BUS640 The Financial Environment Written by: Charles Johnston, Chair, Dept. of Economics and…

BUS640

The Financial Environment

Written by: Charles Johnston, Chair, Dept. of Economics and Finance

Content: Seminar Lecturettes 1-3, and assigned textbook chapters.

MIDTERM EXAM

Directions: Include a copy of the question with each of your answers. For the problem-solving questions, show your work, to receive partial credit. If you use one or more sources of information in preparing any answer, provide an APA-style reference, and cite a reference wherever it is used. Identify any quoted information. Each question is equally-weighted, and counts 10% of your exam grade. The exam is 20% of your course grade. Use the Assignment Feature to submit your exam answers to the Grade Center by the end of seminar three.

1. Assuming zero taxes, calculate the future value of a $1,000 lump-sum contribution to a savings plan, compounded annually, at the end of: (a) five years, using a 4% rate of return; (b) thirty years, using a 8% rate of return.

2. How would each of the following events change the equilibrium financial market value of a company? (a)an increase in its cost of production; (b) an increase in its cost of financing; (c) an increase in the market’s discount rate; (d) an increase in its sales revenue; and (e) an increase in its projected future profits.

3. Describe one way that a financial manager of a retail company would efficiently adjust his company’s financial management practices to each of the following changes in market conditions: (a) a big competitor enters the market; (b) technological progress makes it easier to sell online; (c) it’s the beginning of the Christmas season; (d) the economy just entered a recession; (e) a nationwide banking crisis just started, reducing the availability of credit.

4. In a big corporation whose job is it to: (a) be the top financial manager? (b) prepare the firm’s financial statements? (c) obtain financing for the firm? (d) be the boss of the top financial manager? (e) oversee the top managers, on behalf of the stockholders?

5. (a) Provide an example of an unethical financial management business practice. (b) Provide an example of an ethical but inefficient financial management business practice.

6. A firm has the opportunity to invest in a project that is expected to pay an end-of-year annual return of $2 million for each of the next fifteen years after taxes and expenses. The current cost of the project would be $6 million. Assuming a discount rate of 10%, as the required rate of return and (opportunity) cost of capital (i.e., economic costs of capital): (a) Calculate the present value of the project to the firm. (b) Calculate the net present value of the project. (c) Using the net present value principle, determine whether or not the firm should make the investment. (d) Using the internal rate of return principle, determine whether or not the firm should make the investment. (e) Using the equilibrium market valueof the firm principle, determine whether or not the value of the firm would increase if the firm decided to undertake this investment project.

7. (a) Define the current ratio and return on assets ratio. (b) State what financial management problem each of these financial ratios could be used to identify. (c) What would be a good benchmark to use for each of these financial ratios?

8. Calculate the present value of a bond that pays a coupon rate of 3%

per year for 10 years, and matures in 10 years at its face value of $1000, using each of the following current market interest rates as the discount rate:(a) 2%;(b) 3%; (c) 5%. Show your calculations.

9. (a) Provide two reasons for a company to lease some type of capital equipment, rather than buying it. (b) Provide three reasons for a company to buy some capital equipment, rather than lease it.

10. (a) Identify and briefly describe two phases of the capital budgeting process. (b) Would saving time by skipping one of these phases in the capital budgeting process make sense financially?

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