Business Financial Management FINC-211

Skills Test

This test is designed to test the skills that you should master before taking BFM. The questions test concepts
taught in OPIM 172, OPIM 173, ACCT 101, and ACCT 102.

Statistics (50 points)

Use the following information for questions 1-5.
A stock portfolio ABC is comprised of 6 stocks with equal amounts of each stock (equal weights). These are the
annual returns for each stock in Year 1 and Year 2:
Year 1 Year 2
17.3% 12.6%
5.2% -3.9%
-2.9% 10.1%
10.4% 2%
-5.7% 15.4%
15.9% -8.9%
μ=? μ = 4.55%
σ=? σ = 8.87%
σ2 = ? σ2 = 78.7%

1. What is the portfolio return for Year 1, assuming all stocks are weighted equally? (5 points)

∑ 𝑟𝑒𝑡𝑢𝑟𝑛𝑠
Mean μ = 𝑛

Mean μ = [(17.3 + 5.2 + (-2.9) + 10.4 + (-5.7) + 15.9]/6

Mean μ = 6.70%

2. What is the variance of the stock returns in the portfolio for Year 1? (10 points)

Var σ2 = ∑[ (𝑋 − 𝜇)2 ]/ n

Var σ2 = [(17.3-6.7)2+(5.2-6.7)2+(-2.9-6.7)2+(10.4-6.7)2+(-5.7-6.7)2+(15.9-6.7)2]/6

Variance σ2 = 76.48%

3. What is the standard deviation of stock returns in the portfolio for Year 1? (5 points)

Std = √𝑉𝑎𝑟𝑖𝑎𝑛𝑐𝑒 = √𝜎

Std = √76.48

S σ = 8.75%

4. What is the covariance of the portfolio between Year 1 and Year 2? (15 points)
 ∑[(𝑅𝑒𝑡𝑢𝑟𝑛𝑋 − 𝜇𝑋 )∗(𝑅𝑒𝑡𝑢𝑟𝑛𝑌 −𝜇𝑌 )
Cov σ(X, Y) = 𝑛

Cov σ(X, Y) = {[(17.3-6.7)*(12.6-4.55)]+[(5.2-6.7)*(-3.9-4.55)]+[(-2.9-6.7)*(10.1-4.55)]+ [(10.4-

6.7)*(2.0-4.55)]+[(-5.7-6.7)*(15.4-4.55)]+ [(15.9-6.7)*(-8.9-4.55)]}/6

Cov σ(X, Y) = -37.17%

5. What is the correlation of the portfolio between Year 1 and Year 2? (15 points)

𝐶𝑜𝑣(𝑋,𝑌)
Corr(X,Y) = ρX,Y =
𝜎𝑋 𝜎𝑌

Corr(X,Y) = ρX,Y = -37.17 / [(8.75)(8.87)]

Corr(X,Y) = ρX,Y = -.48

Accounting (50 points)

Use the accompanying financial statements for questions 6-8.

6. Based on the 2013 Walgreen Co. Income Statement, what is Walgreen Co.’s corporate income tax
rate? (5 points)

Income Tax Provision = (Earnings Before Taxes)(Tax Rate)

Tax Rate = 1,445 / 3,895

Corporate Income Tax Rate = 37.1%

7. What is Walgreen Co.’s change in working capital from 2012 to 2013? (5 points)

Working Capital (WC) = Current Assets – Current Liabilities

ΔWC2012-2013 = WC2013 – WC2012 = (CA2013 – CA2012) – (CL2013 – CL2012)

ΔWC2012-2013 = (11,874 – 10,760) – (8,883 – 8,722)

ΔWC2012-2013 = $953

8. Based only on values from the 2013 Walgreen Co. Income Statement, what are Walgreen Co,’s
operating cash flows in 2013? Assume Depreciation is $1,100 in 2013. (15 points)

Operating Cash Flows = Operating Income + Depreciation – Taxes from Operating Activities

Taxes from Operating Activities = (Operating Income)(Tax Rate)

Taxes from Operating Activities2013 = (3,940)(.371) = $1,461.74

Operating Cash Flows2013 = 3,940 + 1,100 – 1,461.74

Operating Cash Flows2013 = $3,578.26

9. Three years ago, Walgreen Co. bought six cash registers for $2,600 each. These cash registers are
being depreciated over five years to a book value of zero, using straight-line depreciation.
 However, a newer model just came on the market, and Walgreen Co. wants to sell the existing
cash registers to make room for the new models. What is the current total book value of the six
cash registers? (10 points)

Book Value = Cost – Accumulated Depreciation

Accumulated Depreciation = (Annual Depreciation)(Number of Years)

Annual Depreciation = (Cost – Salvage Value) / Years of Depreciation

Annual Depreciation = (2,600 – 0) / 5 = $520

Accumulated Depreciation = (520)(3) = $1,560

Book Value = 2,600 – 1,560 = $1,040

Total Book Value = (1,040)(6)

Total Book Value = $6,240

10. Walgreen Co. is considering a new project that is may boost its business. The expected project
annual sales are $34.7m, with costs of $35.9m, and annual depreciation of $8m. Using the tax rate
from Question 6, what is the expected annual cash flow from the project? Should Walgreen Co.
accept the project? Why or why not? (10 points for answer, 5 points for explanation)

Project Cash Flows = (Sales – Costs)(1 – Tax Rate) + (Depreciation)(Tax Rate)

Project Cash Flows = (34.7 – 35.9)(1 - .371) + (8)(.371)

Project Cash Flows = $2.21m