7B 12. Samantha opened a savings account this morning. Her money will earn 5
percent interest, compounded annually. After five years, her savings account will
be worth $5,600. Assume she will not make any withdrawals. Given this, which
one of the following statements is true?
A. Samantha deposited more than $5,600 this morning.
B. The present value of Samantha's account is $5,600.
C. Samantha could have deposited less money and still had $5,600 in five years if
she could have earned 5.5 percent interest.
D. Samantha would have had to deposit more money to have $5,600 in five years
if she could have earned 6 percent interest.
E. Samantha will earn an equal amount of interest every year for the next five
years.
13. 7A 13. This afternoon, you deposited $1,000 into a retirement savings account.
The account will compound interest at 6 percent annually. You will not withdraw
any principal or interest until you retire in forty years. Which one of the
following statements is correct?
A. The interest you earn six years from now will equal the interest you earn ten
years from now.
B. The interest amount you earn will double in value every year.
C. The total amount of interest you will earn will equal $1,000  .06  40.
D. The present value of this investment is equal to $1,000.
E. The future value of this amount is equal to $1,000  (1 + 40).06.
14. 8A 31. You just received a $5,000 gift from your grandmother. You have decided
to save this money so that you can gift it to your grandchildren 50 years from
now. How much additional money will you have to gift to your grandchildren if
you can earn an average of 8.5 percent instead of just 8 percent on your savings?
A. $47,318.09
B. $52,464.79
C. $55,211.16
D. $58,811.99
E. $60,923.52
15. 8B 45. Sixteen years ago, Alicia invested $1,000. Eight years ago, Travis
invested $2,000. Today, both Alicia's and Travis' investments are each worth
$2,400. Assume that both Alicia and Travis continue to earn their respective rates
of return. Which one of the following statements is correct concerning these
investments?
A. Three years from today, Travis' investment will be worth more than Alicia's.
B. One year ago, Alicia's investment was worth less than Travis' investment.
C. Travis earns a higher rate of return than Alicia.
D. Travis has earned an average annual interest rate of 3.37 percent.
E. Alicia has earned an average annual interest rate of 6.01 percent.
16. 9A 49. Some time ago, Julie purchased eleven acres of land costing $36,900.
Today, that land is valued at $214,800. How long has she owned this land if the
price of the land has been increasing at 10.5 percent per year?
A. 13.33 years
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Prof. A. Ghosh
LKCSB: FNCE 101
B. 16.98 years
C. 17.64 years
D. 19.29 years
E. 21.08 years
17. 9B 42. Holiday Tours (HT) has an employment contract with its newly hired
CEO. The contract requires a lump sum payment of $10.4 million be paid to the
CEO upon the successful completion of her first three years of service. HT wants
to set aside an equal amount of money at the end of each year to cover this
anticipated cash outflow and will earn 5.65 percent on the funds. How much must
HT set aside each year for this purpose?
A. $3,184,467
B. $3,277,973
C. $3,006,409
D. $3,318,190
E. $3,466,667
18. 10A/B 125. You have just purchased a new warehouse. To finance the purchase,
you've arranged for a 30-year mortgage loan for 80 percent of the $2,600,000
purchase price. The monthly payment on this loan will be $11,000. What is the
effective annual rate on this loan?
A. 4.98 percent
B. 5.25 percent
C. 5.46 percent
D. 6.01 percent
E. 6.50 percent
19. 11A 39. Which of the following relationships apply to a par value bond?
I. coupon rate < yield-to-maturity
II. current yield = yield-to-maturity
III. market price = call price
IV. market price = face value
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and III only
E. II, III, and IV only
20. 11B 40. Which one of the following relationships is stated correctly?
A. The coupon rate exceeds the current yield when a bond sells at a discount.
B. The call price must equal the par value.
C. An increase in market rates increases the market price of a bond.
D. Decreasing the time to maturity increases the price of a discount bond, all else
constant.
E. Increasing the coupon rate decreases the current yield, all else constant.
21. 12B 86. Redesigned Computers has 5.25 percent coupon bonds outstanding with
a current market price of $546.19. The yield to maturity is 16.28 percent and the
face value is $1,000. Interest is paid semiannually. How many years is it until
these bonds mature?
A. 6.64 years
B. 7.08 years
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Prof. A. Ghosh
LKCSB: FNCE 101
C. 12.41 years
D. 14.16 years
E. 28.32 years
22. 12A 87. Global Communications has a 7 percent, semiannual coupon bond
outstanding with a current market price of $1,023.46. The bond has a par value of
$1,000 and a yield to maturity of 6.72 percent. How many years is it until this
bond matures?
A. 12.26 years
B. 12.53 years
C. 18.49 years
D. 24.37 years
E. 25.05 years
23. 13A 25. An increase in which of the following will increase the current value of a
stock according to the dividend growth model?
I. dividend amount
II. number of future dividends, provided the current number is less than infinite
III. discount rate
IV. dividend growth rate
A. I and II only
B. III and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV
24. 13B 28. Which one of the following is an underlying assumption of the dividend
growth model?
A. A stock has the same value to every investor.
B. A stock's value is equal to the discounted present value of the future cash
flows which it generates.
C. A stock's value changes in direct relation to the required return.
D. Stocks that pay the same annual dividend have equal market values.
E. The dividend growth rate is inversely related to a stock's market price.
25. 14A 81. KL Airlines paid an annual dividend of $1.42 a share last month. The
company is planning on paying $1.50, $1.75, and $1.80 a share over the next 3
years, respectively. After that, the dividend will be constant at $2 per share per
year. What is the market price of this stock if the market rate of return is 10.5
percent?
A. $15.98
B. $16.07
C. $18.24
D. $21.16
E. $24.10
26. 14B 82. Renew It, Inc., is preparing to pay its first dividend. It is going to pay
$0.45, $0.60, and $1 a share over the next three years, respectively. After that, the
company has stated that the annual dividend will be $1.25 per share indefinitely.
What is this stock worth to you per share if you demand a 10.8 percent rate of
return on stocks of this type?
A. $6.67
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Prof. A. Ghosh
LKCSB: FNCE 101
B. $8.21
C. $10.14
D. $11.47
E. $12.03
27. 15A/B 114. Hardwoods, Inc. is a mature manufacturing firm. The company just
paid a $10 dividend, but management expects to reduce the payout by 9 percent
each year, indefinitely. How much are you willing to pay today per share to buy
this stock if you require a 15 percent rate of return?
A. $34.79
B. $37.92
C. $38.27
D. $41.33
E. $42.09
28. 16A 98. Motor City Productions sells original automotive art on a prepaid basis
as each piece is uniquely designed to the customer's specifications. For one
project, the cash flows are estimated as follows. Based on the internal rate of
return (IRR), should this project be accepted if the required return is 9 percent?
A. Accept the project.
B. Reject the project.
C. The IRR cannot be used to evaluate this type of project.
D. The firm should be indifferent to either accepting or rejecting this project.
E. Insufficient information is provided to make a decision based on IRR.
29. 16B 99. Rosa's Designer Gowns creates exquisite gowns for special occasions on
a prepaid basis only. The required return is 8 percent. Rosa has estimated the cash
flows for one gown as follows. Should Rosa sell this gown at the price she is
currently considering based on the estimated internal rate of return (IRR)?
A. Rosa should sell the gown for $155,000.
B. Rose can sell the gown for as little as $153,819 and still earn her required
return.
C. The gown must be sold for a minimum price of $175,926 if Rosa is to earn her
required return.
D. The IRR decision rule cannot be applied to this project.
E. Insufficient information is provided to make a decision based on IRR.
30. 17B 11. Danielle's is a furniture store that is considering adding appliances to its
offerings. Which of the following should be considered incremental cash flows of
this project?
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Prof. A. Ghosh
LKCSB: FNCE 101
I. utilizing the credit offered by a supplier to purchase the appliance inventory
II. benefiting from increased furniture sales to appliance customers
III. borrowing money from a bank to fund the appliance project
IV. purchasing parts for inventory to handle any appliance repairs that might be
necessary
A. I and II only
B. III and IV only
C. I, II, and IV only
D. II, III, and IV only
E. I, II, III, and IV
31. 17A 16. Which of the following should be included in the analysis of a new
product?
I. money already spent for research and development of the new product
II. reduction in sales for a current product once the new product is introduced
III. increase in accounts receivable needed to finance sales of the new product
IV. market value of a machine owned by the firm which will be used to produce
the new product
A. I and III only
B. II and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, II, III, and IV
32. 18A 19. The expected return on a portfolio:
I. can never exceed the expected return of the best performing security in the
portfolio.
II. must be equal to or greater than the expected return of the worst performing
security in the portfolio.
III. is independent of the unsystematic risks of the individual securities held in
the portfolio.
IV. is independent of the allocation of the portfolio amongst individual
securities.
A. I and III only
B. II and IV only
C. I and II only
D. I, II, and III only
E. I, II, III, and IV
33. 18B 20. If a stock portfolio is well diversified, then the portfolio variance:
A. will equal the variance of the most volatile stock in the portfolio.
B. may be less than the variance of the least risky stock in the portfolio.
C. must be equal to or greater than the variance of the least risky stock in the
portfolio.
D. will be a weighted average of the variances of the individual securities in the
portfolio.
E. will be an arithmetic average of the variances of the individual securities in the
portfolio.
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Prof. A. Ghosh
LKCSB: FNCE 101
Part II
(Instructions: These are short answer questions. Please clearly write your answers
in the space provided. The points allotted are as marked.)
M & M Foods
Sales
COGS
Interest
Depreciation
Cash
Accounts receivables
Current liabilities
Inventory
Long-term debt
Net fixed assets
Common stock
Taxes
2011
2012
$5,831
3,670
291
125
250
1,092
717
1,495
2,400
4,006
1,900
590
$6,423
4,109
280
122
313
1,162
1,051
1,521
1,100
4,123
2,100
670
1. Answer Questions (a)-(f) with the above information:
a. 75. What is the net working capital for 2012?
Net working capital = $313 + $1,162 + $1,521 - $1,051 = $1,945
b. 76. What is the change in net working capital from 2011 to 2012?
Change in net working capital = ($313 + $1,162 + $1,521 - $1,051) ($250 + $1,092 + $1,495 - $717) = -$175
c. 77. What is the net capital spending for 2012?
Net capital spending = $4,123 - $4,006 + $122 = $239
d. 78. What is the operating cash flow for 2012?
Operating cash flow = ($6,423 - $4,109 - $122) + $122 - $670 = $1,644
e. 79. What is the cash flow from assets for 2012?
Operating cash flow = ($6,423 - $4,109 - $122) + $122 - $670 = $1,644
Net capital spending = $4,123 - $4,006 + $122 = $239
Change in net working capital = ($313 + $1,162 + $1,521 - $1,051) ($250 + $1,092 + $1,495 - $717) = -$175
Cash flow from assets = $1,644 - $239 - (-$175) = $1,580
f.
80. What is net new borrowing for 2012?
Net new borrowing = $1,100 - $2,400 = -$1,300
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Prof. A. Ghosh
LKCSB: FNCE 101
2. 35. Trish receives $480 on the first of each month. Josh receives $480 on the last day
of each month. Both Trish and Josh will receive payments for next three years. At a
9.5 percent discount rate, what is the difference in the present value of these two sets
of payments?
3. 112. Kristie owns a perpetuity which pays $12,000 at the end of each year. She
comes to you and offers to sell you all of the payments to be received after the 10th
year. Explain how you can determine the value of this offer.
Solution: You should determine the present value of the perpetuity and also the present
value of the first 10 payments at your discount rate. The difference between the two
values is the maximum amount you should pay for this offer. (Assuming a normal rate of
interest, the offer will most likely be worth less than 50 percent of the perpetuity's total
value.)
Here's an example that can be used to explain this answer using an assumed 8 percent
rate of interest.
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Prof. A. Ghosh
LKCSB: FNCE 101
Value of offer at 8 percent = $150,000 - $80,520.98 = $69,479.02
4. 113. Inflation has remained low for the past three years but you have come to the
conclusion that trend is ending and inflation will increase significantly over the next
18 months. Assume you have reached this conclusion prior to other investors
reaching the same conclusion. What adjustments should you make to your bond
portfolio in light of your conclusions?
Solution: Increases in inflation will increase interest rates according to the term structure
of interest rates. Therefore, you should sell any long-term bonds you own and replace
them with short-term bonds. You should also replace lower coupon bonds with higher
coupon bonds. These changes should be done promptly before other investors commence
taking the same actions.
5. 101. Explain why small shareholders should prefer cumulative voting over straight
voting.
Solution: With straight voting, a shareholder must control a majority (50 percent plus
one) of the outstanding shares of stock to gain access to a seat on the board of directors.
With cumulative voting, a shareholder can control one seat on the board by controlling a
lesser number of shares. The number of shares needed to obtain one seat under
cumulative voting is computed as [1/(N+1)] percent + 1 of the outstanding shares, where
N is the number of open seats. If for example, three seats are open, a shareholder only
needs to control 25 percent, or 1/4th, of the outstanding shares plus one additional share
to guarantee election to the board. Having a seat on the board allows a shareholder to
have some control over the direction and management of a firm.
6. 115. The Taxi Co. is evaluating a project with the following cash flows:
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Prof. A. Ghosh
LKCSB: FNCE 101
The company uses a 10 percent interest rate on all of its projects. What is the MIRR
using the discounted approach?
7. 70. A stock had annual returns of 3.6 percent, -8.7 percent, 5.6 percent, and 11.1
percent over the past four years. Which one of the following best describes the
probability that this stock will produce a return of 20 percent or more in a single
year?
Average return = (0.036 - 0.087 + 0.056 + 0.111)/4 = 0.0290
 =  [1/(4 - 1)] [(0.036 - 0.029)2 + (-0.087 - 0.029)2 + (0.056 - 0.029)2 + (0.111 0.029)2] = 0.0836
Upper end of 95 percent range = 0.0290 + (2  0.0836) = 19.62 percent
Upper end of 99 percent range = 0.0290 + (3  0.0836) = 27.98 percent
A return of 20 percent or more in a single year has between a 1 percent and a 2.5 percent
probability of occurring in any one year.
8. 86. How can an investor lose money on a stock while making money on a bond
investment if there is a reward for bearing risk? Aren't stocks riskier than bonds?
There is a reward for bearing risk over the long-term. However, the nature of risk implies
the returns on a high risk security will be more volatile than the returns on a low risk
security. Thus, stocks can produce lower returns in the short run. It is the acceptance of
this risk that justifies the potential long-term reward.
9. 102. Your portfolio is invested 26 percent each in Stocks A and C, and 48 percent in
Stock B. What is the standard deviation of your portfolio given the following
information?
Solution:
E. 13.73 percent
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Prof. A. Ghosh
LKCSB: FNCE 101
E(Rp)Boom = 0.26(0.25) + 0.48(0.25) + 0.26(0.45) = 0.302
E(Rp)Good = 0.26(0.10) + 0.48(0.13) + 0.26(0.11) = 0.117
E(Rp)Poor = 0.26(0.03) + 0.48(0.05) + 0.26(0.05) = 0.0448
E(Rp)Bust = 0.26(-0.04) + 0.48(-0.09) + 0.26(-0.09) = -0.077
E(Rp) = 0.25(0.302) + 0.25(0.117) + 0.25(0.0448) + 0.25(-0.077) = 0.0967
p2 = 0.25(0.302 - 0.0967)2 + 0.25(0.117 - 0.0967)2 + 0.25(0.0448 - 0.0967)2 + 0.25(0.077 - 0.0967)2 = 0.018856
p = 0.018856 = 13.73 percent
10. 96. Explain the difference between systematic and unsystematic risk. Also explain
why one of these types of risks is rewarded with a risk premium while the other type
is not.
Unsystematic, or diversifiable, risk affects a limited number of securities and can be
eliminated by investing in securities from various industries and geographic regions.
Unsystematic risk is not rewarded since it can be eliminated by investors. Systematic risk
is risk which affects most, or all, securities and cannot be diversified away. Since
systematic risk must be accepted by investors it is rewarded with a risk premium and is
measured by beta.
- End of Paper -
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