QUIZ 1

LAHORE UNIVERSITY OF MANAGEMENT AND SCIENCES

PRINCIPALS OF FINANCE

Time allowed: 50 minutes

Total score: 40

Student Name: ________________________ ID: ________________________

Answer ALL questions!

Check that you have 3 pages (including the cover page). The exam is double-sided.

Leave your mobile phones at the front desk until you leave the examination hall.

You may not leave the room once the quiz has started and then return.

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Calculators may be used, provided they cannot store text or are not financial calculators.

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Part A – questions 1 to 3 carry one mark each and questions 4 and 5 carry two mark each.

(10 minutes, 7 points)

1. The primary goal of the financial management is ____________.

A.to maximize the return

B.to minimize the risk

C.to maximize the wealth of owners

D.to maximize profit

2. In his traditional role the finance manager is responsible for ___________.

A.proper utilisation of funds

B.arrangement of financial resources

C.acquiring capital assets of the organization

D.efficient management of capital

3. The finance manager is accountable for.

A) Earning capital assets of the company

B) Effective management of a fund

C) Arrangement of financial resources

D) Proper utilisation of funds

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4. Wendy Winter needs to determine whether or not the current warehouse system should be
upgraded to a new system. The new system would require an initial cash outlay of $250,000. The
current system could be sold for $55,000. The monetary benefit of the new system over the next
five years is $325,000 while the monetary benefit of the current system over the same period is
$125,000. Furthermore, it is expected that the firm’s stock price will increase if the new system
is implemented because it will make the firm more cost efficient and cost effective in the long
run.
a) the marginal benefit of the proposed new warehouse system will be
_____________________ (1)

b) the marginal cost of the proposed new warehouse system will be

________________________ (1)

a. Marginal benefit= Monetary benefit of new system - Monetary benefit of old system =
$325,000 - $125,000 Marginal benefit=$200,000
b. Marginal cost= Cost of the new system – Proceeds of sale of the current system = $250,000 –
$55,000 Marginal cost=$195,000

5. The Motor Corporation sold vehicles for $500,000 to one specific dealer during the year. At
the financial year end, the dealer still owed The Motor Corporation $350,000. The cost of the
vehicles sold was $400,000, and this cost was incurred and paid by The Motor Corporation.
a. the net profit using the accrual basis of accounting is ________________ (1)
b. the net cash flow using the cash basis of accounting is _______________ (1)
a. Sales revenue $ 500,000 Less: Costs 400,000 Net profit $ 100,000
b. Cash inflow $ 150,000 Less: Cash outflow 400,000 Net cash flow ($250,000)

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Part B
Question 1 (15 minutes, 8 points)
Ahmed is an analyst with portfolio A. Ahmed wants to perform a ratio analysis on each one of
the companies in his portfolio and decides to compare them to one another. Some of the ratios he
has determined are as follows:

Required
a) What problems might Ahmed encounter in comparing these companies to one another on the
basis of their ratios? (2)
b) Why might the current and quick ratios for the electric utility and the fast-food stock be so
much lower than the same ratios for the other companies? (2)
c) Why might it be all right for the electric utility to carry a large amount of debt, but not the
software company? (2)
d) Why wouldn’t investors invest all their money in software companies instead of in less
profitable companies? (Focus on risk and return.) (2)

Question 2 (15 minutes, 13 points)

Following is income statement of Azure Co., for years 2020 and 2021:
INCOME STATEMENT (000)
2018 2019
SALES Rs 91,522,872 Rs 95,128,289
COST OF SALES Rs 81,073,777 Rs 87,824,215
GROSS PROFIT Rs 10,449,095 Rs 7,304,074

Distribution and marketing costs Rs 916,906 Rs 931,787

Administrative expenses Rs 677,602 Rs 800,040
Other income Rs 1,883,025 Rs 1,313,522
Other expenses Rs 1,244,569 Rs 1,281,007
NET EXPENSE Rs (956,052) Rs (1,699,312)

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 Profit from operations Rs 9,493,043 Rs 5,604,762
Finance cost Rs 14,476 Rs 11,189
Profit before taxation Rs 9,478,567 Rs 5,593,573
Taxation Rs 2,984,117 Rs 1,742,460
Profit after taxation Rs 6,494,450 Rs 3,851,113

Required
a) Prepare a proforma income statement for 2022 assuming a 30% tax rate. (6.5)
b) Assuming that administrative expense are fixed, prepare a proforma income statement for
2022 assuming a 30% tax rate. (6.5)

Question 3 (10 minutes, 11 points + 1 point for correct layout)

Basic Farmers Delight Corporation reported sales of $350,000 in June, $380,000 in July, and
$390,000 in August. The forecasts for September, October, and November are $385,000,
$418,000, and $429,000, respectively. The initial cash balance on September 1 is $150,000, and
a minimum of $8,000 should be kept.

(1) Farmers Delight predicts that 5% of its sales will never be collected, 30% of its sales will be
cash sales, and the remaining 65% will be collected in the following month.
(2) Farmers Delight receives other monthly income of $3,000.
(3) The actual or expected purchases are $150,000, $120,000, and $115,000 for the months of
September to November, respectively, and 50% are paid in cash while the remainder is paid
in the following month. The purchases for August were $120,000.
(4) Monthly rent is $3,500 chargeable only in October and November.
(5) Wages and salaries are 12% of the previous month’s sales.
(6) Cash dividends of $4,600 are declared and will be paid in September.
(7) Long-term loan repayment of principal and interest of $4,700 is due in October.
(8) Additional equipment costing $8,500 is ordered and scheduled to be paid for in cash in
November.
(9) Taxes of $8,250 are due in November.

Required
Use the given information to compile a cash budget for the months of September, October, and
November.

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