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ADM 3350 A
Fall 2011
MIDTERM EXAMINATION October 19th, 2011
Professor: Kaouthar LAJILI, PhD., CGA Duration: 1 hour and 30 minutes

Part I 20
Part II 30
NAME: __________________________________________
STUDENT #: ________________________
Statement of Academic Integrity
The School of Management does not condone academic fraud, an act ! a student that ma! result in
a false academic e"aluation of that student or of another student# $ithout limiting the generalit! of
this definition, academic fraud occurs %hen a student commits an! of the follo%ing offences&
'lagiarism or cheating of an! (ind, use of oo(s, notes, mathematical tales, dictionaries or other
stud! aid unless an e)'licit %ritten note to the contrar! a''ears on the e)am, to ha"e in his*her
'ossession cameras, radios +radios %ith head sets,, ta'e recorders, 'agers, cell 'hones, or an! other
communication de"ice %hich has not een 're"iousl! authori-ed in %riting#
Statement to be signed by the student:
I ha"e read the te)t on academic integrit! and I 'ledge not to ha"e committed or attem'ted to
commit academic fraud in this e)amination#
/ote& an e)amination co'! or oo(let %ithout that signed statement %ill not e graded and %ill
recei"e a final e)am grade of -ero#
Please answer all questions.
No notes, texts, etc.
alculators, but not com!uters, are !ermitted.
"se three decimals for all calculated results.
Please hand in the entire questionnaire.
No exam boo# needed.
PA$% I: &ulti!le hoice 'uestions
(20 points total)
Please circle the correct answer
1# In a %orld of no cor'orate ta)es if the use of le"erage does not change the "alue of the le"ered
firm relati"e to the unle"ered firm this is (no%n as&
A, the conser"ation of energ! 'rinci'le#
0, MM Pro'osition I that le"erage is in"ariant to mar(et "alue#
1, MM Pro'osition II that the cost of e2uit! is al%a!s constant#
3, MM Pro'osition I that the mar(et "alue of the firm is in"ariant to the ca'ital structure#
4, MM Pro'osition III that there is no ris( associated %ith le"erage in a no ta) %orld#
2# The /P5 formula for ris(! 'ro6ects e"aluates .......... using the ........... #
A, ris(less discount rate, e)'ected incremental cashflo%s#
0, certain cashflo%s, ris(less discount rate#
1, ris(less discount rate, e)'ected incremental cashflo%s#
3, certain cashflo%s, ris(! discount rate#
4, e)'ected incremental cashflo%s, ris(! discount rate#

3# If the use of su''lier financing decreases and is re'laced ! cash financing for the same le"el of
usiness acti"it!, the cash c!cle %ill&
A, increase ecause da!s in 'a!ales decrease#
0, sta! the same ecause the change is onl! on the o'erating c!cle#
1, decrease ecause da!s in 'a!ales decrease#
3, sta! the same ecause usiness acti"it! does not change#
4, sta! the same ecause cash is used for 'a!ment#

7# If the 1APM is used to estimate the cost of e2uit! ca'ital the e)'ected e)cess mar(et return is
e2ual to&
A, the return on the stoc( minus the ris(8free rate#
0, the difference et%een the return on the mar(et and the ris(8free rate#
1, the eta times the mar(et ris( 'remium#
3, the eta times the ris(8free rate#
4, the mar(et rate of return#
5# In an 4PS840I gra'hical relationshi', the det ra! and e2uit! cross# At this 'oint the e2uit! and
det are&
A, e2ui"alent %ith res'ect to 4PS ut ao"e and elo% this 'oint e2uit! is al%a!s su'erior#
0, at rea(e"en in 4PS ut ao"e this 'oint det increases 4PS "ia le"erage and decreases 4PS
elo% this 'oint#
1, e2ual ut a%a! from rea(e"en e2uit! is etter as fe%er shares are outstanding#
3, at rea(e"en and MM Pro'osition II states that det is the etter choice#
4, at rea(e"en and det is the etter choice elo% rea(e"en ecause small 'a!ments can e
9# $hat is its cost of e2uit! if there are no ta)es or other im'erfections: The firm has a det8to8
e2uit! ratio of #90# Its cost of det is ;<# Its o"erall cost of ca'ital is 12<#
A, 1;<
0, 17#7<
1, 10<#
3, 13#5<
=# A firm has a det8to8e2uit! ratio of 1# Its cost of e2uit! is 19<, and its cost of det is ;<# If there
are no ta)es or other im'erfections, %hat %ould e its cost of e2uit! if the det8to8e2uit! ratio
%ere 0:
A, ;<#
0, 10<#
1, 12<#
3, 17<#
4, 19<#
;# 0r!an in"ested in 0r!co, Inc# stoc( %hen the firm %as financed solel! %ith e2uit!# The firm is
no% utili-ing det in its ca'ital structure# To unle"er his 'osition, 0r!an needs to&
A, orro% some mone! and 'urchase additional shares of 0r!co stoc(#
0, maintain his current 'osition as the det of the firm did not affect his 'ersonal le"erage
1, sell some shares of 0r!co stoc( and hold the 'roceeds in cash#
3, sell some shares of 0r!co stoc( and loan it out such that he creates a 'ersonal det8e2uit!
ratio e2ual to that of the firm#
4, create a 'ersonal det8e2uit! ratio that is e2ual to e)actl! 50< of the det8e2uit! ratio of the
># A firm has -ero det in its ca'ital structure# Its o"erall cost of ca'ital is ><# The firm is
considering a ne% ca'ital structure %ith 70< det# The interest rate on the det %ould e 7<#
Assuming that the cor'orate ta) rate is 37<, its cost of e2uit! ca'ital %ith the ne% ca'ital
structure %ould e:
A, 10#32<#
0, 11#2<#
1, 11#0<#
3, 13#>5<#
10# 1ash c!cle e2uals&
A, in"entor! 'eriod 'lus accounts recei"ale 'eriod#
0, change in net %or(ing ca'ital 'eriod#
1, o'erating c!cle 'lus accounts 'a!ale 'eriod#
3, o'erating c!cle 'lus in"entor! 'eriod#
4, none of the ao"e#
11# Selling goods and ser"ices on credit is&
A, an in"estment in a customer#
0, necessar! ecause customers cannot 'a! for the goods#
1, a decision inde'endent of customers#
3, 'ermissile if !our an( lends the mone!#
4, none of the ao"e#
12# The cost of ca'ital for a firm, r
, in a -ero ta) en"ironment is&
A, e2ual to the e)'ected 40IT di"ided ! mar(et "alue of the unle"ered firm#
0, e2ual to r
the rate of return for that usiness ris( class#
1, e2ual to the o"erall rate of return re2uired on the le"ered firm#
3, all of the ao"e#
4, none of the ao"e#
13. $hich of the follo%ing statements is not true:
A, /et %or(ing ca'ital is the difference et%een short8term assets and short term liailities#
0, Short8term financing deals %ith the management of short8term liailities and short8term
1, Short8term financing is concerned %ith determining reasonale amounts of cash to hold, %hich
customers should get credit and others related issues#
3, /et %or(ing ca'ital does not utili-e the conce't of 'resent "alue since all flo%s are short8term#

17# The o'timal credit amount is determined !&
A, the 'oint %hich minimi-es the total credit cost cur"e#
0, the 'oint %hich ma)imi-es the carr!ing costs associated %ith granting credit#
1, the 'oint %hich ma)imi-es o''ortunit! costs associated %ith granting credit#
3, the 'oint %here the additional net cash flo% from ne% customers %ill not co"er the carr!ing
costs of the in"estment in recei"ales#
4, oth a and d#
15. If the a"erage accounts recei"ale that a firm holds decreases %ithout an! decrease in credit sales,
the o'erating c!cle %ill&
A, sta! the same ecause of no sales change#
0, sta! the same ecause cash collections are sooner and it %ill affect the cash c!cle onl!#
1, decrease ecause da!s sales outstanding decreases#
3, sta! the same ecause accounts recei"ale are not in the o'erating c!cle#
4, ha"e an un(no%n effect#
19# $hich of the follo%ing statements aout the current ratio is accurate:
A, ?se of oo( "alues in calculation of this ratio is unacce'tale ecause the mar(et "alues of
these assets and liailities tend to de"iate from oo( "alues#
0, This ratio is calculated ! di"iding current liailities ! current assets#
1, It %ill al%a!s e greater than the 2uic( ratio in com'anies that carr! in"entor!#
3, This ratio is intended to indicate the long run li2uidit! 'osition of the firm#
4, The higher the current ratio, the higher the le"el of cash in a firm#
1=# The o'timal ca'ital structure is the mi)ture of det and e2uit! %hich&
I# Ma)imi-es the "alue of the firm#
II# Minimi-es the firm@s %eighted a"erage cost of ca'ital#
III# Ma)imi-es the mar(et 'rice of the firm@s onds#
A, I onl!
0, III onl!
1, I and II onl!
3, I and III onl!
4, I, II, and III
1;# Airms that use maturit! hedging as a guide to financing 'olic!&
A, tr! to hedge %ith futures contracts#
0, hold e)cess cash alances to reduce ris(#
1, %ill finance long term assets %ith long term financing#
3, rel! on go"ernment 'olic! to (ee' interest rates lo%#
1># 3elta P3A 3istriutors has an in"estment in accounts recei"ale of B2,=50,000# 3ail! credit sales
are B11;,2;0# If 30< of 3elta@s credit customers recei"e a discount ! 'a!ing %ithin 10 da!s, %hat
is the net 'eriod that 3elta maintains:
A, 10 da!s#
0, 23 da!s#
1, 3; da!s#
3, 75 da!s#
4, There is not enough information to tell#
Ans%er& 4
20# $hich of the follo%ing is not true concerning considerations in setting a credit 'olic!:
A, A firm that su''lies a 'erishale 'roduct %ill tend to offer restricti"e credit terms#
0, A firm %hose customers are in a high8ris( usiness %ill tend to offer restricti"e credit terms#
1, Lengthening the credit 'eriod effecti"el! reduces the 'rice 'aid ! the customer#
3, Small accounts, associated %ith firms that find it difficult to ac2uire a line of credit, tend to
recei"e longer credit 'eriods#
PA$% II Problems (%otal )* !oints+
N,%-: Solve problem (1) below and choose two more problems from the following
three ((2) (3) and (4)) and solve (total 3 problems)
Problem . a!ital Structure with %axes +10 'oints,
The $estla(e 1om'an! e)'ects 'er'etual earnings efore interest and ta)es +40IT, of B9
million 'er !ear# The firmCs after8ta)D all8e2uit! discount rate r0 is 17<# The
$estla(e 1om'an! is su6ect to a cor'orate ta) rate of 35<# The 'reta) cost of
the firmCs det ca'ital is 11< 'er annum, and the firm has B> million of det in its
ca'ital structure#
A+ $hat is $estla(e 1om'an!Cs "alue: (/.0 !oints+
1+ $hat is $estla(e 1om'an!Cs cost of e2uit! +rs,: ().0 !oints+
+ $hat is $estla(e 1om'an!Cs %eighted a"erage cost of ca'ital +r$A11,: (2
Answer (if necessary, you may use the bac# of the !age+
Problem / redit &anagement +10 'oints,
A01 Inc# o'erates a mail8order to!s usiness# Management is considering dro''ing its
'olic! of no credit# The credit 'olic! under consideration ! A01 Inc# is as follo%s&
No credit redit
Price 'er unit B=0 B;0
1ost 'er unit B50 B97
Euantit! sold 7,000 9,000
of 'a!ment 100< ;5<
1redit 'eriod 0 1
3iscount rate 0 3<
A+ Should A01 Inc# offer credit to its customers: (3.0 !oints+
1+ $hat must the 'roailit! of 'a!ment e efore A01 Inc# %ould ado't the
credit 'olic!: ().0 !oints+
Answer (if necessary, you may use the bac# of the !age+
Problem ) Short4term 5inance (.* !oints+
1anadian Lights has 'ro6ected the follo%ing sales for the coming !ear&
E1 E2 E3 E7
Sales B;30 B=75 B>05 B>;0
Sales in the !ear follo%ing this one are 'ro6ected to e 15< greater in each 2uarter#
A+ 1alculate 'a!ments to su''liers assuming that 1anadian Lights 'laces
orders during each 2uarter e2ual to 30< of 'ro6ected sales for the ne)t
2uarter# Assume that the com'an! 'a!s immediatel!# $hat is the
'a!ales 'eriod in this case: () !oints+
1+ Fe%or( +A, ao"e assuming a >08da! 'a!ales 'eriod () !oints+
+ Fe%or( +A, ao"e assuming a 908da! 'a!ales 'eriod (2 !oints+
Answer (if necessary, you may use the bac# of the !age+
Problem 2 1asic a!ital Structure +10 'oints,
Al'ha 1or'# and 0eta 1or'# are identical in e"er! %a! e)ce't their ca'ital structures#
Al'ha 1or'oration, an all8 e2uit! firm, has 10,000 shares of stoc( outstanding, currentl!
%orth B 20 'er share# 0eta 1or'oration uses le"erage in its ca'ital structure# The mar(et
"alue of 0etaCs det is B 50,000, and its cost of det is 12 'ercent# 4ach firm is e)'ected
to ha"e earnings efore interest of B 55,000 in 'er'etuit!# /either firm 'a!s ta)es#
Assume that e"er! in"estor can orro% at 12 'ercent 'er !ear#
A+ $hat is the "alue of Al'ha 1or'oration: $hat is the "alue of 0eta
1or'oration: $hat is the mar(et "alue of 0eta 1or'orationCs e2uit!: ()
1+ Go% much %ill it cost to 'urchase 20 'ercent of each firmCs e2uit!: (/
+ Assuming each firm meets its earnings estimates, %hat %ill e the dollar
return to each 'osition in +0, o"er the ne)t !ear: (/ !oints+
6+ 1onstruct an in"estment strateg! in %hich an in"estor 'urchases 20
'ercent of Al'haCs e2uit! and re'licates oth the cost and dollar return of
'urchasing 20 'ercent of 0etaCs e2uit!# () !oints+
Answer (if necessary, you may use the bac# of the !age+
&idterm -xam 5ormula Sheet (A6& ))0*+
R D P g
= +
1 0
[ ]
E f E M f
= +
)# ( ) ( ) ( ) WACC E V R D V R T
= + 1
( )
[ ]
( ) [ ]
Coupon FV ice Matuit!
FV ice
Pr *
Pr * 2

0" [ ]
( ) ( ) [ ]
# # $ P
# $ $ # # $ P# %PV

+ + + =
, @ + , +
3" APR & peiodic ate' ()*+ (net peiod , discount peiod)
7. EAR & +1 - (peiodic ate)) to t.e po/e 0(()*+ (net peiod1discount peiod)2 8 1
1urrent ratio I 1urrent assets J 1urrent liailities
Euic( ratio I +1urrent assets 8 In"entor!, J 1urrent liailities
Total asset turno"er I Total o'erating re"enues J A"erage total assets
Fecei"ales turno"er I Total o'erating re"enues J A"erage recei"ales
A"erage collection 'eriod I 3a!s in 'eriod J Fecei"ales turno"er
In"entor! turno"er I 1ost of goods sold J A"erage in"entor!
3a!s in in"entor! I 3a!s in 'eriod J In"entor! turno"er
3et ratio I Total det J Total assets
3et8e2uit! ratio I Total det J Total e2uit!
42uit! multi'lier I Total assets J Total e2uit!
Interest co"erage I 4arnings efore interest and ta)es J Interest
/et 'rofit margin I /et income J Total o'erating re"enue
Kross 'rofit margin I 4arnings efore interest and ta)es J Total o'erating re"enues
/et return on assets I /et Income J A"erage Total Assets
Kross return on assets I 4arnings efore interest and ta)es J A"erage total assets
/etLKrossM Feturn on assets +FOA, I /etLKrossM Profit margin ) Asset Turno"er
Feturn on e2uit! +FO4, I /et income J A"erage stoc(holders@ e2uit!
Pa!out ratio I 1ash di"idends J /et Income
Fetention ratio I Fetained earnings J /et Income I 1 N Pa!out ratio
Price8to8earnings +P*4, ratio I Mar(et 'rice 'er share J 4arnings 'er share
3i"idend !ield I 3i"idend 'er share J Mar(et 'rice 'er share
Mar(et8to8oo( +M*5, ratio I Mar(et 'rice 'er share J 0oo( "alue 'er share
Toin@s E ratio I +Mar(et "alue of det P e2uit!, J Fe'lacement "alue of total assets

r, P +1
8 1
A I n, r, P5+A, I Annuit! an of