Fina 2360 Fall 2015 Fall Midterm Key

Finance 2360 Midterm Exam Fall 2015 Student Name:

Answer Key Sections E  F

Student Num!er: Section: "otal "ime Allowed: 2#5 $ours %nstructions: &lease read t$e 'uestions care(ully) S$ow your met$odolo*y) Final answers carry near +ero mar,s# State any assum-tion t$at you ma,e# .nly aut$ori+ed calculators are allowed# /ell -$ones are not allowed in t$e exam room# No !at$room !rea,s) % $ae read and understand t$e instructions:

Si*nature: 

.r*ani+ation &art % Multi-le /$oice &art %% "rue4False &art &art %%% %%% &ro! &ro!le lems ms 56 56 Mar, Mar,s s &ro!lem 1 &ro!lem 2 &ro!lem 3 &ro!lem  "."A7 includes 2 !onus -oints

alue 2 12 12 11 12 21 82

Mar,

&A9" %: M7"%&7E /;.%/E EA/; <ES"%.N %S =.9"; 2 MA9KS# /%9/7E ";E M.S" A&&9.&9%A"E ANS=E9 ". EA/; <ES"%.N#

1. All else equal, the monthly payment amount of a loan decreases if A. The quoted interest rate increases B. The maturity of the mortgage decreases /# "$e -ayments occur at t$e !e*innin* s# at t$e end o( t$e mont$ D. The principal increases E. None of the above . !hen a firm receives an outstanding payment from a customer and uses it to pay off a "year ban# loan $. The long"term debt ratio %ill decrease. 2 year loan is lon* term de!t > reduction $$. &'A %ill increase. &ayin* o(( de!t# 9educes t$e interest resultin* a $i*$er N% and a $i*$er return on t$e assets net income4assets $$$. The current ratio %ill decrease. 9educes cas$ in /A > yes A. 'nly $ is true B. $ and $$ are true (. $ and $$$ are true D. $$ and $$$ are true E# %? %% and %%% are true ). !hen a firm ta#es out a "year ban# loan to pay its suppliers $. The total debt ratio %ill increase. 9ecorded as lon* term de!t# "rue $$. &'A %ill decrease. @orrowin* will allow N% to increase and 9.A will increase not decrease# False# $$$. The current ratio %ill increase. %ncrease in cas$ wit$ not increase in /7# "rue A. 'nly $ is true B. $ and $$ are true /# % and %%% are true D. $$ and $$$ are true E. $, $$ and $$$ are true

Finance 2360 Fall 2015 Midterm

1

*. The purchase and sale of securities after the original issuance occurs in the A. +rimary mar#et B. Secondary mar,et# Existin* securities are traded in t$e secondary mar,et# (. Dealer mar#et. D. Auction mar#et. E. iquidation mar#et. -. (apital structure refers to A. the amount of inventory held. B. the amount of cash on hand. /# t$e mixture o( de!t and e'uity# D. the accounts receivable policy. E. the management of long"term investments. . A current asset A# $as a li(e o( less t$an one year# .ne year or one !usiness cycle w$ic$eer is less# B. includes accounts payable. (. is an illiquid asset. D. is included in the statement of comprehensive income. E. is part of shareholders/ equity. 0. (urrent assets minus current liabilities are referred to as A. Tangible assets. @# Net wor,in* ca-ital# /urrent assets and current lia!ilities are t$e ca-ital you wor, wit$# (. Net income. D. Net assets. E. Net boo# value. . The cash generated from a firm/s normal business activities is called A. 2inancing cash flo%. B. Net income. (. 3ross profit. # .-eratin* cas$ (low# "$is is t$e cas$ (low t$at is *enerated or s-ent in t$e o-erations o( t$e (irm# E. 2ree cash flo%.


2

8# !hich one of the follo%ing %ill cause cash flo% to stoc#holders to increase, all else constant4 A. A secondary common stoc# offering B. A decrease in dividends per share (. An increase in cash flo% to creditors given no change in cash flo% from assets D. A decrease in cash flo% from assets given no change in cash flo% to creditors E# A decrease in cas$ (low to creditors *ien an increase in cas$ (low (rom assets# "$e decrease in t$e cas$ (lows to creditors lenders or !ond$olders will result in a $i*$er net income and an increase in t$e cas$ (low (or t$e s$are$olders# 15. A common"si6e statement of comprehensive income is defined as a financial statement %herein all items are e7pressed as a percentage of A. their prior year/s value. B. their pro8ected value. (. their -"year average value. D. total assets. E# sales# %n t$e common si+e income statement? all alues are ex-ressed as a -ercenta*e o( t$e sales (or t$e -eriod# 11# !hich of the follo%ing is 9are: a source of cash4 $. An increase in accounts payable. An increase in A4& means you $aenBt -aid yet# Source $$. A reduction in inventory. A decrease in inentory means t$at you $ae sold inentory# Source $$$. An increase in retained earnings. "$e net income $as !een added to t$e 94E and t$e N% is *reater t$an any diidends t$at $ae !een -aid out# Source# $;. An increase in notes payable. Cou $ae !orrowed additional (unds# Source A. $$ and $$$ only B. $ and $; only (. $, $$ and $; D. $, $$$, and $; only E# %? %%? %%%? and %

1. A loan %here the borro%er receives money today and repays a single lump sum at some time in the future is called a9n: <<<<<<<<<<< loan. A. Amorti6ed. "$e amorti+ed loan -ays a !lend o( -rinci-al and interest# B. (ontinuous. Foreer? $as no maturity date# (. Balloon. Ma,es -ayments durin* t$e loan -lus an in(lated t$us !alloon at maturity # &ure discount# Cou !orrow a discount alue and -ay !ac, t$e (ull alue at maturity# E. $nterest"only. &ays interest and only interest durin* t$e loan -eriod muc$ li,e t$e cas$ (lows (or a !ond and t$en -ay t$e -rinci-al !ac, at maturity# &A9" %%: "9E4FA7SE


3

%N%/A"E =;E";E9 ";E S"A"EMEN" %S "9E .9 FA7SE 1 MA9K AN &9.%E AN ED&7ANA"%.N =%"; A" M.S" 2 SEN"EN/ES 2 MA9KS# 9ES"A"%N .9 &A9A&;9AS%N %S N." A SFF%/%EN" ED&7ANA"%.N#

1.The loan amount outstanding for an amorti6ed loan is equal to the future value of all remaining payments. True or false4 E7plain. False#

"$e loan amount outstandin* is e'ual to t$e -resent alue o( all remainin* -ayments# "$e amount outstandin* at maturity is +ero (or an amorti+ed loan? so at eery -oint in time t$e discounted alue o( all remainin* cas$>(lows -ayments $as to e'ual t$e !alance outstandin*#

. The statement =The time value of money is positive> implies that the future value of a stream of cash"flo%s is al%ays larger than the present value. True or false4 E7plain. "rue#

"$e time alue o( money is -ositie means t$at one dollar today is wort$ more t$an one dollar at any time in t$e (uture# Anot$er way o( ex-ressin* t$is is to say t$at interest rates are -ositie# "$ere(ore? t$e (uture alue o( a stream o( cas$>(lows $as to !e lar*er t$an t$e -resent alue o( said stream o( cas$>(lows#

). !hen o%ners are managers 9such as in a sole proprietorship:, a firm %ill have agency costs. False#

A*ency costs re(er to t$e costs o( t$e con(lict o( interests !etween s$are$olders and mana*ement# =$en owners are mana*ers? t$ey do not $ae con(lict o( interests wit$ t$emseles#

*. 3enerally, the more liquid an asset is, the higher the return it gives. False#

sually t$e return on a li'uid asset is lower t$an an illi'uid asset# For exam-le cas$ $eld at $and is t$e most li'uid? !ut $as +ero return# 9eturns (rom inestment as (ixed assets are $i*$er#


4

&A9" %%% &9.@7EMS ANS=E9 A77 &9.@7EMS %N ";E S&A/E &9.%E# %F ";E9E %S %NSFF%/%EN" S&A/E? ASK F.9 S.ME A%"%.NA7 &A&E9# S;.= C.9 /A7/7A"%.NS /7EA97C# &9.@7EM 1 12 Mar,s "otal

?our great uncle 8ust passed a%ay and left you %ith an inheritance of @55,555. ?our uncle %as #no%n for his cheapness and you decide to follo% his e7ample, since it seemed to have paid off for him quite %ell. ntil you retire e7actly )- years from no%, you put the full amount of the inheritance into an investment account %hich pays -.- A+& compounded monthly. ?ou estimate you %ill live another  years in retirement and live off the money from the investment account. 'nce you retire you shift your investment account to%ards more secure assets at the e7pense of performance causing it to earn only ) A+& compounded monthly. a. !hat %ill be the value of the inheritance %hen you retire4 9 mar#s: A+& C -.- compounded monthly 0 35

& G 200?000 /alculate t$e interest rate# m 0.055 APR EAR = 1+ −1 = 1 + 12 m

( (

EPR=

APR 1+ m

) )

m f

( (

−1 = 1 +

0.055 12

F GH

) )

12

12

−1 =( 1.004583333 ) −1 =0.056407860 ≈ 5.64

12 12

(

)1

−1= 1.004583333 −1 =0.004583333 ≈ 0.458333333

sin* EA9 35 t FV = PV ( 1 + r ) =200,000 ( 1.056407860) =1,365,013.15 ≈ 1,365,013.15 sin* E&9 420 t FV = PV ( 1 + r ) =200,000 ( 1.004583333) =1,365,013.15 ≈ 1,365,013.15

b. !hat %ill be your monthly %ithdra%als from your investment account during retirement, if your first %ithdra%al %ill be e7actly )- years from no%4 9* mar#s: A+& C ).5 0 2I

& G 1?365?013#15 m 0.03 APR f EPR = 1+ −1 = 1 + 12 m

(

)

(

) − =( 12 12

1

1

1.00250 )

−1=0.00250

First cas$ (low occurs at year 35 J !e*innin* o( t$e mont$ > annuity due


5

[ ] 1−

PV =C

C =

[

1−

C =

1

( 1 +r )t r

( 1 +r ) isolatin* / we $ae

( 1.0025 )336 0.0025

[ ] 1−

1

( 1 + r )t r

1,365,013.15 1

PV

]

=

1,365,013.15 227.7025156

=5,994.721430

( 1+ r )

≈ 5,994.72

( 1.0025 )

c. No% assume you %ant to leave your four grandchildren an inheritance of @-,555 each %hen you die. By ho% much %ill your monthly %ithdra%als from the investment account decrease4 9 mar#s: %( you want to leae 100?000 to your (our *randc$ildren? you will $ae to set aside 100,000 FV PV = = = 43,216.33 t  ( 1 + r ) (1.0025 )336 So you will $ae only 1?365?013#15 J 3?216#33 G 1?321?L86#I2  aaila!le (or your own retirement# /alculatin* t$e mont$ly wit$drawal li,e in -art !# now *ies us 1,321,796.82 × .0025 PV × r C = = =5,804.93 1 1 # 1− (1 + r ) 1− ( 1.0025) 336 1.0025 (1 + r )t

(

(

)

)

"$ere(ore? you will only $ae to wit$draw 5?88#L2 J 5?I0#83 G 1I8#L8 dollars less eac$ mont$ (rom t$e inestment account to $ae 25?000 le(t oer (or eac$ o( your *randc$ildren w$en you die# 

Alternatie met$od  !e can find the annuity cash flo% that %ill result in the balance in the account in the future of @155,555.

[

sing FV =C

C =

¿

r

]( + ) 1 r

%e can isolate ( so

FV

[

( 1 +r )t −1 r

[

( 1 +r )t −1

]( + ) 1 r

100,000 336

( 1.0025 ) −1 0.0025

](

= 1.0025 )


100,000 =189.7929417 ≈ 189.79 526.8899840

6


7

&9.@7EM 2 Mort*a*e? 11 Mar,s "otal

r. Fmith is ta#ing out a @*55,555 mortgage from a ban# that offers a -"year loan at -. a.

(alculate r. FmithGs monthly payments. 3 mar,s 2 m 0.05 12 APR f = 1+ −1= 0.004123915 onthly payment onthly rate E+& 1 + m 2

(

) (

)

[ ] 1−

in -H1C)55 months PV =C

C =

b.

[

1−

400,000 1

( 1.004123915 )300 0.004123915

]

=

C =

1

( 1 + r )t

isolating ( %e have

r

PV

[ ] 1−

1

( 1 +r )t r

400,000 =2,326.419810 ≈ 2,326.42 171.9380132

At the end of the -th year, r. Fmith gets a much better 8ob as a (2'. Fo he re" negotiates %ith the ban# and signs a ne% mortgage, under %hich he %ill pay off the remaining balance in 15 years. (alculate r. FmithGs ne% monthly payments, if the interest rate stays at -. 9- mar#s: "o (ind t$e amount Mr# Smit$ needs to re>ne*otiate (or $is loan? we need to (ind t$e -resent alue o( $is remainin* -ayments# "$e amount outstandin* at t$e end o( t$e 5 t$ year: in t$e remainin* 20 years G 2012 G 20 mont$s? still need to -ay

2,326.42

eery mont$? so

[ ] [ 1−

PV =C

1

( 1 +r )t r

1−

¿ 2,326.42

1

( 1.004123915 )240 0.004123915

]

=354,030.0545 ≈ 354,030.05

An alternatie met$od is to (ind t$e (uture alue o( t$e initial loan alue and t$e (uture alue o( t$e -ayments t$at $ae !een made# 5 1 -I 5

& G 00?000

2?326#2 F G H

2?326#2

2?326#2

F G H

Future alue o( t$e initial loan 60 t FV = PV ( 1 + r ) = 400,000.00 ( 1.004123915 ) =512,033.8034


8

Future alue o( t$e -ayments

[

FV =C

( 1 +r )t −1 r

]=

2,326.42

[

( 1.004123915 )60−1 0.004123915

]=

158,003.7907

And t$e !alance owin* is t$e di((erence 512?033#I03 J 15I?003#L80L G 35?030#012L 35?030#01# "$e di((erence !etween t$e two met$ods is t$e e((ect o( roundin*# Mr# Smit$ wants to s$orten t$e amorti+ation -eriod to 10 years rat$er t$an t$e remainin* 20 year# Amorti+e t$is amount in a 10>year -eriod or 120 mont$s# "o calculate Mr# Smit$Bs new mort*a*e -ayment we use t$e (ollowin*:

[ ] 1−

PV =C

1

( 1 + r )t r

isolating C we have C =

PV

[ ] 1−

1

( 1 + r )t r

C =

c.

[

1−

354,030.05

]

1

( 1.004123915)120 0.004123915

=

354,030.05 94.50462078

=3,746.166558 ≈ 3,746.17

$t turns out that r. Fmith loses his 8ob after - years in the position as a (2'. Jo% long %ould it ta#e him to pay off the mortgage, if he could only pay @55 every month4 3 mar,s 2irst, %e need to #no% ho% much r Fmith o%es %hen 5 payments remain.

[ ] [ 1−

PV =C

1

( 1 +r )t r

1−

¿ 3,746.17

1

( 1.004123915 )60

0.004123915

]

=198,759.65

Fetting up the equation, %e have the follo%ing 198,759.65=800.00

[

1−


1

( 1.004123915 )t

0.004123915

]

9

((

)

198,759.65 ( 0.004123915 ) 800.00

( 1.004123915 )t =

t =

( ((

−1

( 1.004123915 )t

−1

((

)

198,759.65 ( 0.004123915 ) 800.00

ln ( 1.004123915 ) t = ln

ln

)

−1=

( ((

)−

1

)

−1

)

198,759.65 ( 0.004123915 ) 800.00

−1

)

198,759.65 ( 0.004123915 ) 800.00 ln ( 1.004123915 )

)−

1

)

=

)−

undefined

1

therefore NEVER

0.004115435

An alternate method is to loo# at the amorti6ation schedule

The @55 r. Fmith is %illing to pay %ill not cover the interest payment and the value of the loan %ill continue to gro% in the future. The loan %ill never be paid off.


10

&9.@7EM 3 9e*istered Education Sain*s &lan? 12 Mar,s "otal A Registered Education Saings !lan" or RES!" is an inestment e#icle used $% &arents to sae 'or t#eir c#ildren(s &ost)secondar% education in *anada+ ,o encourage &arents to sae" eer% %ear t#e goernment o' *anada contri$utes 20o' t#e .rst /2"500 o' a 'amil%s annual contri$ution to its RES! account in t#at %ear" until t#e c#ild turns 18 %ears old+ ,#at is" i' a 'amil% contri$utes inests  dollars to its RES! account in a %ear  is t#e sim&le sum o' de&osits in t#at %ear" not t#e 'uture alue" t#en t#e goernment ill contri$ute 0+2 at t#e end o' t#at %ear" it# an annual ceiling o' 20-  2"500  500+ ou ill #ae a daug#ter in anuar% and ill mae a .rst contri$ution to %our RES! in anuar% and %ou ill contri$ute eer% mont#+ Assume t#at t#e RES! #as an eectie mont#l% interest rate o' 0+2-+ a+ Assuming no goernment contri$utions #at is t#e total amount in %our RES! account #en %our daug#ter turns 18" i' %ou contri$ute /200 at t#e end o' eer% mont#: 2 mars 1 2 3 215 216 mont#s 18 %ears

!;

200

200 200

200

200 F;
,#e total in t#e account ill $e t#e 'uture alue o' t#e de&osits+ Mont#l% de&osits re=uire a mont#l% interest rate 0+2- or 0+002

[

FV =C

( 1 +r )t −1 r

]= [ 200

( 1.002 )216−1 0.002

]=

53,967.07196 ≈ 53,967.07

Alternative>

Some students calculated t#e &resent alue>

[ ] [ 1−

PV =C

1

( 1 +r )

t

r

=200

1−

1

( 1.002 )216 0.002

]

=35,051.04778

?o" e need to .nd t#e 'uture o' t#e account #en %our daug#ter turns 18+ 216 t FV = PV ( 1 + r ) =35,051.04778 ( 1.002 ) =53,967.07196 ≈ 53,967.07 You will note that there is NO ROUNDING of the numbers until the nal answer!

b. !ith government contributions as described above %hat is the total amount in your &EF+ account %hen your daughter turns 1, if you contribute @55 at the end of every month4 9) mar#s: "$e *oernment contri!ution is 20 o( your total annual contri!ution u- to your maximum contri!ution o( 2?500 -er year# Cou contri!ute 200 x 12 or 2?00 -er year# "$e *oernment will contri!ute 0#2C or 20 o( 2?00 or I0 at t$e end o( eac$ year (or t$e next 1I years# 1

2

3

17

18 %ears

!; 480 480 480 480 480 F;

11

(

APR EAR= 1+ m

) − =( m

1

0.024 1+ 12

)−= 12

1 0.024265768 ≈ 2.43

You will note that there is NO ROUNDING of the numbers for the interest rate.

[

FV =C

( 1 +r )t −1 r

]= [ 480

]=

( 1.024265768 )18−1 0.024265768

10,675.20078 ≈ 10,675.20

Total amount available %ill be -),I0.50 K 15,0-.5 C *,*.0 Alternative>

Fome students calculated the present value

[ ] [ 1−

PV =C

1

( 1 +r ) r

t

1−

= 480

1

( 1.024265768 )18 0.024265768

]

= 6,933.431064

No%, %e need to find the future of the account %hen your daughter turns 1. 18 t FV = PV ( 1 + r ) =6,933.431064 ( 1.024265768 ) =10,675.20081 ≈ 10,675.20 You will note that there is NO ROUNDING of the numbers until the nal answer!

c. $f your first contribution is @)55 and your end"of"month contribution gro%s at the rate of 5.1 per month, %hat is the total amount 9including government contributions: in your &EF+ account %hen your daughter turns 14 90 mar#s: r C 5.  per month C 5.55 per month 5 1  1- 1

& /1 G 300 * G 0#001 / 2 G /11O*

F au*$ter turns 1I

"$e amount in t$e 9ES& account is t$e (uture alue o( t$e constantly *rowin* contri!utions to t$e (und -lus t$e annual *oernment contri!ution# =e do not $ae a (ormula (or t$e (uture alue o( a *rowin* annuityP $oweer? we can (ind t$e -resent alue o( t$e *rowin* annuity and t$en (ind t$e (uture alue o( t$e lum- sum -resent alue#

[ ] [ ( )

1−

PV =C

1+ g 1+ r

r− g

t

=300

(

1−

1.001 1.002

)

216

0.002 −0.001

]

=58,201.20095 ≈ 58,201.20

Now (ind t$e (uture alue o( t$is amount# 216 t FV = PV ( 1 + r ) =58,201.20095 ( 1.002 ) = 89,610.68495 ≈ 89,610.68 Now (ind t$e (uture alue o( t$e *oernment contri!ution#


12

Cour annual contri!ution is 12 D 300 !e(ore any *rowt$ and t$e maximum *oernment contri!ution -ro-ortion is 2#500# "$us? t$e *oernment will contri!ute 0#20C or 20 o( t$e maximum o( 2?500 or 500

-er year# Note: 12 x 300 G 3?600 Q 2?500#

"$ere is no *rowt$ in t$e *oernment contri!ution !ecause we are at t$e maximum *oernment contri!ution#

[

FV =C

( 1 +r )t −1 r

] [

(1.024265768 )18−1

=500

0.024265768

]

=11,120.00084 ≈ 11,120.00

"otal amount aaila!le in t$e 9ES& will !e I8?610#6I O11?120#00 G100?L30#68 Alternate Solution: Fome students calculated the present value

[ ] [ 1−

PV =C

1

( 1 +r )t r

1−

=500

1

( 1.024265768 )18

0.024265768

]

=7,222.324025

No%, %e need to find the future of the account %hen your daughter turns 1. 18 t FV = PV ( 1 + r ) =7,222.324025 ( 1.024265768 ) =11,120.00084 ≈ 11,120.00

FC%: "o (ind t$e (uture alue o( a *rowin* annuity? we (ind t$e -resent alue o( t$e *rowin* annuity and t$en (ind t$e (uture alue o( t$at lum->sum -resent alue#

[ ] [

FV =C

[

¿ C

( 1 + g )t 1− ( 1 +r )t r −g

( 1+ r )t −( 1+ g )t r −g

( 1 +r )t =C

] [ =300

( 1 + g )t ( 1+ r )t 1 ( 1+ r ) − t ( 1 +r ) t

r−g

( 1.002 )216−( 1.001 )216 0.002 −0.001


]

]

=89,610.68495

≈ 89,610.68

13

&9.@7EM  MoeBs @ar? 21 Mar,s "otal

oeGs Bar has reported the follo%ing information for the year ending Feptember )5, 51-, 51*, and 51).

a. $n the space provided above, complete the common si6e statement for the first three entries on the asset side of the 51- balance sheet. 9 mar#s: /as$ 1?8004II1?800 G 0#016I85 G 1#6I85 Mar,eta!le Securities L?0004II1?800 G 0#00L383LG0#L38 Accounts 9eceia!le 10?I004II1?800 G 0#65I12 G 6#5I

b. (omplete the common si6e income statement for the entries EB$T, Net $ncome, and Dividends for 51-. 9 mar#s:

E@%" G 66?55041?605?100 G 0#0162 G #162 Net %ncome 1?10041?605?100 G 0#0006I5 G 0#06I5


14

iidends L0?00041?605?100 G 0#03611 G #361 See diidend calculation in t$e cas$ (low statement#

c. (alculate the follo%ing for 51-# 915 mar#s, 1 per ratio: S$ow your wor,) i:

+rofit argin Net Income 1,100 Profit Margin= = =0.000685316 ≈ 0.0685 1,605,100 Sales

ii:

&eturn on Assets Returnon Assets=

iii:

Net Income 1,100 = =0.001247307 ≈ 0.125 otal Assets 881,900

&eturn on Equity Returnon E!uit" =

1,100 Net Income = =0.004356436 ≈ 0.436 otal E!uit" 14,000+ 238,500

iv:

&eceivables Turnover 1,605,100 Sales Receiva#lesurnover = = =3.907254138 ≈ 3.907 $ 410,800 Accounts Receiva#le v:

$nventory Turnover 1,258,900 Cof%S = =4.906079501 ≈ 4.906 $ Inventor" urnover = Inventor" 256,600

vi:

(urrent &atio Current Ratio =

vii:

694,500 Current Assets = =1.720763132 ≈ 1.7207 $ Current &ia#ilities 403,600

Total Asset Turnover otal Asset urnover =

viii:

1,605,100 Sales = =1.820047624 ≈ 1.82 $ 881,900 otal Assets

Luic# &atio 'uic( Ratio =

Current Assets − Inventor" 694,500−256,600 = =1.084985138 ≈ 1.08 $ 403,600 Current &ia#ilities

i7:

Total Debt &atio otal Assets −otal E!uit" 881,900−252,500 otal )e#t Ratio= = =0.713686359 ≈ 71.37 881,900 otal Assets


15

7:

Times $nterest Earned ¿ Interest Earned

( IE ) = E*I


=

Interest

66,550 65,100

=1.022273425 ≈ 1.02

16

d. Based upon your calculated ratios and the industry averages, %ould you grant oe additional credit, if he %as applying for a loan4 E7plain %hy or %hy not. A yesMno ans%er is %orth 6ero. 9 mar#s:

!hen %e loo# at the ratios, the return ratios are %ea# because of the lo% income for the period %hile the turnover ratio are near or e7ceeding the industry averages. The current ratio and the quic# ratio are at or above the industry average ho%ever, the current and quic# ratio only loo# at the ability to cover the current liabilities not the long term liabilities. The lo% income for the year is a result of the high debt amounts thus, increasing the amount of debt %ill have a serious impact on the companyGs ability to cover its interest requirement 9Times $nterest Earned:. $t is not recommended that another loan be approved unless you %ant to lead oeGs Bar to ban#ruptcy. An additional fact is that oeGs Bar paid @05,555 in dividends in 51- 9cash outflo%: and no% he needs additional cash. Not one student mentioned this in their analysis.


17

e. +rovide a cash flo% statement for oeGs Bar for 51-. 5 mar,s


18

Fina 2360 Fall 2015 Fall Midterm Key

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