Introduction

 to  Financial  Management  

FIN  254       MIDTERM  
Section:  14  
Full  Marks:    75  
Time:  3  Hours  

Qualitative Part (15 Marks)

Answer all the questions (use own words): (2*7.5= 15 Marks)

Word limit: 120 words for each question!

1. Define  agency  problems,  and  describe  how  they  give  rise  to  agency  costs.  
 
2. Explain  with  example:  local  bond,  foreign  bond,  Eurobond.  
Quantitative Part (Show formulas and calculations)
(60 Marks)
1. The Walton Corporation’s 2019 financial statements follow, along with some
industry average ratios.

Walton Corporation: Balance Sheet as of

December 31, 2019
Assets

Cash $ 72,000
Accounts receivable 4,39,000
Inventories 894,000
Total current assets $ 1,405,000
Fixed assets 4,31,000
Total assets $1,836,000

Liabilities and Equity

Accounts and notes payable $ 432,000

Accruals 170,000
Total current liabilities $ 602,000
Long-term debt 404,290
Common stock 575,000
Retained earnings 254,710
Total liabilities and equity $1,836,000

Walton Corporation: Income Statement for 2019

Sales $4,290,000
Cost of goods sold 3,580,000
Selling, general, and administrative expenses 370,320
Depreciation 159,000
Earnings before taxes (EBT) $ 180,680
Taxes (40%) 72,272
Net income $ 108,408

Per Share Data

EPS $ 4.71
Cash dividends per share $ 0.95
P/E ratio 5
Market price (average) $ 23.57
Number of shares outstanding 23,000
Industry Financial Ratios (2011)

Quick ratio 1.0

Current ratio 2.7
Inventory turnover 7.0
Total assets turnover 2.6
Return on assets 9.1%
Return on equity 18.2%
Debt ratio 50.0%
Gross Profit margin 20%
Net Profit margin 3.5%
P/E ratio 6.0

Questions (20):

Calculate Walton’s 2019 ratios, interpret them and compare them with the industry
average data, and comment briefly on Walton’s strengths and weaknesses.

2. Given the financial data for Federer, Inc.:

For the year ended December 31,

2018 2019
Depreciation $ 6,000
EBIT 30,000
Interest Expenses 3,000
Taxes 8,000
Cash $21,000 25,000
Accounts Receivable 39,000 45,000
Inventory 29,000 30,000
Net fixed assets 23,000 26,000
Accounts payable 25,000 30,000
Notes payable 50,000 40,000
Accruals 1,000 2,000

Questions (5):

Calculate Operating Cash Flow (OCF) and Free Cash Flow (FCF) for the year of
2019. (5)
3. To expand its operation, Manila Pacific Inc. has applied to the International Bank
for a 3 year, $350,000 loan. Prepare a loan amortization table assuming 10 percent
rate of interest.

Questions (10):

a. Calculate the annual, end of year loan repayment.

b. Prepare a loan amortization schedule showing the interest and principal break
down of each of the three loan repayments.

4. Jon Snow is 63 years old and recently retired. He wishes to provide retirement
income for himself and is considering an annuity contract with the Targaryen
Insurance Company. Such a contract pays him an equal-dollar amount each year that
he lives. For this cash-flow stream, he must put up a specific amount of money at the
beginning. According to actuary tables, his life expectancy is 15 years, and that is the
duration on which the insurance company bases its calculations regardless of how
long he actually lives.

Questions (10):

a. If Targaryen uses a compound annual interest rate of 5 percent in its

calculations, what must Jon pay at the outset for an annuity to provide him
with $10,000 per year? (Assume that the expected annual payments are at the
end of each of the 15 years.)
b. Jon had $30,000 to put into an annuity. How much would he receive each year
if the insurance company uses a 5 percent compound annual interest rate in its
calculations?
5. Pablo Escobar and Ivana Waite are twins.

Pablo Escobar has decided to start saving for his retirement. Beginning on his twenty-
first birthday, Pablo plans to invest $2,000 each birthday into a savings investment
earning a 7 percent compound annual rate of interest. He will continue this savings
program for a total of 10 years and then stop making payments. But his savings will
continue to compound at 7 percent for 35 more years, until Earl retires at age 65.

Ivana Waite also plans to invest $2,000 a year, on each birthday, at 7 percent, and will
do so for a total of 35 years. However, she will not begin her contributions until her
thirty-first birthday.

Questions (10):

How much will Pablo’s and Ivana’s savings programs be worth at the retirement age
of 65? Who is better off financially at retirement, and by how much?

6. Questions (5):

What is the present value of perpetuity of $100 per year if the appropriate discount
rate is 7%? If interest rates in general were to double and the appropriate discount rate
rose to 14%, what would happen to the present value of the perpetuity?