ENGM 401 & ENGM 620

Sample Second Mid-Term Exam

Midterm #2 will have the same format as Midterm #1.
The midterm will cover chapters 4, 5, and 6 of the text, and the beginning of chapter 7, section
7.1, and the material in lectures 12 to 22. The midterm will be in multiple choice format, open-
book and open-notes (hard copy only), with 20 5-choice questions and 25 true-false questions.
The 5-choice questions will be weighted higher than the true-false questions. Some questions will
require simple calculations. Calculators are allowed, but no electronic device is permitted that has
communication capabilities enabled. There is a URL link on the web site to a guide to
calculations, which you will find useful.
Note that midterm problems in general cover:
• defining terms and activities in engineering management,
• identifying quantitative financial information in the context of business situations,
• filling out or interpreting financial information on statements,
• calculating and interpreting metrics (such as financial ratios) that pertain to engineering finance
and engineering management scenarios, and
• analyzing engineering financial situations such the time-value of money and interest
calculations.
You may wish to use these samples to make up your own questions for studying. Definitions of
terms sometimes depend on the circumstances, so read the questions carefully and choose the
most correct answer.
Part 1: Multiple Choice (2.5 points each) Enter Answers on Scantron Sheet 1 to 20.

1. The time value of money is affected by:

a) Inflation.
b) Risk.
c) Liquidity.
d) a & b.
e) a & b & c.

2. Return on Equity is:

a) A key test for owners of a company about its profitability.

b) Net Income divided by Retained Earnings.
c) Net Income divided by Capital Shares.
d) Operating Income divided by Shareholder’s Equity.
e) More volatile for companies with a low debt ratio.

3. The Debt Ratio is:

a) An important Activity Ratio.

b) Total Liabilities divided by (Total Assets - Total Liabilities).
c) Bank Debt divided by Total Assets.
d) An indicator of whether a company can survive a downturn in its business and
still pay the interest on its debt.
e) Total Assets divided by Total Liabilities.
 ENGM 401 & 620 X1 Sample Midterm Exam #2

4. A company pays $5,000 to shareholders in dividends, and has $8000 in new capital
shares from shareholders. The company also takes on an additional $7,000 in new long-
term borrowing. The Financing Activities total is:

a) -$20,000.
b) -$10,000.
c) -$4,000.
d) $10,000.
e) $20,000.

5. Interest rate is sometimes called:

a) Discount rate.
b) Amortization rate.
c) Return rate.
d) a & b.
e) a & c.

6. Which cash flow series diagram shows the correct equivalence of the two sums?

7. The Current Assets minus Current Liabilities minus Cash is:

a) The Non-Cash Working Capital.

b) Net Cash.
c) The Working Capital plus the Current Portion of the Long-Term Debt.
d) The Long-Term Assets minus the Current Portion of the Long-Term Debt.
e) None of the above.

Page 2 of 9
 ENGM 401 & 620 X1 Sample Midterm Exam #2

8. An investor is considering purchasing some stock, and is looking for long-term growth.
The investor is looking at companies a range of industry sectors. Which financial ratios
will be important in the decision?
a) Dividend yield and current ratio.
b) DuPont Identity and profit margin on sales.
c) Price to earnings ratio and sustainable growth.
d) Total assets turnover and quick ratio.
e) Market to book ratio and EV to EBITDA.

9. The T-Total Beverage Co. buys new fixed assets very close to the end of the business
year for $2,000,000. Existing fixed assets are worth $1,500,000, and accumulated
depreciation is $800,000. The Investing Activities total is:

a) -$2,700,000.
b) -$2,000,000.
c) -$1,300, 000.
d) -$500,000.
e) $2,000,000.

For questions 10, 11, and 12: You have the following information available from your
company’s most recent Income Statement and Balance Sheet:

EBIT $3,141.00
Interest $80.00
Taxes $1,040.74
Net Income $2,020.26

Current Assets $1,950.00

Total Assets $ 7,500.00
Long-Term Debt $1,000.00
Capital Shares $ 2,890.00
Retained Earnings
(beginning of period) $900.000
Retained Earnings
(end of period) $2,420.26

10. The interest rate on the long-term debt is:

a) 0.4%.
b) 0.8%.
c) 4.0%.
d) 5.0 %.
e) 8.0%.

11. The Debt Ratio is:

a) 6.7%.
b) 13.3%.
c) 29.2%.

Page 3 of 9
 ENGM 401 & 620 X1 Sample Midterm Exam #2

d) 43.5%.
e) 70.8%.

12. Which statement is not true?

a) The working capital ratio is 1.64.

b) The current portion of the long-term debt cannot be calculated from the given
information.
c) The company has positive working capital.
d) The company added less to retained earnings in this period than it paid in
dividends.
e) The company paid a dividend.

13. The Growco company has the following information available from the most recent
income statement and balance sheet:
Sales revenue $ 5,890.00
Bad debt, warranty, allowances $ -
COGS $ 3,416.20
SG&A $ 1,142.00
Operating income $ 1,331.80
Other income $ -
EBIT $ 1,331.80
Interest paid $ 200.00
Taxes $ 384.81
Net income $ 746.99
Fixed and long-term assets $ 7,345.00
Total assets $ 13,113.00
Current liabilities $ 5,613.00
LT debt $ 5,000.00
Total equity $ 2,500.00
Interest rate 4.0%
Corporate tax rate 34.0%

The company uses operating income for calculating the Profit Margin on Sales and other
operations management ratios. Which statement is true?

a) The Working Capital Ratio is less than 1.

b) The Profit Margin on Sales is less than the contribution margin percentage.
c) The interest on long-term debt is 5%.
d) The Return on Total Assets is 5.7%.
e) The Times Interest Earned is 6.5.

Page 4 of 9
 ENGM 401 & 620 X1 Sample Midterm Exam #2

14. If a company reduces its receivables and inventory during a reporting period, but no
other conditions change, then what will probably happen?

a) The Times Interest Earned ratio will probably go up.

b) The Return on Equity will probably go down.
c) The Working Capital will probably go up.
d) The amount of the short-term credit line account will probably go down.
e) The Working Capital Ratio will probably go down.

For Questions 15, 16 and 17. Consider the following two Statements of Cash Flow for a
company with stable sales (i.e., negligible change in revenue over the past three years):

($M) Last This

Year Year
Operating Activities:
Net Earnings for the Year $583 $720
Depreciation $314 $375
Changes in Non-Cash Working Capital ($204) $62
subtotal $693 $1,157

Investing Activities:
Additions to Fixed Assets ($50) ($150)
Additions to Goodwill and Intangibles $- $-
subtotal ($50) ($150)

Financing Activities:
Dividends ($190) ($190)
Net New Long Term Borrowings $240 ($300)
Net New Capital Shares $- $-
subtotal $50 ($490)

Funds Flow $693 $517

15. Which of these statements is correct?

a) The company dividend shows that it had the same share buyback in both years.
b) The company has less funds flow into the company this year than last year.
c) The company had more funds flow out of the company last year than this year.
d) The company had higher operating expenses this year than last year.
e) None of the above.

Page 5 of 9
 ENGM 401 & 620 X1 Sample Midterm Exam #2

16. The net cash at the start of last year was -$230 M. Which statement is correct?

a) Net cash at the end of last year was $643 M.

b) Net cash at the end of last year was $693 M.
c) Net cash at the end of this year is $463 M.
d) Net cash at the end of this year is $517 M.
e) Net cash at the end of this year is $980 M.

17. As well as the statements of cash flow, you also have the following stock market
information about the company:
Last year This year
share capital $ 250 M $ 250 M
price per share $ 49.80 $ 72.19
Which statement is most correct about the kind of investor who would be interested in
buying stock in this company?

a) A conservative investor will not be interested because the earnings per share is
dropping.
b) A speculative investor will be interested because of the very large growth in the
market capitalization.
c) An investor looking for well-run operations and moderate growth will be
interested, based on the rising P/E ratio and earnings.
d) An investor looking to break up the company will be interested because the
market to book value of assets shows that the stock is seriously undervalued.

18. For the following cash flow diagram, choose the most correct answer.

a) This is a series of future-value payments for a twenty-year bond with a coupon

rate of 2% and a market rate of 2.4%.
b) This is a series of present-value payments for a twenty-year bond with a coupon
rate of 2% and a market rate of 2.4%.
c) This is a series of future-value payments for a twenty-year bond with a coupon
rate of 2.4% and a market rate of 2%.
d) P = 200(P|A,2.4%,20) + 10,200(P|F,2.4%,20)
e) P = 200(P|F,2.4%,20) + 10,000(P|F,2.4%,20).

Page 6 of 9
 ENGM 401 & 620 X1 Sample Midterm Exam #2

19. Choose the most correct statement about how the time-value of money affects
investments.

a) The equivalence of two amounts at different times depends on the interest rate
that is used.
b) Inflation causes the future value of a present sum to be smaller than the
principal.
c) A bond always has the same present value, no matter what the market rate.
d) The time-value of a bond is calculated using only the coupon rate.
e) A riskier investment will have a lower return rate.

20. A company has negative cash flow, a low times interest earned ratio, market
capitalization of $16M, total liabilities of $9M, capital shares of $19M, retained earnings
of $24M, and dividend yield of 3%. What is your assessment of the company?
a) This company’s stock is over-valued.
b) This company may be worth more by stopping its operations and selling off the
assets.
c) This company can be profitable if it can reduce its leverage.
d) This company’s stock is attractive because it has a low price to earnings ratio.

Part 2: True False (2 points each). Mark A if the statement is true, and B if the
statement is false. Enter answers on Scantron Sheet 21 to 45.

21. Risk is the probability of an event times the cost associated with the consequence of
that event.

22. If a company makes a profit, then it has positive net cash flow.

23. The Times Interest Earned Ratio is an important ratio for lenders.

24. The Debt-To-Equity Ratio is Total Liabilities / Total Assets.

25. A dollar in the future has a discounted value because it is worth less than a
dollar today.

26. A sum of money at one point in time is equivalent to another sum at another time,
regardless of the interest rate.

27. The annuity received from a $10,000 bond with a coupon rate of 5% is $500.

28. The current portion of the long-term debt has to be paid in the next reporting period
(usually a year).

29. Selling an asset is a source of funds.

30. For a given nominal interest rate, simple interest yields a higher return than compound
interest.

Page 7 of 9
 ENGM 401 & 620 X1 Sample Midterm Exam #2

31. Net cash is the sum of cash minus the amount of the short-term credit line.

32. An investor may decide to sell a stock that has a high price to earnings ratio.

33. An investor who wants low risk will probably invest more in bonds than in stocks.

34. The change in retained earnings for a reporting period minus the dividend equals the
net income after interest.

35. The conventional definition of one day of inventory is equal to the COGS for one day
of production.

36. A company that has high expectation of growth in the future may have a high price to
earnings ratio.

37. A cash flow statement directly links the business performance to the market
capitalization.

38. The present value of a future sum will decrease as the interest rate drops.

39. An increase in an equity account occurs when there is a share buyback.

40. Non-cash expenses (such as depreciation) are always a source of funds.

41. A creditor is someone who owes money to a business.

42. An owner with a high credit rating will receive a preferred dividend.

43. At a point in time, interest paid on debt always equals the current portion of the long-
term debt.

44. Leverage is usually measured by the Ratio of current liabilities to current assets.

45. If the earning power of an investment is less than the cost of the debt, then the owners
will have a lower return than the earning power of the investment.

Page 8 of 9
 ENGM 401 & 620 X1 Sample Midterm Exam #2

Answers:
1e
2a
3d
4d
5e
6b
7e
8c
9b
10 e
11 c
12 d
13 b
14 d
15 c
16 e
17 c
18 a
19 a
20 b

21 True
22 False
23 True
24 False
25 True
26 False
27 True
28 True
29 True
30 False
31 True
32 True
33 True
34 False
35 False
36 True
37 False
38 False
39 False
40 True
41 False
42 False
43 False
44 False
45 True

Page 9 of 9