GORDON COLLEGE

OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

MANAGERIAL FINANCE
FIN 302

MIDTERM EXAM
OCTOBER 13, 2018

I. Problem Solving

1. SM, Inc. and Ayala Corp., are rivals in the retailing business. Some financial statement values
for each company follow. Use them in a ratio analysis that compares the firm’s financial
leverage and profitability. – 20 points

Item SM, Inc. Ayala Corp.

Total assets Php 10,000,000.00 Php 10,000,000.00

Total equity (all common) 9,000,000.00 5,000,000.00
Total debt 1,000,000.00 5,000,000.00
Annual interest 100,000.00 500,000.00
Total sales 25,000,000.00 25,000,000.00
EBIT 6,250,000.00 6,250,000.00
Earnings available for
common stockholders 3,690,000.00 3,450,000.00

a. Calculate the following debt and coverage ratios for the following companies.
1) Debt ratio
2) Times interest earned ratio
b. Calculate the following profitability ratios for the two companies.
1) Operating profit margin
2) Net profit margin
3) Return on total assets
4) Return on common equity
c. In what way has the larger debt of Ayala Corp. made it more profitable than SM, Inc.? What are
the risks that Ayala Corp.’s investors undertake when they choose to purchase its stock instead
of SM, Inc.?

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2. Good Shepherd, Inc. had sales totaling Php 40,000,000.00 in fiscal year 2012. Some ratios for
the company are listed below. Use this information to determine the peso values of various
income statement and balance sheet accounts as requested. - 20 points

Good Shepherd, Inc.

Year Ended December 31, 2012

Sales Php 40,000,000.00

Gross profit margin 80%
Operating profit margin 35%
Net profit margin 8%
Return on total assets 16%
Return on common equity 20%
Total asset turnover 2
Average collection period 62.2 days

Calculate values for the following:

a. Gross profits
b. Cost of goods sold
c. Operating profits
d. Operating expenses
e. Earnings available for common stockholders
f. Total assets
g. Total common stock equity
h. Accounts receivable

3. Use the financial statements below for Majesty King Company for the year ended December
31, 2012, along with the industry average ratios below, to:
a. Prepare and interpret a complete ratio analysis of the firm’s 2012 operations. – 30 points

Majesty King Company Income Statement

for the year ended December 31, 2012

Sales revenue Php 600,000.00

Less: Cost of goods sold 460,000.00
Gross Profits 140,000.00
Less: Operating expenses
General and administrative expenses 30,000.00
Depreciation expense 30,000.00
Total operating expense 60,000.00
Operating profits 80,000.00
Less: Interest expense 10,000.00
Net profits before taxes 70,000.00
Less: Taxes 27,100.00
Net profits after taxes (earnings available
for common stockholders) Php 42,900.00
Earnings per share (EPS) Php 2.15

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 Majesty King Company Balance Sheet
December 31, 2012

Assets

Cash Php 15,000.00

Marketable securities 7,200.00
Accounts Receivable 34,100.00
Inventories 82,000.00
Total current assets Php138,300.00
Net fixed assets 270,000.00
Total assets Php408,300.00

Liabilities and Stockholder’s Equity

Accounts Payable Php 57,000.00

Notes Payable 13,000.00
Accruals 5,000.00
Total current liabilities 75,000.00
Long-term debt Php 150,000.00
Common stock equity (20,000 shares
outstanding) Php 110,200.00
Retained earnings 73,100.00
Total stockholders’ equity Php 183,300.00
Total liabilities and stockholders’ equity Php 408,300.00

Ratio Industry average, 2012

Current ratio 2.35

Quick ratio 0.87
Inventory turnover 4.55
Average collection period 35.80 days
Total asset turnover 1.09
Debt ratio 0.30
Times interest earned ratio 12.30
Gross profit margin 0.20
Operating profit margin 0.14
Net profit margin 0.09
Return on total assets (ROA) 0.10
Return on common equity (ROE) 0.17
Earnings per share (EPS) 3.10

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 4. Marian needs to have Php 15,000.00 at the end of 6 years to fulfills her goal of purchasing a
small sailboat. She is willing to invest a lump sum today and leave the money untouched for 5
years until it grows to Php 15,000.00, but she wonders what sort of investment return she will
need to earn to reach her goal. Compute the approximate annually rate of return needed in
each of these cases: - 10 points
a. Marian can invest Php 11,800.00 today.
b. Marian can invest Php 8,750.00 today.
c. Marian can invest Php 7,250.00 today.

5. Emmanuel Cruz wishes to select the better of two 10-year annuities, C and D, Annuity C is an
ordinary annuity of Php 2,500.00 per year for 10 years. Annuity D is an annuity due of Php
2,200.00 per year for 10 years. – 20 points

a. Find the future value of both annuities at the end of year 10, assuming that Emmanuel can
earn (1) 10% annual interest (2) 20% annual interest.
b. Use your findings in part a to indicate which annuity has the greater future value at the
end of year 10 for both the (1) 10% and (2) 20% interest rates.
c. Find the present value of both annuities, assuming that Emmanuel can earn (1) 10%
annual interest and (2) 20% annual interest.
d. Use your findings in part c to indicate which annuity has the greatest present values for
both (1) 10% and (2) 20% interest rates.

II. Theory – 10 points

1. What is finance?
2. What is the goal of the firm and, therefore, of all managers and
employees?
3. Describe the legal forms of business organization.
4. Enumerate the four key financial statements.
5. Differentiate the cross-sectional analysis from bench marking.

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For I know the plans I have for you, declares the

LORD, plans to prosper you and not to harm you,
plans to give you Hope and a Future.
- Jeremiah 29:11

Prepared by: Ms. Nerissa Q. Magpayo-Nibot, MM