B.Sc. (Banking and Finance) Program

MIDTERM EXAMINATION

SPRING SESSION 2014

Course Name Business Finance

Course Code

Student Name

ID No.

Time Allowed 2 Hours

Exam Date

Student Signature

Total Number of Questions: True / False: 10 + MCQs: 20 + Descriptive Style Questions: 2+ Numerical Type: 1

DIRECTIONS TO CANDIDATES1. Read the questions carefully before answering.2. Write the answer in the separate answer sheet provided.3. Part A: Answer ALL questions. The marks for each question are shown in the section. The total is 5 marks.4. Part B: Answer ALL questions. The marks for each question are shown in the section. The total is 10 marks.5. Part C: Answer any TWO questions out of the three questions. The marks for each question are shown in the

section. The total for Part C is 6 marks. 6. Part D: Answer the Numerical Question. This is for 4 marks7. This Examination is worth 25% of your final marks for

EXAMINATION MATERIALS/AIDS ALLOWED: NoneChecked by the Examination Committee: …………………………………………………

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Part A: TRUE/FALSE QUESTIONS (½ Mark Each) – Total 10*0.5= 5 Marks

1. The term ‘Capital Structure’ is defined as the mixture of a firm's debt and equity financing.

2. General partner is a business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership.

3. A business created as a distinct legal entity and treated as a legal "person" is called a corporation.

4. Determining whether to pay cash for a purchase or use the credit offered by the supplier is a working capital management decision.

5. No potential financial loss is one of the primary advantages of being a limited partner instead of a general partner.

Chapter 2

6. Interest paid is part of operating expense/cashflow.

7. The cost of equity for any firm is higher than the cost of debt.

8. Since the balance sheet has to balance (total equity = total assets – total liabilities). The portion of equity that can most easily fluctuate to balance the balance sheet is retained earnings.

9. As per Matching principle, companies show revenue when it accrues and match the expenses required to generate the revenue

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Part B: MULTIPLE CHOICE QUESTIONS (½ Mark Each) – Total 20*0.5=10 Marks

1. Which one of the following terms is defined as the management of a firm's long-term investments? A. working capital managementB. financial allocationC. agency cost analysisD. capital budgetingE. capital structure

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5. A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a: A. corporation.B. sole proprietorship.C. general partnership.D. limited partnership.E. limited liability company.

14. Which one of the following is a capital budgeting decision? A. determining how many shares of stock to issueB. deciding whether or not to purchase a new machine for the production lineC. deciding how to refinance a debt issue that is maturingD. determining how much inventory to keep on handE. determining how much money should be kept in the checking account

34. Which type of business organization has all the respective rights and privileges of a legal person? A. sole proprietorshipB. general partnershipC. limited partnershipD. corporationE. limited liability company

37. Which one of the following best states the primary goal of financial management? A. maximize current dividends per shareB. maximize the current value per shareC. increase cash flow and avoid financial distressD. minimize operational costs while maximizing firm efficiencyE. maintain steady growth while increasing current profits

45. Which one of the following actions by a financial manager is most likely to create an agency problem? A. refusing to borrow money when doing so will create losses for the firmB. refusing to lower selling prices if doing so will reduce the net profitsC. refusing to expand the company if doing so will lower the value of the equityD. agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of salesE. increasing current profits when doing so lowers the value of the firm's equity

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46. Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes.I. compensation based on the value of the stockII. stock option plansIII. threat of a company takeoverIV. threat of a proxy fight A. I and II onlyB. III and IV onlyC. I, II, and III onlyD. I, III, and IV onlyE. I, II, III, and IV

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47. Which form of business structure is most associated with agency problems? A. sole proprietorshipB. general partnershipC. limited partnershipD. corporationE. limited liability company

48. Which one of the following is an agency cost? A. accepting an investment opportunity that will add value to the firmB. increasing the quarterly dividendC. investing in a new project that creates firm valueD. hiring outside accountants to audit the company's financial statementsE. closing a division of the firm that is operating at a loss

49. Which one of the following is least likely to be an agency problem? A. increasing the size of a firmB. concentrating on maximizing current profitsC. closing a division with net lossesD. increasing the market value of the firm's sharesE. obtaining a patent for a new product

50. Which one of the following is a means by which shareholders can replace company management? A. stock optionsB. promotionC. Sarbanes-Oxley ActD. agency playE. proxy fight

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51. Which one of the following grants an individual the right to vote on behalf of a shareholder? A. proxyB. by-lawsC. indenture agreementD. stock optionE. stock audit

52. Which one of the following parties has ultimate control of a corporation? A. chairman of the BoardB. board of directorsC. chief executive officerD. chief operating officeE. shareholders

53. Which of the following parties are considered stakeholders of a firm?I. employeeII. long-term creditorIII. governmentIV. common stockholder A. I onlyB. IV onlyC. I and III onlyD. II and IV onlyE. II, III, and IV only

54. Which of the following represent cash outflows from a corporation?I. issuance of securitiesII. payment of dividendsIII. new loan proceedsIV. payment of government taxes A. I and III onlyB. II and IV onlyC. I and IV onlyD. I, II, and IV onlyE. II, III, and IV only

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55. Which of the following are cash flows from a corporation into the financial markets?I. repayment of long-term debtII. payment of government taxesIII. payment of loan interestIV. payment of quarterly dividend A. I and II onlyB. I and III onlyC. II and IV onlyD. I, III, and IV onlyE. I, II, and III only

56. Which one of the following is a primary market transaction? A. sale of currently outstanding stock by a dealer to an individual investorB. sale of a new share of stock to an individual investorC. stock ownership transfer from one shareholder to another shareholderD. gift of stock from one shareholder to another shareholderE. gift of stock by a shareholder to a family member

57. Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: A. took place in the primary market.B. occurred in a dealer market.C. was facilitated in the secondary market.D. involved a proxy.E. was a private placement.

58. Public offerings of debt and equity must be registered with which one of the following? A. New York Board of GovernorsB. Federal ReserveC. NYSE Registration OfficeD. Securities and Exchange CommissionE. Market Dealers Exchange

1) Which of the following is Income Statement Equation

a) Revenue – Expenses = Income

b) Revenue – Cost of Goods Sold = Income

c) Revenue + Expenses = Profits

d) Revenue + Cost of Goods Sold = EBIT

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2) Depreciation in the income statement can be termed as

a) Cash Expense

b) Non-cash Expense

c) One-time Expense

d) Non-operating Expense

3) The value of assets as recorded in balance sheet is known as

a) Market Value

b) Book Value

c) Transaction Value

d) Bankers Valuation

Who takes benefits/losses from increases/decreases in the market value of a firm’s assets.

a) Shareholders

b) Lenders

c) Trade Creditors

d) Customers

Which of the following corporate companies are taxed in UAE

a) Foreign oil exploration companies and branches of foreign banks

b) Hotels and airline companies

c) Restaurants and Logistics companies

d) Educational Institutes and Pharmaceutical companies

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Essay Questions

64. List and briefly describe the three general areas of responsibility for a financial manager.

65. Describe the key advantages associated with the corporate form of organization.

66. Why are so many businesses structured as sole proprietorships when the corporate form of business offers more advantages?

67. What concerns might a loan officer have when loaning funds to a sole proprietorship that he or she might not have when loaning funds to a corporation?

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68. From a liability point of view, what is the difference between investing in a sole proprietorship and a general partnership?

69. Give some examples of ways in which manager's goals can differ from those of shareholders.

70. How do the actual effects of the Sarbanes-Oxley Act of 2002 compare to the initial intent of that Act?

71. How might agency problems arise in partnerships?

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72. Compare and contrast the NYSE with NSADAQ.

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PART C (I): DESCRIPTIVE QUESTIONS (3*2 =6 MARKS)

Long Answer Types

Note: Attempt any TWO of the following questions. Write all your answers on the space provided.

1. Define and explain the reasons for Agency Problem.2. What are the various factors that a financial manager should consider when analyzing a capital

budgeting project?

3. What is the cash flow identity? Explain the various terms involved in the same.

PART-D

Numerical Type (1*4= 4 MARKS)

1. From the information given belowa) Sales of Dhs. 730,000b) Cost of Goods Sold, Administrative & Selling Expenses and Depreciation of Dhs.

580,000 , Dhs 105,000 and Dhs 135,000 and an Interest Expense of Dhs. 75,000.Calculate the followingi) Net Incomeii) Operating Cash-flow

2) Refer the following abbreviated financial statement

Parrothead Enterprises2012 and 2013 Partial Balance Sheets

Assets Liabilities and Owners Equity(Dhs. Mln) FYEnding 2012 2013 2012 2013Current Assets 653 707 Current Liabilities 261 293Net Fixed Assets 2,691 3,240 Long Term Debt 1,422 1,512

Use the information to find the belowi) Owners’ Equity for 2012 and 2013ii) Change in Net Working Capital for 2009

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