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BUSI 2093 Exam Cover Sheet (Set C)

COURSE: Introduction to Managerial Finance SECTION: 7B

INSTRUCTOR: Debasish (Dave) Sanyal DATE 10th Nov, 2020
NAME: __________________________ STUDENT ID: _________________________
General Instructions
 Do not open this exam paper until told to do so.

 Absolutely NO TALKING and/or PEERING over your neighbours’ paper. The invigilator will
remove you from the exam, and you will receive an automatic Zero on your exam.

 No papers, cellphones, briefcases, or any other cases are allowed while the examination is
in progress.

 Coats, jackets, or any other article of clothing not being worn may not be left
during the examination.

 Student must show his/her student I.D. card. No student will be allowed to write an
examination without her/his student I.D. card.

 Students are allowed to start writing their exam up to two hours after the scheduled start
time. No student will be allowed to leave the examination setting while exam is in
progress unless he/she is prepared to hand in their exam.

 There are five questions of 20 marks each.

Professor Use Only

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Mid Term Test Paper Class BUSI 2093 Set C

Q1 C. (20 Marks)

Are the following Capital Budgeting or Financing decisions? Give reasons for your
answer.

1. Intel decides to spend $500 million to develop a new microprocessor.

The development of a micro-processor is a capital budgeting decision. The
investment of $500 million will purchase a real asset, the microprocessor.

2. Glaxo buys a license to produce and sell a new drug developed by a biotech
company
Capital Budgeting. Though intangible, the license is a real asset that is
expected to produce future sales and profits.

3. Merck issues new shares to help pay for the purchase of Medco, a
pharmaceutical distribution company
Financing. Through issue of shares, new cash is generated which are used in
business for operation, acquisition of new business, expansion etc.

4. Pierre Lapin sells shares to finance expansion of his newly formed security
trading firm
Financing. Same explanation as above.
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Q2 C. (20 Marks)

Based on the following information of Shelly and Co. prepare an Income

Statement for 2000 and Balance Sheet for 1999 & 2000. Use the tax rate of 35%.

1999 2000
Amt. in $ Amt. in $
Sales 3,790 3,990
Cost of Goods Sold 2,043 2,137
Depreciation 975 1,108
Interest 225 267
Dividends 200 225
Current Assets 2,140 2,346
Net Fixed Assets 6,770 7,087
Current Liabilities 994 1,126
Long Term Debt 2,869 2,958

Shelley & Co
Balance Sheet as at December 31st 1999 & 2000
$ $ $ $
Current Assets 2,140 2,34 Current Liabilities 994 1,126
6
Net Fixed Assets 6.770 7,08 Long Term Debt 2,86 2,956
7 9
Equity 5,04 5,351
7

Total Assets 8,910 9,43 Total Liabilities & SHE 8,91 9,433
3 0

Shelley & Co
Income Statement for the period 2000
$
Sales 3,990
Cost of Goods sold 2,137
Depreciation 1,108
EBIT 745
Interest paid 267
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Taxable Income 478

Taxes (35%) 167
Net Income 311

Dividend 225
Addition to RE 86
Q3 C. (20 Marks)
Here are the simplified financial statements of X Corp. from a recent year:

INCOME STATEMENT (Figs in $ Mil.)

Net Sales 13,194
Cost of Goods Sold 4,060
Other Expenses 4,049
Depreciation 2,518
Earning Before Interest & Taxes 2,566
Interest Expenses 685
Income Before Tax 1,882
Taxes 570
Net Income 1,311
Dividend 856

Balance Sheet (Figs in $ Mil.)

End of the Start of the
year year
Cash & marketable Securities 89 158
Receivables 2,382 2,490
Inventories 187 238
Other Current Assets 867 932
Total Current Assets 3,524 3,818
Net Property & Plants Equipment 19,973 19,915
Other Long Term Assets 4,216 3,770
Total Assets 27,714 27,503
Liabilities & Shareholders Equity
Payables 2,564 3,040
Shirt Term Debt 1,419 1,573
Other Current Liabilities 811 787
Total Current Liabilities 4,795 5,400
Long Term Debt & Leases 7,018 6,833
Other Long Term Liabilities 6,178 6,149
Share Holders Equity 9,724 9,120
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Total Liabilities & Equity 27,714 27,503

Calculate the following financial ratios: Show definition, formula and calculation
1. Quick ratio
2. Inventory Turnover
3. Return on Equity
Quick Ratio = Cash + marketable securities + accounts Receivables/C.
Liabilities
End of the year = 89+2,382/4,795 = 0.515
Start of the year = 158 + 2,490/5,400 = 0.490

Inventory Turnover = Cost of Goods sold/average inventory

End of the year =4,060/ ((187+238)/2)) =19.11

Return on Equity = Earnings Available for Common Stock/Average Equity

End of the year = 1,311/ ((9,724+9,120)/2)) = 0.139 or 14%

Q4 C. (20 Marks)

Suppose you want to buy a new house. You currently have $15,000 and you
figure you need to have a 10% down payment. If the type of house you want
costs about $200,000 and you can earn 7.5% per year,
• how long will it be before you have enough money for the down payment?

How much do you need to have in the future?

Down payment = 0.1 x (200,000) = 20,000
Compute the number of periods
Formula Approach
t = ln(20,000 / 15,000) / ln(1.075) = 3.98 years
Calculator Approach
PV = -15,000
FV = 20,000
I/Y = 7.5
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CPT N = 3.98 years

Q5 C. (20 Marks)

In 1995 Coca Cola Enterprises needed to borrow about a quarter of a billion dollars
for 25 years. It did so by selling debt instrument each of which simply promised to
pay the holder $1,000 at the end of 25 years. The market interest rate at the time
was 8.53%. How much would you have been prepared to pay for one of the
company’s debt instrument?

To calculate the present value, multiply the $1,000 future payment by the 25 year
discount factor:

PV = $1,000 * 1/ (1.0853)25
= $1,000 * 0.129 = $129