Financial Management: The Islamic University of Gaza Faculty of Commerce Accounting Department

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The Islamic University of Gaza

Faculty of Commerce
Accounting Department

Financial Management
Make Up Exam - Summer 2013

Time Allowed: TWO hours

Please use the attached answer sheet for your answers.


You may keep this question paper.

Ramadan Al-Omari, FCCA


June 2013

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Question No. 1 (15 marks)

Trying Students Ltd, a local company that deals in computer products, was established in March
2013. The Company started its business on 1st April 2013.

Use the information given below to prepare the Company’s Cash Budget for the months
April, May, and June 2013.

1. Trying Students Ltd expects its monthly sales for the months April to June 2013 to be $
180,000, $ 150,000 and $ 160,000 respectively. The firm makes 30% of its sales for cash
and collects 40% one month later and the remaining 30% in the following month.

2. Other cash inflows are expected at $24,000 in April, $26,000 in May, and $ 42,000 in
June.

3. Trying Students Ltd expects its monthly purchases for the months April to June 2013 to
be $ 160,000, $ 120,000, and $ 100,000 respectively. The firm pays 20% cash for its
purchases, 50% in the following month, and 30% two months later.

4. Wages and Salaries for April 2013 are estimated at $40,000. Wages and salaries for May
and June are estimated to be 40% of the preceding month’s sales.

5. Rent of $20,000 must be paid monthly.

6. Interest payment of $13,000 is due for payment in June 2013.

7. Trying Students Ltd. Expects to pay cash dividends of $25,000 in April 2013.

8. Taxes of $60,000 are due and will be paid in June.

9. The firm plans to make a payment of $30,000 cash purchase of fixed assets in May.

10. Trying Students Ltd started its business on 1st April with an opening cash balance of
$10,000. The Company’s policy is to maintain a monthly minimum cash balance of $
20,000.

**********

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Question No. 2 (15 marks)

The following are the financial statements of Success Inc., a local internet service provider. (All
figures are in US$)

Income Statement for the year ended 31 May 2013

Sales revenue 200,000


Less: Cost of goods sold
Beginning Inventory 15,000
Purchases 149,000
Cost of goods available for sale 164,000
Ending Inventory 25,000
139,000
Gross Profit 61,000
Less: Operating expenses 24,000
Earnings before interest and taxes 37,000
Less: Interest expense 4,000
Net profit before taxes 33,000
Less: Taxes 6,000
Net profit available for distribution 27,000
Less Dividends 9,000
Retained Earnings 18,000
====

Balance Sheet as at 31 May 2013

Assets Liabilities
Cash 16,000 Accounts payable 18,000
Accounts Receivable 10,000 Accrued Expenses 2,000
Inventories 25,000 Long Term Debt 30,000
Land and Buildings 100,000 Common Stock (100,000
Furniture and Equipment 20,000 shares of $ 1 each) 100,000
Retained earnings 21,000
Total Assets 171,000 Total Liabilities 171,000

You are required to calculate the following ratios:

Inventory turnover, Average collection period, Operating profit margin, Return on total assets,
Return on Equity, Earnings per share, Times Interest Earned Ratio, Current ratio, Average age of
inventory, and Debt ratio,.

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Question No. 3 (10 Marks)

Mark the following statements as “True” or “False”.

1. Unlike holders of equity capital, bondholders are creditors of the firm.

2. Preferred stock is a long term debt instrument that usually receives a fixed interest rate.

3. The interest rate or required return represents the price of money.


4. Interest rates act as a regulating device that controls the flow of money between suppliers
and demanders of funds.

5. The nominal interest rate is the rate that creates equilibrium between the supply of
savings and the demand for investment funds in a perfect world.

6. The real rate of interest is the actual rate of interest charged by the supplier of funds and
paid by the demander.

7. Bonds are long-term debt instruments used by businesses and government to raise large
sums of money, typically from a one group of lenders.

8. Return represents the total loss on an investment plus the principal amount invested.

9. An investment portfolio is any collection or combination of a firm’s fixed assets.

10. Risk is defined as the chance of suffering a financial gain.

11. Investors will hold portfolios because they will diversify away a portion of the benefit.

12. Common equity holders have voting rights that permit them to elect the firm’s board of
directors.

13. A bond is a long-term equity instrument that pays its holder a specified amount of
dividend over a specified period of time.

14. The bond’s coupon rate is the specified interest rate that must be periodically paid.

15. Bondholders will exercise the conversion option of their bonds only when the market
price of the stock is lower than the conversion price.

16. The call premium is equal to one year of coupon interest and compensates the holder for
having it called prior to maturity.

17. Issuers will exercise the conversion feature when interest rates fall and the issuer can
refund the issue at a lower cost.

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18. Because equity holders are the last to receive distributions, they expect greater returns to
compensate them for the additional risk they bear.

19. While interest paid to bondholders is tax-deductible to the issuing firm, dividends paid to
preferred and common stockholders of the corporation is not.

20. Payment of dividends is not at the discretion of the bondholders.

**********

Question 4 (20 Marks)

Choose the correct answer.

1. A bond’s call feature gives the


a. Issuer the opportunity to repurchase the bond prior to maturity at the call price.
b. Bondholder the right to sell the bonds at their par value to the public.
c. Issuer the right to convert the bonds into shares of common stock.
d. Bondholder the right to sell the bonds at the stock market.

2. Business risk is the chance


a. That a firm will not be able to meet its financial obligations.
b. That a firm will not be able to pay its operating costs.
c. Of suffering a trading loss.
d. Borrowing a long term loan.

3. The real rate of interest is the


a. Actual rate of interest charged by lenders of funds.
b. Interest rate declared by the central bank.
c. Rate that achieves the equilibrium between supply and demand for funds.
d. None of the above.

4. In order to compensate the bondholders for having their bonds called prior to maturity, they
are paid a call premium which is equal to
a. Two year of coupon interest.
b. One month of coupon interest
c. Unknown amount of compensation
d. One years of coupon interest.

5. Financial risk is the chance that a firm may not be able to pay its
a. Financial costs
b. Operating costs
c. Salaries to its employees.
d. Administrative costs.

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6. When funds are raised by issuing stocks or bonds, the cost the company must pay is called
a. Income tax.
b. The required return.
c. Salaries to the board of directors.
d. Operating profit.

7. When funds are lent, the cost of borrowing is called the


a. Dividends paid.
b. Exchange rate.
c. Interest rate.
d. None of the above.

8. A bond’s coupon rate is the


a. Current yield of the bond.
b. Excess of the bond’s market value over its par value.
c. Market value of the bond.
d. Specified interest rate that must be periodically paid.

9. Bondholders will exercise the conversion option only when the market price of the
a. Stock is greater than the conversion price.
b. Bond is higher than its par value.
c. Stock is lower than the conversion price.
d. Bond is higher than its market price.

10. Authorized shares are the number of shares of common stock that
a. A firm’s corporate charter allows.
b. Are held by the public.
c. Have been purchased by the firm.
d. Have been put into circulation.

11. To adjust the income statement to show cash flow from operations
a. Non-cash charges should be added back to net profit after taxes.
b. Dividends paid to shareholders should be added back to net profit.
c. Amounts paid to suppliers should be added back to net profit after taxes.
d. Amounts received from customers should be added back to net profit.

12. Investors will hold portfolios because


a. They are risk seekers.
b. They can earn more income on their investments.
c. Portfolios are easy to buy and sell.
d. They will diversify away a portion of the risk.
13. The liquidity of a firm is measured by
a. Its annual earnings.
b. Its ability to pay its short-term financial obligations.

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c. Difference between its total assets and total liabilities.
d. The earnings per share.
14. All groups of individuals who have a direct economic link to a firm are called
a. Stockholders.
b. Board of Directors.
c. Stakeholders.
d. Employees.

15. The conversion feature of convertible bonds allows


a. The firm to repurchase the bonds.
b. The firm to convert the bonds into notes payable.
c. Bondholders to sell their bonds in the stock exchange.
d. Bondholders to exchange their bonds for a specified number of common stock.

16. A bond’s current yield is equal to the


a. Annual interest divided by the current price of the bond.
b. Risk free interest rate.
c. Annual interest divided by the par value of the bond.
d. None of the above.

17. The bond’s principal is the amount


a. Of the interest that must be paid to the bondholder.
b. Of dividends payable to the bondholders.
c. Borrowed by the firm and the amount owed to the bond holder on the maturity date.
d. Of its market price.

18. The bond’s maturity date is the time at which


a. Interest on the bond must be paid.
b. A bond must be converted into common stock.
c. A bond must be called by the issuer.
d. A bond becomes due and the principal must be repaid.

19. An investor who is willing to invest in a high risk investment, is considered as


a. Risk-seeker.
b. Risk-averse.
c. Rational investor.
d. Reliable finance manager.

20. Issuers of bonds will exercise the call feature when interest rates
a. Rise and the issuer can refund the issue at a higher cost.
b. Fall and the issuer can refund the issue at a lower cost.
c. Bondholder can receive a high premium.
d. Bondholder can replace his bonds.

**********

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GOOD LUCK

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