MIDTERM EXAM in FINANCIAL MANAGEMENT

1. What are the three principal forms of business organization? What are the advantages and disadvantages of each? 10
points.

2. Should stockholder wealth maximization be thought of as a long-term or a short-term goal — for example, if one action
would probably increase the firm’s stock price from a current level of $20 to $25 in 6 months and then to $30 in 5 years
but another action would probably keep the stock at $20 for several years but then increase it to $40 in 5 years, which
action would be better? Can you think of some specific corporate actions that might have these general tendencies? 20
points.

3. Drawing on your background in accounting, can you think of any accounting differences that might make it difficult to
compare the relative performance of different firms? 15 points.

4. What’s the difference between stock price maximization and profit maximization? 10 points.

5. If you were the president of a large, publicly owned corporation, would you make decisions to maximize stockholders’
welfare or your own personal interests? What are some actions stockholders could take to ensure that management’s
interests and those of stockholders coincided? What are some other factors that might influence management’s actions?
15 points.

6. Assume that you are serving on the board of directors of a medium-sized corporation and that you are responsible for
establishing the compensation policies of senior management. You believe that the company’s CEO is very talented,
but your concern is that she is always looking for a better job and may want to boost the company’s short-run
performance (perhaps at the expense of long-run profitability) to make herself more marketable to other corporations.
What effect would these concerns have on the compensation policy you put in place? 15 points.

7. Edmund Enterprises recently made a large investment in upgrading its technology. While the technology improvements
will not have much of an impact on performance in the short run, they are expected to produce significant cost savings
over the next several years. What impact will this investment have on Edmund Enterprises’ earnings per share this
year? What impact might this investment have on the company’s stock price? 15 points.

8. You have just obtained financial information for the past 2 years for Powell Panther Corporation. Answer the following
questions.

Powell Panther Corporation: Income Statements for Year Ending December 31 (Millions of
Dollars)
2018 2017

Sales $1,200.0 $1,000.0

Operating costs excluding depreciation 1,020.0 850.0
EBITDA $ 180.0 $ 150.0
Depreciation 30.0 25.0
Earnings before interest and taxes $ 150.0 $ 125.0
Less: Interest 21.7 20.2
Earnings before taxes $ 128.3 $ 104.8
Taxes (40%) 51.3 41.9
Net income available to common stockholders $ 77.0 $ 62.9
Common dividends $ 60.5 $ 46.4
Powell Panther Corporation: Balance Sheets as of December 31 (Millions of Dollars)

2018 2017

ASSETS
Cash and marketable securities $ 12.0 $ 10.0
Accounts receivable 180.0 150.0
Inventories 180.0 200.0
Total current assets $372.0 $360.0
Net plant and equipment 300.0 250.0
Total assets $672.0 $610.0
LIABILITIES AND EQUITY
Accounts payable $108.0 $ 90.0
Notes payable 67.0 51.5
Accruals 72.0 60.0
Total current liabilities $247.0 $201.5
Long-term bonds 150.0 150.0
Total debt $397.0 $351.5
Common stock (50 million shares) 50.0 50.0
Retained earnings 225.0 208.5
Common equity $275.0 $258.5
Total liabilities and equity $672.0 $610.0

A. Prepare a cash flow statement for the year ended 2018. 30 points
B. What is the net operating profit after taxes (NOPAT) for 2018? 10 points.
C. What are the amounts of net operating working capital for 2017 and 2018? 20 points,
D. What are the amounts of total operating capital for 2017 and 2018? 20 points.
E. What is the free cash flow for 2018? 10 points
F. How can you explain the large increase in dividends in 2018? 10 points.