College of Business Administration

Department of Finance & Economics

Course Title: Financial Management 11M/11
Course Code: 0308230-10707
Total 25 Marks
Time: 1 Hour

Section A: MCQ [13X1 = 13 Marks]

[There is ONLY ONE CORRECT ANSWER in every 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.
Answer: A

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
Answer: A

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
Answer: A

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

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

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D) Liquidity ratios
Answer: D
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
Answer: A

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
Answer: C
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
Answer: B

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
Answer: C

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. Generally speaking, which firm is placing fewer burdens on its borrowing?
A) Firm 1
B) Firm 2
C) Firm 3
D) Firm 4
Answer: A

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.
Answer: C

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

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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
Answer: C

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
Answer: D

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.
Answer: D

Section B: Calculations 12 Marks

14. These are some performance indicators for Emirates and Etihad [4 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 industry [Comment on all four areas of
ratios - 2 mark]

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15. Find the following information for Savoy Corporation for the year ending December 31, 2021:
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 net income for the Savoy Corporation for 2021? [1 mark]
Net Income = $836,000 - $345,000 - $93,000 - $126,000 -$79,000 - $57,100 = $135,900.

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b) What is the cash flow for the Savoy Corporation for 2021? [1 mark]
Cash Flow = Net Income + Depreciation = $135,900 + $126,000 = $261,900.

c) What is the EBIT for the Savoy Corporation for 2021? [1 mark]
Answer: $272,000

d) What is the average tax rate for the Savoy Corporation for 2014? [1 mark]
A) 29.6%

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16) Find the Balance Sheet for McCoy Corporation on the 31st December 2012 and 2013 respectively below:

By using common-size statements, comment on the following key activities of financial management [3
marks for the calculation and 3 marks for the comments on the three functions]:

(a) Operating activities

(b) Investment Activities
(c) Financing Activities

Appendix: Financial Ratios:

Profitability ratios

1. Profit margin: Net Income/Sales

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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:

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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