MGT3310 Fundamentals of Financial Management Midterm

| June 6, 2016

Question
MGT3310 Fundamentals of Financial Management

Midterm Assessment

1. Calculate the change in the key balance sheet accounts between 2014 and 2015 and classify each as a source (S), a use (U), or neither (N), and indicate which type of cash flow it is: an operating cash flow (O), and investment cash flow (I) or a financing cash flow (F).

ABC Corp.

Balance Sheet Changes and Classification

of Key Accounts between 2014 and 2015

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Account

2015

2014

Change

Classification

Type

Long-term debts

$960

$800

Accounts receivable

640

500

Common stock

200

200

Cash

640

500

Retained earnings

960

800

Accruals

50

200

Inventory

840

600

Accounts payable

1,150

1,000

Net fixed assets

1,800

2,000

2. Identify whether the key characteristic describes common stock (CS) or preferred stock (PS).

________

1.

Source of financing which places minimum constraints on the firm

________

2.

Used by young firms receiving investment funds from venture capital firms

________

3.

Potential dilution of earnings and voting power

________

4.

Fixed financial obligation

________

5.

Increases the firm’s borrowing power

________

6.

May have cumulative and participating features

________

7.

May be convertible into another type of security

________

8.

Last to receive earnings or distribution of assets in the event of bankruptcy

________

9.

Frequently includes a call feature

3. You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:

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Answer the following questions:

· Given the information, what is the expected annual return of this portfolio?

· What is the beta of the portfolio in the table (containing X, Y, and Z)?

MGT3310 Fundamentals of Financial Management

Midterm Assessment

4. Xiao Xin owns stock in a company which has paid the annual dividends shown in the table below:

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Complete the following:

· Calculate the growth rate of these dividends.

· Calculate the estimated dividend for 2015.

· Using the Gordon model, calculate the per share value of the stock for 2014.

5. Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?

6. Calculate the future value of an annuity of $5,000 each year for eight years, deposited at 6 percent.

7. Dottie has decided to set up an account that will pay her granddaughter (Lexi) $5,000 a year indefinitely. How much should Dottie deposit in an account paying 8 percent annual interest?

8. Calculate the future value of $10,000 received today and deposited for six years in an account which pays interest of 12 percent compounded quarterly.

9. Darling Paper Container, Inc. purchased several machines at a total cost of $300,000. The installation cost for this equipment was $25,000. The firm plans to depreciate the equipment using the MACRS 5-year normal recovery period. Prepare a depreciation schedule showing the depreciation expense for each year.

MGT3310 Fundamentals of Financial Management

Midterm Assessment

10. Identify each expense or revenue as a cash flow from operating activities (O), a cash flow from investment activities (I), or a cash flow from financing activities (F).

Administrative expenses
Rent payment
Interest on a note payable
Sale of equipment
Dividend payment
Stock repurchase
Sale of finished goods
Labor expense
Sale of a bond issue
Repayment of a long-term debt
Selling expenses
Depreciation expense
Sale of common stock
Purchase of fixed assets
11. Discuss the limitations of ratio analysis and the cautions which must be taken when reviewing a cross-sectional and time-series analysis.

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