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Bus 300 Lemke Midterm Exam September 22, 2004

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The balance sheet and income statement on the next page for questions #1 through #7: (5 pts) 1. What is the firm’s operating cash flow for 2000? 623

(5 pts) 2. What is the firm’s net capital spending for 2000? 328

(5 pts) 3. What is the firm’s change in net working capital for 2000? 136 (5 pts) 4. What is the firm’s cash flow from assets for 2000? 159

(5 pts) 5. What is the firm’s cash flow to creditors for 2000? 30 (5 pts) 6. What is the firm’s cash flow to stockholders for 2000? 129

(5 pts) 7. If the firm has 180 million shares of stock outstanding, what is the firm’s 2000 earnings per share? 2.02

(45 pts) 8. Brit Kneespeers wants to buy a new car (Lambourghini) when he graduates college in 4 years. He expects it to cost $110,000 at that time. He has the following sources of money:

1. Two years from now he will receive $40,000 from a trust and plans to put that money in his bank account which pays 5% APR compounded monthly.

2. He will save up money by making quarterly deposits of $2,000 in an investment account that pays 8% APR compounded quarterly.

3. At the time of purchase, Brit believes he will be able to afford to take out a 5 year, 10% APR (monthly compounding) loan with monthly payments of $150.

Brit’s godparents (Chris & Tina Che-Guevara) have offered to deposit a lump sum of money into his bank account now so that he will have enough to buy the car in 4 years. Based on this information, calculate the expected size of the deposit that Brit’s

godparents will need to make today. Show all work including formulas used. $44,197.65 $37,278.57 $7,059.81 $21,463.97 $17,580.52

(4 pts) 9. What effect would the following actions have on a firm’s current ratio? Assume that the net working capital is positive. Explain your answer.

a. A short-term bank loan is repaid. Increase b. A customer pays off a credit account. Same

(5 pts) 10. A firm is considering actions which will raise it debt ratio. It is anticipated that these actions will have no effect on sales, operating income (EBIT), or on the firm’s total assets. If the firm does increase its debt ratio, which one of the following will occur? Explain.

a. Return on assets will increase b. Times interest earned will increase c. Profit margin will decrease ← d. Total asset turnover will increase

(6 pts) 11. Annuity A makes annual payments of $1528.21 for each of the next 10 years, while annuity B makes annual payments of $990 per year forever. At what interest rate would you be indifferent between the two? At interest rates above/below this break-even rate, which annuity would you choose? Show all work including formulas used. r = 11% (6 pts) 12. Our Wall Street Journal readings have mentioned a number of factors that could affect

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The following balance sheet and income statement should be used for questions #1 through #8:

Kuipers, Inc.

12/31/99 and 12/31/00 Balance Sheet ($ in millions)

1999 2000 1999 2000

Cash $ 100 $ 121 Accounts payable $ 400 $ 350 Accounts rec. 350 425 Notes payable 390 370

Inventory 440 410 Total $ 790 $ 720

Total $ 890 $ 956 Long-term debt 500 550 Net fixed assets 1,556 1,704 Common Stock 600 580

Retained earnings 556 810

Total assets $ 2,446 $ 2,660 Total liabilities $2,446 $ 2,660 Kuipers, Inc.

2000 Income Statement ($ in millions)

Net Sales $ 1,384

Less: Cost of goods sold 605

Less: Depreciation 180

EBIT 599

Less: Interest paid 80

Taxable income 519

Less: Taxes 156

Net income $ 363

Addition to retained earnings $ 254

Dividends paid 109

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Bus 300 – Lemke Midterm Exam November 17, 2004

The following information should be used for questions #3 through #11: 1999 2000

Sales $2,900 $3,300

COGS 2,030 2,310

Interest 410 420

Dividends 56 79

Depreciation 290 330

Cash 250 150

Accts. Receivable 242 412

Current Liabilities 900 1,100

Inventory 1,015 900

Long-term Debt 3,200 3,100

Net Fixed Assets 6,000 5,700

Tax Rate 34% 34%

(3 pts) 3. What is earnings before interest and taxes for 2000? 660 (3 pts) 4. What is net income for 2000? 158.40

(3 pts) 5. What is operating cash flow for 2000? 908.40 (3 pts) 6. What is net working capital for 2000? 362 (3 pts) 7. What is net capital spending for 2000? 30

(3 pts) 8. What is the change in net working capital during 2000? 362 – 607 = -245 (3 pts) 9. What is cash flow to stockholders for 2000? 603.40

(3 pts) 10. What is cash flow to creditors for 2000? 520 (3 pts) 11. What is cash flow from assets for 2000? 1,123.40

(6 pts) 12. Explain what happens to a firm’s current ratio if: (a) Inventory is purchased with cash. Same (b) Inventory is purchased on credit. Decrease (4 pts) 13. Can a firm’s current ratio be too high? Explain. Yes

(4 pts) 14. When would a firm’s return on equity definitely equal the return on assets? Explain. Debt = 0

(10 pts) 15. If someone asked you how the stock market had been doing over the past month what would you tell them and what evidence would you offer to support your statement?

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(40 pts) 16. Becky Davidham plans to buy a house in 5 years. She expects it to cost $250,000 at that time. She has the following sources of funds:

1. She will save up money by making quarterly deposits of $5,000 in an investment account that pays 10% APR compounded quarterly.

2. Her Aunt Mia will deposit $15,000 into a bank account at the end of year 2 and year 4. The account pays 7% APR compounded monthly.

3. At the time of purchase, Becky believes she will be able to afford to take out a 15 year, 12% APR (monthly compounding) loan with monthly payments of $700. Becky’s friend, Donna Mara, has offered to deposit a lump sum of money into her bank

account (7% APR, monthly compounding) now so that she will have enough to buy the house in 5 years. Based on this information, calculate the expected size of the deposit that Donna will need to make today.

Show all work including formulas used.

$127,723.28 $18,493.88 $16,084.35 $58,325.16 $29,373.31 $20,720.08

(7 pts) 17. Investment XYZ promises to pay a fixed amount ($C) every 2 years forever. Assume the appropriate annual discount rate is r.

(a) Derive an expression for the value of investment XYZ that is a function of only C and r. (b) If r = 10%, find the value of C that would make an investor indifferent between

investment XYZ and an investment that makes annual payments of $100 forever.

(a)

(

)(

)

2

1 1

1 1 1 2

2-period exchange factor

r r r r

= =

+ + + +

2 2 2-period discount rate = r + r

2 2

C 2-period perpetuity

r r =

+

(b) 100 210

21 10

C $

C $

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Bus 300 – Lemke Midterm Exam April 20, 2005

(5 pts) 3. (a) The Wall Street Journal often refers to stocks as expensive. Explain what is meant by the term “expensive.”

(4 pts) (b) Under what circumstances would you be willing to invest in an “expensive” stock? That is, what sort of beliefs might you have concerning the company’s future?

(30 pts) 4. Consider the following abbreviated financial statements for Parrothead Enterprises:

Parrothead Enterprises 2004 and 2005 Partial Balance Sheets

Parrothead Enterprises 2005 Income Statement Assets Liabilities & Owners’ Equity Sales 8,600

2004 2005 2004 2005 Costs 4,150

Current Assets 650 705 Current Liabilities 265 290 Depreciatio 800 Net Fixed Assets 2,900 3,400 Long-Term Debt 1,500 1,720 Interest Paid 216

(a) What is the owners’ equity for 2004 and 2005? 1785, 2095 (b) What is the change in net working capital for 2005? 30

(c) In 2005, Parrothead Enterprises purchased $1,500 in new fixed assets. How much in fixed assets did Parrothead Enterprises sell? 200

(d) What is the cash flow from assets for the year 2005? The tax rate is 35%. 1918.10 (e) During 2005, Parrothead Enterprises raised $300 in new term debt. How much

long-term debt must Parrothead Enterprises have paid off during the year? 80 (f) What is the cash flow to creditors? -4

(8 pts) 5. In class we divided long-term solvency measures into two groups, (1) the level of indebtedness, and (2) the ability to service debt.

(a) List two ratios that measure the level of indebtedness. D/E Ratio, Total Debt Ratio

(b) List two ratios that measure the ability to service debt. TIE Ratio, Cash Coverage Ratio

(6 pts) 6. Solve for the present value of a $20,000 lump-sum paid in 7 years discounted at 8% APR with continuous compounding. Show all work including formulas used.

(6)

(38 pts) 7. Frederick Krueger plans to buy a house in 4 years. He expects it to cost $500,000 at that time. He has the following sources of funds:

1. At the time of purchase, Frederick believes he will be able to afford to take out a 20 year, 9% APR (monthly compounding) loan with monthly payments of $2,000.

2. His generous uncle, Mike Myers, will deposit $30,000 into Frederick’s bank account at the end of year 1. The account pays 6% APR compounded monthly.

3. He will save up money by making quarterly deposits of $10,000 in an investment account that pays 7% APR compounded quarterly.

A Swedish friend currently attending Dordt College, Bjorn Loser, has offered to deposit a lump sum of money into Frederick’s bank account (6% APR, monthly compounding) now so that he will have enough to buy the house in 4 years. Based on this information, calculate the expected size of the deposit that Bjorn will need to make today.

Show all work including formulas used.

$222,289.91 $35,900.42 $182,816.77 $58,992.10 $46,433.22

Bus 300 – Lemke Midterm Exam September 19, 2005

(6 pts) 10. Write an equation for the value of a perpetuity that pays $C at the end of each year if interest is compounded continuously and the quoted rate (APR) is r. Show all work.

1

r

C PPV

e =

(5 pts) 12. A firm purchases inventory using a short-term bank loan. What effect would this action have on the firm’s current ratio? Assume that the net working capital is positive. Explain your answer.

Current Ratio will decrease.

(8 pts) 15. Consider two investment possibilities:

A. A five year ordinary annuity with annual payments of $X.

B. A perpetuity with payments of $2X that begins at the end of year 5. Solve for the interest rate at which these two investments are of equal value.

(7)

(35 pts) 16. George plans to buy a house in 6 years. He expects it to cost $550,000 at that time. He has the following sources of funds:

1. His friend, Kramer, has offered to deposit $50,000 into George’s bank account 2 years from now and again 5 years from now. The account pays 4.5% APR compounded monthly.

2. George will save up money by making quarterly deposits of $7,000 in an investment account that pays 6% APR compounded quarterly.

3. At the time of purchase, George believes he will be able to afford to take out a 15 year, 8% APR (monthly compounding) loan with monthly payments of $1,200. Another friend, Newman, has offered to deposit a lump sum of money into his bank

account (4.5% APR, monthly compounding) now so that George will have enough to buy the house in 6 years. Based on this information, calculate the expected size of the deposit that Newman will need to make today. Show all work including formulas used. $59,840.72 $52,296.99 $200,434.65 $125,568.71 $111,858.93 $85,433.95

(8)

Use the balance sheet and income statement below for questions #4 through #10: (4 pts) 4. What is the amount of the net capital spending for 2005? $1,080

(4 pts) 5. What is the operating cash flow for 2005? $2,845

(4 pts) 6. What is the cash flow from assets for 2005? $430 (ΔNWC = $1,335) (4 pts) 7. What is the cash flow to creditors for 2005? $405

(4 pts) 8. What is the amount of dividends paid in 2005? $275 (4 pts) 9. What is the cash flow to stockholders for 2005? $25

Nabors, Inc. 2005 Income Statement ($ in millions)

Net sales $9,610

Less: Cost of goods sold 6,310 Less: Depreciation 1,370 Earnings before interest and taxes 1,930 Less: Interest paid 630

Taxable Income $1,300

Less: Taxes 455

Net income $ 845

Nabors, Inc. 2004 and 2005 Balance Sheets ($ in millions)

2004 2005 2004 2005 Cash $ 310 $ 405 Accounts payable $ 2,720 $ 2,570 Accounts rec. 2,640 3,055 Notes payable 100 0 Inventory 3,275 3,850 Total $ 2,820 $ 2,570 Total $ 6,225 $ 7,310 Long-term debt 7,875 8,100 Net fixed assets 10,960 10,670 Common stock 5,000 5,250 Retained earnings 1,490 2,060 Total assets $17,185 $17,980 Total liab.& equity $17,185 $17,980

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Bus 300 – Lemke Midterm Exam November 11, 2005

The following information should be used for questions #4 through #10: Show your work!

Knickerdoodles, Inc.

2004 2005

Sales $ 740 $ 785

COGS 430 460

Interest 33 35

Dividends 16 17

Depreciation 250 210

Cash 70 75

Accounts receivables 563 502

Current liabilities 390 405

Inventory 662 640

Long-term debt 340 410

Net fixed assets 1,680 1,413

Common stock 700 235

Tax rate 35% 35%

(4 pts) 4. What is the change in net working capital from 2004 to 2005? -$93 (4 pts) 5. What is net capital spending for 2005? -$57

(4 pts) 6. What is the operating cash flow for 2005? $297 (4 pts) 7. What is the cash flow from assets for 2005? $447 (4 pts) 8. What is net new borrowing for 2005? $70

(4 pts) 9. What is the cash flow to creditors for 2005? -$35 (4 pts) 10. What is the cash flow to stockholders for 2005? $482

(10)

(6 pts) 12. Solve for the future value of $30,000 invested for 6 years at 8% APR with continuous compounding. Show all work including formulas used.

FV = $48,482.23

(7 pts) 13. Consider the following assets:

(1) A $1,000 perpetuity that begins at the end of the second year (i.e., the first payment of $1,000 occurs at t = 3).

(2) A 10 year annuity that begins at the end of the fourth year (i.e., the first payment occurs at t = 5).

The relevant discount rate for both assets is 12%.

What would the annuity payments need to be for the two assets to have the same value?

PMT = $1,850.07

(38 pts) 14. Harold Green plans to buy a house in 5 years. He expects it to cost $600,000 at that time. He has the following sources of funds:

1. At the time of purchase, Harold believes he will be able to afford to take out a 15 year, 10% APR (monthly compounding) loan with monthly payments of $1,500.

2. In 3 years, his generous Uncle Red will deposit $50,000 into Harold’s bank account. The account pays 5% APR compounded monthly.

3. He will save up money by making quarterly deposits of $10,000 in an investment account that pays 8% APR compounded quarterly.

Harold’s friend Winston has offered to deposit a lump sum of money into his bank account (5% APR, monthly compounding) now so that he will have enough to buy the house in 5 years. Based on this information, calculate the expected size of the deposit that Winston will need to make today.

Show all work including formulas used.

References

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