Mohammad Ali Jinnah University

Department of Management Sciences

FN2300 (AE) Introduction To Business Finance

Final Examination Spring 2020 (Open Book/Notes)
Thursday, 18th June, 2020 (18:30-21:30)
Course Instructors: Farhan Mahboob

Time Allowed: 3 Hours Max. Marks: [50]

Instructions: (Read carefully before the exam begins):
1. You are to attempt the final exam yourself in all honesty, without resorting to any unfair means. Sign the
honor pledge below, before beginning the exam, and turn in with your answer sheet.

2. Before you begin, make sure that you have a complete Exam Question paper with six questions on 4
pages; answer all six (6) questions, with each page visibly & prominently showing your [i] name, [ii]
student id and [iii] question part attempted.

3. You are required to submit in the designated section of your google classroom as well as email to
farhan.mahboob@jinnah.edu (course instructor), prior to the submission deadline. Both submission via
email and Google Classroom are a requirement; failure to do so within the stipulated time, may result in
a ZERO grade!

4. Submit before 21:30 (9:30pm) Thursday, 18th June 2020.

5. Submit a concise neatly organized document/attachment which should address all 6 questions, in your
own words. The file naming convention should be “FN2300-AE-FINAL” followed by your student id,
first name and last name; spaces should be replaced with dashes. So, for example if you name is Maha
Aqalmand, with student id FA19-MBA-0420, then your submission file name should be: FN2300-AE-
FINAL-MBA-0420-MAHA-AQALMAND.

6. There are 6 questions (on 4 pages) for a total of 50 marks.

7. Questions will not be interpreted; however, if you make any assumptions, make sure to mention them.

8. Submit as a single document/attachment.

Honor Pledge for Exams (Required)

“I affirm that I will not give or receive any unauthorized help on this exam, and that all work will be my own.”

__________________ _________________________________ _________

Signature Name Student ID #

Registration Id #: Page 1 of 4
 FN2300 (AE) Introduction To Business Finance
Final Examination Spring 2020

ANSWER ALL 6 QUESTIONS

QUESTION 1 (10 marks)

Use the following financial statements for Fox Manufacturing Company for the year ended December
31, 2019 (Income Statement & Balance Sheet), to:

a. Prepare and a common size Income Statement.

b. Prepare and a common size Balance Sheet.

Fox Manufacturing Company, Income Statement, for the Year Ended December 31, 2019
Sales revenue 250,000,000
Less: Cost of goods sold 90,000,000
Gross profits 160,000,000
Less: Operating expenses
Selling expense 35,000,000
General and administrative expenses 15,000,000
Lease expense 10,000,000
Depreciation expense 20,000,000
Total operating expense 80,000,000
Operating profits 80,000,000
Less: Interest expense 5,000,000
Net profits before taxes 75,000,000
Less: Taxes (rate = 40%) 30,000,000
Net profits after taxes 45,000,000
Less: Preferred stock dividends 0
Earnings available for common stockholders 45,000,000

Fox Manufacturing Company, Balance Sheet December 31, 2019

Assets Liabilities and Stockholders’ Equity

Current assets Current liabilities
Cash 150,000,000 Accounts payable 200,000,000
Marketable securities 250,000,000 Notes payable 150,000,000
Accounts receivable 100,000,000 Accruals 150,000,000
Inventories 200,000,000 Total current liabilities 500,000,000
Total current assets 700,000,000 Long-term debt (inc.fin.lease)300,000,000
Gross fixed assets (at cost)
Land and buildings 500,000,000
Machinery & equipment 300,000,000 Stockholders’ equity
Furniture & fixtures 200,000,000 Common stock (200million share@1 par) 200,000,000
Gross fixed assets 1,000,000,000 Paid-in capital in excess of par value 320,000,000
Less: Accumulated deprec. 100,000,000 Retained earnings 280,000,000
Net fixed assets 900,000,000 Total stockholders’ equity 800,000,000
Total assets 1,600,000,000 Total liabilities & stockholders’ equity 1,600,000,000

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QUESTION 2 (10 marks)
Use the following financial statements for Fox Manufacturing Company given in Question # 1, calculate the
following ratios:
a. Gross profit margin
b. Operating profit margin
c. Net profit margin
d. Debt ratio
e. Inventory turnover
f. Return on total assets
g. Return on total equity

QUESTION 3 (5 marks)
Based on your experience as a Portfolio Manager this semester, formulate the guidelines for investment
on an International Stock Market, such as NASDAQ.

QUESTION 4 (10 marks)

Faris Brothers, Inc., needs a cash disbursement schedule for the months of April, May, and June. Use the
following information to prepare a cash disbursement schedule (for April, May & June):

Sales:
February $1,700,000; March $1,600,000; April $1,860,000; May $1,910,000; June $1,750,000; July
$1,850,000.

Purchases:
Total purchases are calculated as 60% of the next month’s sales. [THERE IS NO MISTAKE IN THIS QUESTION!]
20% of purchases are made in cash, 30% of purchases are paid for 1 month after purchase, and the
remaining 50% of purchases are paid for 2 months after purchase.

Rent:
The firm pays rent of $80,000 per month.

Wages and salaries:

Base wage and salary costs are fixed at $50,000 per month plus a variable cost of 6% of the current month’s
sales.

Taxes:
A tax payment of $175,000 is due in June. Fixed asset outlays: New equipment costing $225,000 will be
bought and paid for in April.

Interest payments:
An interest payment of $140,000 is due in June.
Cash dividends: Dividends of $22,500 will be paid in April.

Principal repayments and retirements:

No principal repayments or retirements are due during these months.

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QUESTION 5 (10 marks)
Riller Corporation is considering replacing a machine.
The replacement will reduce operating expenses (that is,
increase revenues) by $70,000 per year for each of the 5
years the new machine is expected to last.

Although the old machine has zero book value, it can be

used for 5 more years.

The depreciable value of the new machine is $120,000.

The firm will depreciate the machine under MACRS (as

given in Table 3.2) using a 5-year recovery period and is
subject to a 40% tax rate on ordinary income.

Required:
Estimate the incremental operating cash inflows
generated by the replacement.

QUESTION 6 (5 marks)

During your technical interview for a Portfolio Manager, your Interviewer Mr Bhola Lal, has asked you
to evaluate and give your recommendation about the following investment options:

a. What single investment made today, earning 14% annual interest, will be worth $1,000,000 at the
end of 5 years?
b. What is the present value of $1,000,000 to be received at the end of 5 years if the discount rate is
14%?
c. What is the most you would pay today for a promise to repay you $1,000,000 at the end of 5 years if
your opportunity cost is 14%?
d. Compare, contrast, and discuss your findings in parts a through c, clearly giving your
recommendation.

The real test of a portfolio manager is under tight constraints!

END OF PAPER

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