Arab Academy for Science & Technology

Graduate school of Business

Course Code & Title: FIN 935- Managerial Finance
Midterm Examination

Question 1:
(A) Multiple Choice Questions:
1. $1,200 is received at the beginning of year 1, $2,200 is received at the beginning of year
2, and $3,300 is received at the beginning of year 3. If these cash flows are deposited at
12 percent, their combined future value at the end of year 3 is _________.
(a) $ 6,700
(b) $17,000
(c) $12,510
(d) $ 8,141

2. Which of the following assist companies in raising capital, advise firms on major
transactions such as mergers or financial restructuring, and engage in trading and market
making activities?
(a) Investment Banks
(b) Securities Exchanges
(c) Mutual Funds
(d) Commercial Banks
3. A financial manager must choose between three alternative investments. Each asset is
expected to provide earnings over a three-year period as described below. Based on the
wealth maximization goal, the financial manager would choose (Justify your answer)

Year Asset X Asset Y Asset Z

1 $15,000 $ 4,000 $ 6,000
2 $9,000 $10,000 $14,000
3 $5,000 $15,000 $11,000
$29,000 $29,000 $31,000

(a) Asset X.
(b) Asset Y.
(c) Asset Z.
(d) Be indifferent between Asset X and Asset Y

………………………………………………………………………………………………………
………………………………………………………………………………………

4. David wishes to accumulate $1 million by the end of 20 years by making equal annual
end-of-year deposits over the next 20 years. If David can earn 10 percent on his
investments, how much must he deposit at the end of each year?

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 (a) $ 14,900
(b) $ 50,000
(c) $117,453
(d) $ 17,460

5. The officer responsible for the firm's financial activities such as financial planning and
fund raising, making capital expenditure decisions, and managing cash, credit, the
pension fund, and foreign exchange is
(a) Treasurer.
(b) Controller.
(c) Foreign exchange manager.
(d) None of the above.

6. A firm has the following accounts and financial data for 2019:

The firm's earnings per share for 2019 is ________.

A) $0.5335
B) $0.5125
C) $0.3204
D) $0.3024

B) Indicate whether the following statements are (True) or (False) and correct the false
statements:

1. Accounting is concerned with the process institutions, markets, and instruments involved
in the transfer of money among and between individuals, businesses and government
2. Financial services are concerned with the duties of the financial manager.
3. The corporate controller is the officer responsible for the firm's financial activities such as
financial planning and fund raising.
4. Profit maximization is the main goal of a business organization.
5. The net accounting profit is the difference between the cash inflows and cash outflows of
a given project.
6. Financial markets are intermediaries that channel the savings of individual, businesses,
and governments into loans or investments.
7. Primary and secondary markets are markets for short-term and long-term securities,

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 respectively.
8. Public offering is the sale of a new security issue, typically bonds or preferred stock,
directly to an investor or group of investors.
9. When considering each financial decision alternative or possible action in terms of its
impact on the share price of the firm's stock, financial managers should accept only those
actions that are expected to increase the firm's profitability.
10. The financial manager prepares financial statements that recognize revenue at the point of
sale and expenses when incurred.
11. Capital markets are for investors who want a safe temporary place to deposit funds where
they can earn interest and for borrowers who have a short term need for funds.
12. Common stock dividends paid to stockholders are equal to the earnings available for
common stockholders divided by the number of shares of common stock outstanding.
13. Time-series analysis is the evaluation of the firm's financial performance in comparison to
other firm(s) at the same point in time.
14. Marginal analysis means that projects must be implemented if their revenues are higher
than their expenses.

Question 2:
LuLu CO. is considering replacing a production line with a new, more productive one. You are
given the information that follows.
 The existing production line currently generates $120,000 profit per year and could be
sold today for $80,000.
 The new proposed production line would generate profits of $200,000 per year
 The new proposed production line requires an initial investment $110,000.
 The company is seeking your advice regarding whether to replace the production line or
keep the existing one.
Required:
a) Based on the Marginal analysis concept, what would you recommend?
b) State the reasons why focusing on profit only should not be the optimal goal for
companies.

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Question 3 :
You planned to retire after 20 years your goal is to create a fund that will allow you to
receive 300000 every year until infinity, how much should you deposit after 6 years in an
account that earns 12% to accumulate the retirement fund that will be invested in an account that
earns 10% annually?
Question 4 :
ABC, Inc. has issued a bond with par value of $1,000, a coupon rate of 9 percent that is paid
annually, and that matures in 20 years.

1) If bonds of similar risk are currently earning a 11% rate of return, how much should
ABC, Inc. bond sell for today?
2) If the required return were at 6% instead of 11%, what would the current value of
ABC, Inc. bond be? Contrast this finding with your findings in part (a) and discuss.

Question 5 :
XYZ Inc’s most recent dividend was $20 per share. Dividends are expected to grow at an 9%
annual rate into the foreseeable future.

If your required rate of return is 15% annually, how much should you pay for a share of
XYZ Corp?

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Question 6:

MNO Company's credit sales policy is to have:

 50% of the sales amount in cash
 30% collected after one month
 20% after two months.
 The purchasing policy is to pay 60% in cash and the rest is to be paid after one month.

Required:
a) Calculate the net accounting profit for December.
b) Calculate the net cash flow for December.
c) Comment on the difference between the two previous answers.

Item October November December

Sales 500,000 450,000 550,000

Purchases 350,000 340,000 420,000

Question 7 :
DiDi Dairy Products Key Ratios

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 Income Statement
DiDi Dairy Products
For the Year Ended December 31, 2019

Balance Sheet
DiDi Dairy Products
December 31, 2019

Answer the following questions :

1. The current ratio for DiDi Dairy Products in 2019 was ________.
A) 1.58
B) 0.63
C) 1.10
D) 0.91

2. Since 2018, the liquidity of DiDi Dairy Products ________.

A) has deteriorated
B) has remained the same
C) has improved
D) is not determinable

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3. The net working capital for DiDi Dairy Products in 2019 was ________.
A) $10,325
B) -$10,325
C) -$1,425
D) $14,250

4. The inventory turnover for DiDi Dairy Products in 2019 was ________.
A) 43
B) 5
C) 20
D) 25

5. The inventory management at DiDi Dairy Products ________ since 2018.

A) has deteriorated
B) has remained the same
C) has improved slightly
D) cannot be determined

6. The average collection period for DiDi Dairy Products in 2019 was ________.
A) 32.5 days
B) 11.8 days
C) 25.3 days
D) 35.9 days

7. If DiDi Dairy Products has credit terms which specify that accounts receivable should be paid
in 25 days, the average collection period ________ since 2018.
B) has remained the same
C) has improved
D) cannot be determined

8. DiDi Dairy Products had a ________ degree of financial leverage than the industry standard,
resulting in ________.
A) lower; lower return on total assets
B) lower; lower return on equity
C) higher; higher return on equity
D) higher; higher return on total assets

9. The debt ratio for DiDi Dairy Products in 2019 was ________.
A) 50 percent
B) 11 percent
C) 55 percent
D) 44 percent

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10. DiDi Dairy Products' gross profit margin was inferior to the industry standard. This may have
resulted from ________.
A) a high sales price
B) the high cost of goods sold
C) excessive selling and administrative expenses
D) excessive interest expense

11. The gross profit margin and net profit margin for DiDi Dairy Products in 2019 were
________.
A) 13 percent and 0.9 percent, respectively
B) 13 percent and 1.5 percent, respectively
C) 2 percent and 0.9 percent, respectively
D) 2 percent and 1.5 percent, respectively

12. The return on total assets for DiDi Dairy Products for 2019 was ________.
A) 0.9 percent
B) 5.5 percent
C) 25 percent
D) 2.5 percent

13. The return on equity for DiDi Dairy Products for 2019 was ________.
A) 0.6 percent
B) 5.6 percent
C) 0.9 percent
D) 50 percent

Question : Evaluate the performance of the above company based on your results
………………………………………………………….
……………………………………………………

Good Luck

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