Topics: Corporate tax, Debt, Depreciation Pages: 4 (1331 words) Published: February 6, 2013
Name: Student ID: Section: AK/ADMS 4540 Financial Management Fall 2011 Exam 2 Part 1 Instructor: Dr. William Lim Time Limit: 1.5hours

Instructions: Answer all 4 questions of this exam in the spaces provided on the question sheets. (If necessary, you may write on the back of the sheet). Although the stories may appear "plausibly real", they are fictitious. You have 1 ½ hours to work. The marks for each question are given. Please provide the marker with the greatest opportunity to give you credit by showing all calculations clearly. Answers without clear and correct calculations/working steps/explanations will be penalized. Only normal writing instruments, a calculator and one 8.5"x11" or letter-size page list of hand-written formulas may be used to write this test. This formula sheet must be submitted with the test; otherwise you will automatically receive a mark of zero (0). Question 1 (20 marks) With the Leafs rebuilding and near the bottom of the standings, you decide to get out of the cold and head to Florida. One evening in Tampa, you see A-Rod and M-Phelps coming out of a bong party celebrating A-Rod’s world series ring. Both are extremely worried about the volatility in the stock market, especially when their investments were managed by B-Madoff (BM). BM claimed to use Graham and Dodd’s financial statement analysis techniques to pick stocks. 1a. BM’s company A has a long-term debt ratio of 0.70 and a current ratio of 1.20. Current liabilities are \$850 million, sales are \$4.31 billion, profit margin is 9.5 percent, and ROE is 21.5 percent. What is the amount of company A’s net fixed assets?

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Question 1 (continued) 1b. BM is also looking at company B and company C, which have debt/total asset ratios of 60% and 40%, and returns on total assets of 20% and 30%, respectively. Which company has a greater ROE?

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Question 2 (30 marks) 2a. Unhappy with BM’s stock market performance, A-Rod and M-Phelps decide to invest some of their money in a...