Business Finance Final Exam BUS401(2010A)

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FINAL EXAMINATION


Time :


3 Hours

Instruction :

Please answer 3 questions, of which Question 1 is compulsory.
All questions carry equal marks. Please note the layout of
your answers should be in paragraph style.


QUESTION 1
(i) Eli Lilly is very excited because sales for his nursery and plant company are
expected to double from $600,000 to $1,200,000 next year. Eli notes that net assets
(Assets Liabilities) will remain at 50 percent of sales. His firm will enjoy an 8
percent return on total sales. He will start the year with $120,000 in the bank and is
bragging about the J aguar and luxury townhouse he will buy. Does his optimistic
outlook for his cash position appear to be correct? Compute his likely cash balance
or deficit for the end of the year. Start with beginning cash and subtract the asset
buildup (equal to 50 percent of the sales increase) and add in profit.

(ii) In problem 1 if there had been no increase in sales and all other facts were the same,
what would Elis ending cash balance be? What lesson do the examples in problems
1 and 2 illustrate?



QUESTION 2
Argue why the statement of cash flows provides useful information that goes beyond
income statement and balance sheet data? Support your answer by applying examples and
academic references.


QUESTION 3
Argue why are Treasury bills a favorite place for financial managers to invest excess cash,
as compared to other options? Your answer must be supported with examples and
academic citations.


QUESTION 4
Why does money have a time value? Your answer must be supported with examples and
academic citations.


Business Finance Final Exam BUS401(2010A)


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QUESTION 5
Discuss the relationship between bond prices and interest rates. What impact do changing
interest rates have on the price of long-term bonds versus short-term bonds? Your answer
must be supported with examples and academic citations.


QUESTION 6
If common stockholders are the owners of the company, why do they have the last claim
on assets and a residual claim on income? Your answer must be supported with examples
and academic citations.


QUESTION 7
Why are institutional investors important in today's business world? Your answer must be
supported with examples and academic citations.