Review for chapters 1 to 3

Financial Management and

Investment
Dr. Tamer Mohamed Shahwan
Professor of Financial Management,
Department of Management, Faculty of Commerce,
Zagazig University
English Section Coordinator, Faculty of Commerce,
Zagazig University
Ph.D. in Business Administration, Humboldt University of
Berlin, Germany

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

1
Problem one:
Working with financial statements:
The following information is available on Al Ain Corporation.
Long-term debt to equity 0.5 to 1
Total asset turnover 2.5 times
Average collection period* 18 days
Inventory turnover 9 times
Gross profit margin 10%
Acid-test ratio 1 to 1
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF
COMMERCE, ZAGAZIG UNIVERSITY
8-2
• Assume a 360-day year and all sales on
credit.
• Complete the balance sheet for the company.

Cash $……… Notes and payables $100,000

Accounts receivable ………. Long-term debt ……..
Inventory ………. Common stock 100,000
Plant and equipment …… Retained earnings 100,000
Total Assets Total liabilities and
$............... Shareholders' equity $………
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF
COMMERCE, ZAGAZIG UNIVERSITY
8-3
Recall that:
◦Inventory turnover = Cost of goods sold ÷
Inventory
◦Quick ratio = [Current Assets- Inventory] ÷
Current liabilities
◦Average collection period = [receivables ×days in
the year] ÷ Annual credit sales
◦Long-term debt to equity = long-term debt ÷
Equity
◦Total asset turnover = Sales ÷ Total assets
◦Cost of goods sold = [1-Gross profit
margin][sales]
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF
COMMERCE, ZAGAZIG UNIVERSITY
8-4
Part Two: Financial analysis using
financial ratios

XYZ Corporation Comparative Balance Sheet

As at June 30, 2011 and 2012 (Millions of Dollars)

Where, XYZ profit after tax is $30 million for 2012, and Sales are
$10 million.

Calculate the following financial ratios for the XYZ

Corporation using the information given above and 2012
information.
Current ratio, Total assets turnover, Debt ratio, Return on total
assets (ROA), and Return on common equity (ROE).

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

5
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY
6
Answer:
Current ratio= Current assets/Current Liabilities
= 57/40=1.425
Total asset turnover = sales /Total assets
= 10/137=.0729
Debt ratio = Total Liab/Total Assets
=75/137=0.5474
Return on total assets=profit after tax/total assets
= 30/137=0.2189
Return on common equity =
profit after tax/total equity
= 30/62=0.4838

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

7
 Part one: M.C.Q
1) Finance is ________.

A) the system of verifying, analyzing, and recording business

transactions

B) the science of the production, distribution, and consumption of

goods and services

C) the art and science of managing money

D) the art of merchandising products and services

Answer is : C

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

8
 Part one: M.C.Q
2) Which of the following is a duty of a financial manager in a
business firm? ________.

A) developing marketing plans

B) controlling the stock price

C) raising financial resources

D) auditing financial records

Answer is : C

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

9
 Part one: M.C.Q
3) A ________ is responsible for evaluating and
recommending proposed long-term investments.

A) financial analyst

B) credit manager

C) pension fund manager

D) capital expenditures manager

Answer is : D
PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY
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 Part one: M.C.Q
4) Which of the following forms of organizations is the easiest to
form?

A) sole proprietorships

B) limited liability corporation

C) limited partnership

D) S-corporations

Answer: A

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

11
 Part one: M.C.Q
5) Which of the following is a strength of a corporation?

A) low taxes

B) limited liability

C) low organization costs

D) less government regulation

Answer: B

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

12
 Part one: M.C.Q
6) The wealth of the owners of a corporation is represented by
________.
A) profits
B) earnings per share
C) share value
D) cash flow

Answer is : C

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

13
 Part one: M.C.Q
7) Wealth maximization as the goal of a firm implies enhancing the
wealth of ________.

A) the auditors

B) the creditors

C) the federal reserve

D) the firm's stockholders

Answer: D

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF COMMERCE, ZAGAZIG UNIVERSITY

14
 Part one: M.C.Q

8) The amount earned during the accounting period on each outstanding

share of common stock is called ________.
A) dividend per share
B) earnings per share
C) net profits after taxes
D) book value per share

Answer: B

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-15
 Part one: M.C.Q

9) The key variables in the owner wealth maximization process are

________.
A) market risk premium and risk
B) cash flows and risk
C) risk-free rate and share price
D) total assets and risk

Answer: B

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-16
 Part one: M.C.Q

10) Which of the following is true of stakeholders?

A) They are the owners of a firm.
B) They are groups to whom a firm has financial obligations.
C) They are groups having a direct economic link to a firm.
D) They include only the bondholders, common stockholders, and
preferred stockholders.

Answer: C

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-17
 Part one: M.C.Q

11) As a key participant in financial transactions, individuals are

________.
A) net demanders of funds because they save more money than they
borrow
B) net users of funds because they save less money than they borrow
C) net suppliers of funds because they save more money than they
borrow
D) net purchasers of funds because they save more money than they
borrow
Answer: C

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-18
 Part one: M.C.Q

12) Government is typically a ________.

A) net provider of funds because it borrows more than it saves
B) net demander of funds because it borrows more than it saves
C) net provider of funds because it can print money at will
D) net demander of funds because it saves more than it borrows

Answer: B

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-19
 Part one: M.C.Q

13) Firms that require funds from external sources can obtain them
________.
A) through financial institutions
B) from central bank directly
C) through forex market
D) by issuing T-bills

Answer: A

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-20
 Part one: M.C.Q

14) Investment banks are institutions that ________.

A) perform all activities of commercial banks and retail banks
B) are exempted from Securities and Exchange Commission
regulations
C) engage in trading and market making activities
D) are only limited to capital market activities
Answer: C

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-21
 Part one: M.C.Q

16) Which of the following assists 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
Answer: A

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-22
 Part one: M.C.Q

17) Most businesses raise money by selling their securities in a ________.

A) public offering
B) forex market
C) futures market
D) commodities market
Answer: A

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-23
 Part one: M.C.Q

18) Which of the following is a forum in which suppliers and demanders

of funds can transact business directly?
A) shadow banking system
B) financial markets
C) commercial banks
D) financial institutions
Answer: B

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-24
 Part one: M.C.Q

19) The sale of a new security directly to an investor or a group of

investors is called ________.
A) arbitraging
B) short selling
C) a capital market transaction
D) a private placement
Answer: D

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-25
 Part one: M.C.Q

20) The ________ market is where securities are initially issued and the
________ market is where pre-owned securities (not new issues) are
traded.
A) primary; secondary
B) money; capital
C) secondary; primary
D) primary; money
Answer: A

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-26
 Part one: M.C.Q

21) The over-the-counter (OTC) market is ________.

A) a highly liquid market as compared to NASDAQ
B) a market in which low risk-high return securities are traded
C) an organized market in which all financial derivatives are traded
D) a market where smaller, unlisted securities are traded
Answer: D

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-27
 Part one: M.C.Q

22) Which of the following are examples of a secondary market transa

ction?

A. A company issues new C. An investor asks his broker to

common stock. purchase 1,000 shares of Microsoft

common stock.

B. A company issues new D. Statements (B) and (C) are correct.

bonds. E. Statements (A) and (B) are correct.

PROF. DR. TAMER MOHAMED SHAHWAN, FACULTY OF

COMMERCE, ZAGAZIG UNIVERSITY
8-28