INTRODUCTION TO BUSINESS FINANCE

Mid Term

Question No 1:

Multiple Choice Questions (10)

1. C
2. B
3. D
4. B
5. B
6. A
7. C
8. D
9. B
10. B

Question No 2: (5)

Calculate the following ratios:

Current Ratio 2 Receivables Turnover 39

Inventory Turnover 1.67 Fixed Assets Turnover 3.55

Total Asset Turnover 1.7 Debt to Equity Ratio 91.67%

Profit Margin 33.62% Return on Assets 57%

Return on Equity 109.25% Price/Earnings Ratio 1.67

Question No 3: (5)

    February March April

Total sales 200 220 180
Cash purchases 70 80 60
Credit purchases 40 30 40
Labor and administrative expenses 30 30 30
Taxes, interest, and dividends 10 10 10
Capital expenditures 100 0 0

Complete the following cash budget:

    February March April

Sources of cash      
Collections on current sales  100 110 90
Collections on accounts receivable 90 100 110
Total sources of cash 190 210 200
Uses of cash      
Payments of accounts payable 30 40 30
Cash purchases 70 80 60
Labor and administrative expenses 30 30 30
Capital expenditures 100 0 0
Taxes, interest, and dividends 10 10 10
Total uses of cash 240 160 130
Net cash inflow -50 50 70
Cash at start of period  100 50 100
+ Net cash inflow -50 50 70
= cash at end of period 50 100 170
+ Minimum operating cash balance  100 100 100
= Cumulative short-term financing  50 0 -70

Question No 4: (2.5)

You take out a 30-year $100,000 mortgage loan with an APR of 8 percent and monthly payments. In 12
years you decide to sell your house and pay off the mortgage. What is the principal balance on the loan?

The payment on the mortgage is computed as follows:

 PMT × annuity factor ( 8/12 %,360 periods )=$ 100 ,000  PMT = $733.76

After 12 years, 216 months remain on the loan, so the loan balance is:

$ 599. 55×Annuity factor (128 %, 216 periods)=$ 83 , 862

Question No 5: (2.5)

A store offers two payment plans. Under the installment plan, you pay 25 percent down and 25 percent
of the purchase price in each of the next 3 years. If you pay the entire bill immediately, you can take a 10
percent discount from the purchase price. Which is a better deal if you can borrow or lend funds at a 6
percent interest rate?

Compare the present value of the payments. Assume the product sells for $100.

Installment plan:

PV = $25 + [$25  annuity factor(5%, 3 years)] = $93.08

Pay in full: Payment net of discount = $90

Choose the second payment plan for its lower present value of payments.