ASIA-PACIFIC INTERNATIONAL UNIVERSITY

Faculty of Business Administration

Second Semester 2020-2021 - Midterm Examination

FINC 232 /332 Business Finance

Lecturer Dr. Damrong Sattayawaksakul Student Name ___________________

Date Thursday, February 25, 2021
Time 15.00 to 17.00 ID No. ___________________
Venue IT 222 and Online via Moodle Section A: Short Answer 22
Exam Grade 30 percent Section B: Short Calculation 20
Section C: Financial Analysis 18
TOTAL (MARKS) 60
Instructions
1. Open book exam. Use your textbook only when it is necessary. However, time is limited;
please be sure that you use your time wisely.
2. The questions will be uploaded to Moodle at 15.00, on Thursday, February 25, 2021. All
answers must be completed by 17.00 (Thailand time) on Thursday, February 25, 2021.
No makeup or additional time is given for anyone who starts late. You must submit your
answers in Moodle.
3. Online students must use the Teams to show your face during the exam time. You are
NOT ALLOWED to consult or share information with your classmates or anyone else
during the exam; answers to all exam questions must be your work alone. Any violations
or suspicious activities of such nature will invite penalties. Make sure that you practice
academic honesty and integrity in all your work. “He that is faithful in that which is least
is faithful also in much: and he that is unjust in the least is unjust also in much.” Luke
16:10

Part A: Short Answer (Total 22 points)

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1. Is “issuing 10-year versus 20-year bonds” a firm's financing decision or investment decision? (3
points)
2. What is the primary goal of financial management? (3 points)
3. What are the major disadvantages of a sole proprietorship? (3 points)
4. When corporations need to raise funds through stock issues, do they rely on the primary market or
secondary market? (3 points)
5. Are mutual funds a financial intermediary or a financial institution? (2 points)
6. What account represents the cumulative earnings of the firm since the firm started, minus dividends
paid? (3 points)
7. Is goodwill an intangible asset or a current asset? (2 points)
8. What is the major limitation of financial statements? (3 points)

Part B: Short Calculation (4 points each)

1. Assume a firm generates $2,000 in sales and has a $500 increase in accounts receivable during an
accounting period. Based solely on this information, What is the change in cash flow?

2. What is the change in cash for a firm with the following: $15,000 cash flow from operations, $2,500
cash used for new investment, a reduction in the level of debt of $3,000, $1,500 in cash dividends,
and $200 in depreciation expense?

3. What is the market price of a share of stock for a firm with 100,000 shares outstanding, a book
value of equity of $3,000,000, and a market-to-book ratio of 3?

4. What is the future value of $1,000 if interest is compounded annually at a rate of 8% for five years?

5. How much must be invested today in order to generate a 5-year annuity of $1,000 per year, with the
first payment 1 year from today, at an interest rate of 12%?

Part C: Financial Analysis (Total 18 points)

Given the financial data of Verentsia Company below:

VERRENTSIA COMPANY
Balance Sheet
As of December 31, 2018 and 2019
2018 2019
ASSETS
Cash $10,000 $50,000
Accounts Receivable 30,000 50,000
Inventory 180,000 200,000
Net plant and equipment 680,000 700,000
Total assets $900,000 $1,000,000

LIABILITIES AND EQUITY

Accounts payable $50,000 $100,000
Accrued expenses payable 70,000 100,000
Long-term debt 250,000 240,000
Common stock 100,000 100,000
Paid-in capital 50,000 50,000
Retained earnings 380,000 410,000
Total liabilities and stockholders’ equity $900,000 $1,000,000
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VERRENTSIA COMPANY
Income Statement
For the year ended December 31, 2019
Sales (all on credit) $2,500,000
Cost of goods sold 2,000,000
Gross profit $500,000
Sales and administrative expenses 40,000
Depreciation 60,000
Operating profit (EBIT) $400,000
Interest expense 50,000
Profit before tax $350,000
Tax (40%) 140,000
Net income $210,000

Requirement:
Calculate the financial ratios and write your answers in the following table by using the data of
Verentsia Company given above, analyze the financial performance of the year 2019 and provide
suggestions for improvement (1 year = 365 days).

1. Net Profit Calculation Result Suggestion (if there is)

Margin The net profit margin in 2018 is
Ind. Average = 6% already at the industry average, so
=NI/Sales it is recommended that companies
=210,000/2,500,000=8% increase the net profit generated
and reduce excessively high
expenses so as to increase the net
profit margin.

2. Return on assets Calculation Result Suggestion (if there is)

(investment) The rate of return on assets is
Ind. Average = already past the industry average
20% =210,000/1,000,000=21% which indicates that firms are less
efficient at using existing assets to
generate more revenue

3. Average Calculation Result Suggestion (if there is)

collection period
Ind. Average = 2 =365/Receivable turnover ratio This is still not good for the
days =365/62.5 = 5.84 days company because it collects
receivables faster by the industry
(2 days) on average than the
company (5.84 days).

4. Inventory Calculation Result Suggestion (if there is)

turnover
Ind. Average = 18 =2,000,000/180,000=11,1 times No suggestion
times
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5. Current ratio Calculation Result Suggestion (if there is)

Ind. Average = 1.8 No suggestion
times =300,000/200,000=1.5 times

6. Quick ratio Calculation Result Suggestion (if there is)

Ind. Average = 1.0 No Suggestion
times =100,000/200,000=0.5 times

Ratio Formula
Profitability Measures
  Return on assets (ROA) after-tax operating income/total assets
  Return on capital (ROC) after-tax operating income/(long-term debt + equity)
  Return on equity (ROE) net income/equity
  EVA* ($ millions) after-tax operating income - cost of capital x capital
  Operating profit margin after-tax operating income/sales
 
Efficiency Measures
  Asset turnover sales/total assets at start of year
  Receivables turnover sales/receivables at start of year
  Average collection period (days) receivables at start of year/daily sales
  Inventory turnover cost of goods sold/inventory at start of year
  Days in inventory inventories at start of year/daily cost of goods sold
 
Leverage Measures
  Total debt ratio total liabilities/total assets
  Times interest earned EBIT/interest payments
  Cash coverage ratio (EBIT + depreciation)/interest payments
 
Liquidity Measures
  Net working capital to assets net working capital/total assets
  Current ratio current assets/current liabilities
Quick ratio (cash + marketable securities + receivables)/current liabilities
  Cash ratio (cash + marketable securities)/current liabilities
 Page 4 of 3

Answer Part B :
1. Sales Revenue $2000
Increase $500 on Receivable
based on the assumption that the company experienced a change in cash flow of 1500 due to an
increase in accounts receivable

2. Statement of Cashflows
Cash from operation……………………$15,000

Investment……………………………...($2,500)
Cash from investing……………………$2,500

Change in Debt………………………...$3,000
Paid Dividend………………………….($1.500)

Add: Depreciation……………………..$200
Cash and Cash Equivalent $14,2000

3. Share 100,000
Book Value $3,000,000
Market Value ?
Market to Book Ratio 3
MV=$3,000,000 x 3 = $9,000,000

4. Years 1 = 1000(1.08)=1080
Years 2 = 1000(1.08)^2=1166.4
Years 3 = 1000(1.08)^3=1259.712
Years 4 =1000(1.08)^4=1360.48869
Years 5 =1000(1.08)^5=1469.328077
Total = $5335.928767
5. PV=1000(1/12-1((0.12)(1.12)^5)=3605.78