College of Business Administration

Department of Finance & Economics

MIDTERM EXAM
16 Oct 2022 - Fall 2022-2023

Course name: Financial Management

Course No: 0308230
Exam duration: 1 hour

Student Name:
ID:
Section (circle) 11 (11:00 – 12:00) 11M (11:00-12:00)
Student signature:

Exam Rules:
1. Do not open this exam until you are told to begin
2. No Questions are allowed during the examination
3. This exam has 2 parts:
 Multiple choices 13 marks
 Prob Solving and Data Analysis 12 marks
4. Do not separate the pages of the exam
5. Calculators are allowed but cannot be shared
6. Turn off all the cell phones and remove all headphones
7. Take off your cap
8. No communication of any kind

Exam Assessment

Questions Weight Marks Type of Question Student Scores

1-13 13 MCQ: 1-13

14 2 Prob solving and data analysis: 14
15 4 Prob solving and data analysis: 15
16 6 Prob solving and data analysis: 16
Total 25

1
MCQ Answer sheet

Name: ID:

MCQ

1 A B C D 8 A B C D

2 A B C D 9 A B C D

3 A B C D 10 A B C D

4 A B C D 11 A B C D

5 A B C D 12 A B C D

6 A B C D 13 A B C D

7 A B C D

2
Part 1: MCQs (13 marks = 13*1): Transfer you answers to the table in page 2
Answer all questions and transfer your answers to the table in page 2.

[There is ONLY ONE correct ANSWER in every MCQ question. Please CIRCLE ONLY ONE answer for each
question. If you CIRCLE MORE THAN ONE answer, your answer for the question will be CANCELLED]

1) With regard to trend analysis over time, which of the following statements is TRUE?

A) We often look at the past five years of financial statements to establish trends and then
predict future performance based on these trends.
B) To look at trends over time requires that we examine a financial statement at one point in
time.
C) The net income last year was $20,000 and the past five years has shown an increase of 10% on
average for each of these five years. The predicted net income for next year is still $20,000.
D) It is better to predict future performance by basing it solely on net income than on all the
individual accounts.

2) Comparing two companies using ________ may point out differences in management styles.

A) common-size financial statements

B) sales growth
C) historical share prices
D) earnings per share

3) To convert an income statement into a common-size income statement, we restate all the
numbers as percentages of ________.

A) total revenues
B) cost of goods sold
C) net income
D) total assets

4) ________ can be helpful for managers to understand short-term cash obligations.

A) Profitability ratios
B) Asset management ratios
C) Debt ratios
D) Liquidity ratios

3
5) ________ help us analyze whether a company is moving toward financial stress or is using
debt to benefit the company and ultimately, the owners of the company.

A) Financial leverage ratios

B) Asset management ratios
C) Days' sales in inventory
D) Total asset turnover

6) Which of the following identities is TRUE?

A) Operating Cash Flow = EBIT - Depreciation + Taxes

B) Net Capital Spending = Ending Net Fixed Assets - Depreciation
C) Net Working Capital (NWC) = Current Assets - Current Liabilities
D) Cash Flow from Assets = Operating Cash Flow - Net Capital Spending

7) One of the key components to making financial decisions is to ________.

A) understand the timing and amount of dividends

B) understand the timing and amount of cash flow
C) understand the timing of EBIT
D) understand the amount of net income

8) Because financial ratios can vary across industries, it is ________ these ratios by industry.

A) not necessary to study

B) unimportant to benchmark
C) important to benchmark
D) futile to examine

9) The debt-to-equity ratios for Firm 1, Firm 2, Firm 3, and Firm 4 are 0.25, 0.35, 0.35, and 0.45,
respectively. The earnings per share for Firm 1, Firm 2, Firm 3, and Firm 4 are $4.5, $3.5, $3, and
$2.5, respectively. Which firm is placing fewer burdens on its borrowing?

A) Firm 1
B) Firm 2
C) Firm 3
D) Firm 4

4
10) Which of the following is NOT an example of an agency cost?

A) Paying an accounting firm to audit your financial statements

B) Paying an insurance company to assure that building codes have been met for new
construction
C) Paying a landscaping firm to maintain your firm's grounds
D) All of the above are agency costs.

11) Of the following activities, which is MOST likely to be an interaction between the financial
manager and the manufacturing manager?

A) Setting of credit policies

B) Developing a system to bill customers, pay suppliers, and track inventory
C) Budgeting the timing and amount of cash needed for the production schedule
D) Determining that there are a sufficient number of trained workers to develop the product

12) Which of the following can lead to increased expected cash flow over time to the firm?

A) Open and collaborative relations with the community

B) Qualified and motivated employees
C) Greater customer satisfaction
D) All of the above

13) Maximizing the market value of firm equity and which of the following are mutually
exclusive?

A) Maximizing market value and a safe and happy work place are mutually exclusive.
B) Maximizing market value and good relationships with the local community are mutually
exclusive.
C) Maximizing market value and customer satisfaction are mutually exclusive.
D) None of the above is mutually exclusive with maximizing the value of market equity.

5
Part 2: Problem solving and data analysis (12 marks): Answer all the questions in this part

Question 14

These are some performance indicators for Emirates and Etihad Airlines below [2 Marks]:
Financial Ratios Emirates Airline Etihad Airlines Airlines Industry
Return on Assets 2.21% 4.71% 0.7%
Price/Earnings 25.41 21.88 22.44
Debt-to-Equity 1.00 0.50 1.69
Current Ratio 0.90 1.00 0.92
Required:
i) Compare the position of the two airlines with respect to the airlines industry
[Comment on all four areas of ratios - 2 marks]

6
Question 15

Find the following information for Savoy Corporation for the year ending December 31, 2021 [4
Marks]:
Account Balance
Cost of goods sold $345,000
Interest expense $79,000
Taxes $57,100
Revenue $836,000
Selling, general, and administrative
expenses $93,000
Depreciation $126,000

By using the information above, answer the following questions:

a) What is the EBIT for the Savoy Corporation for 2021? [1 mark]
b) What is the average tax rate for the Savoy Corporation for 2021? [1 mark]
c) What is the net income for the Savoy Corporation for 2021? [1 mark]
d) What is the cash flow for the Savoy Corporation for 2021? [1 mark]

7
Question 16

Find the Balance Sheet for McCoy Corporation on the 31st December 2012 and 2013 respectively
below [6 Marks]:

By using common-size statements, comment on the following key activities of financial

management:

a) Operating activities
b) Investment Activities
c) Financing Activities

[3 marks for the calculation and 3 marks for the comments on the three functions]

8
 Appendix - Financial Ratios
Profitability ratios
1. Profit margin: Net Income/Sales
2. Return on assets: Net Income/Total Assets
3. Return on equity: Net Income/Shareholders’ Equity

Asset utilization ratios

4. Receivable turnover: Sales/Accounts Receivables
5. Accounts Receivables Days: Accounts Receivables/Average Daily Sales
6. Inventory turnover: Cost of Goods Sold/Inventory
7. Average Payable Days: Accounts Payable/Average Daily Cost of Goods Sold
8. Fixed asset turnover: Sales/Fixed Assets
9. Total asset turnover: Sales/Total Assets

Liquidity ratios
10. Current ratio: Current Asset/Current Liability
11. Quick ratio: (Current Asset – Inventory)/Current Liability
12. Cash Ratio = Cash / Current Liability

Debt utilization ratios

13. Debt to Equity: Long-term Debt/Shareholders’ Equity
14. Debt to total assets (debt ratio): Total Liabilities/Total Assets
15. Times interest earned: EBIT/Interest Expense

Market value ratios

16. Earnings per share (EPS): Net Income/No of Shares Outstanding
17. Price/Earnings (P/E) ratio: Market Capitalization/Net Income OR Price per Share/Earnings
per Share (EPS)
18. Market/Book (M/B) ratio: Market Value per Share/Book Value per Share
19. Dividend Payout Ratio= Dividend/Net Income

DuPont Analysis:
Involves breaking down ROE into three components of the firm:
20)a) Operating efficiency, as measured by the profit margin (net income/sales);
20)b) Asset management efficiency, as measured by asset turnover (sales/total assets); and
20)c) Financial leverage, as measured by the equity multiplier (total assets/total equity).
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑒𝑡𝑟𝑢𝑛 𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 = 𝑋 𝑋 =
𝑆𝑎𝑙𝑒𝑠 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

The End