Manila Tytana Colleges

College of Accountancy and Management

Midterm Examination
Financial Management I
MULTIPLE CHOICE: Choose the correct answer (50 Points)
1. Which of the following is not one of the five Cs of credit?
a. character
b. capacity
c. capital
d. credit scoring
ANS: D PTS: 1 DIF: E
REF: 16.4 Accounts Receivable Standards and Terms NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows

2. The terms of sale for customers are called the

a. credit terms
b. collection policy
c. cash discounts
d. none of the above
ANS: A PTS: 1 DIF: E
REF: 16.5 Collecting, Monitoring, and Applying Cash to Receivables
NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows

3. Bavarian Brew has an average age of inventory of 35 days, an average collection period of 27 days. What is the
company’s operating cycle?
a. 35 days
b. 27 days
c. 62 days
d. 8 days
ANS: C
35+27 = 62
4. Bavarian Brew has an average age of inventory of 35 days, an average collection period of 27 days, and an average
payment period of 16 days. What is the company’s cash conversion cycle?
a. 62 days
b. 46 days
c. 51 days
d. 43 days
ANS: B
35+27-16 = 46

PTS: 1 DIF: E REF: 16.1 The Cash Conversion Cycle

NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

5. Bavarian Brew has an average age of inventory of 35 days, an average collection period of 27 days and a cash
conversion cycle of 16 days. What is the company’s average payment period?
a. 46 days
b. 62 days
c. 16 days
d. 19 days

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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I
ANS: A
35+27-16 = 46

PTS: 1 DIF: E REF: 16.1 The Cash Conversion Cycle

NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

6. Bavarian Brew has an average payment period of 35 days, an average collection period of 27 days and a cash
conversion cycle of 16 days. What is the company’s average age of inventory?
a. 51 days
b. 43 days
c. 24 days
d. 16 days
ANS: C
16+35-27 = 24

PTS: 1 DIF: M REF: 16.1 The Cash Conversion Cycle

NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

10. Bavarian Brew has an average payment period of 35 days, an average age of inventory of 27 days and a cash
conversion cycle of 16 days. What is the company’s average collection period?
a. 24 days
b. 51 days
c. 16 days
d. 38 days
ANS: A
16-27+35 = 24

PTS: 1 DIF: M REF: 16.1 The Cash Conversion Cycle

NAT: Analytic skills
27. The operating cycle is the length of time from the receipt of inventory until the
a. beginning of the cash conversion cycle.
b. end of the cash conversion cycle.
c. payment of accounts payable.
d. collection of cash from sales.
ANS: D PTS: 1 DIF: E
REF: 16.1 The Cash Conversion Cycle NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows

28. The time between the points at which a firm pays for raw materials and at which it receives payment for finished
goods is
a. the average age of inventory
b. the cash conversion cycle
c. the average collection period
d. the operating cycle
ANS: B PTS: 1 DIF: E
REF: 16.1 The Cash Conversion Cycle NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows

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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I

29. If a firm has been experiencing increased sales while its inventory levels have decreased, then
a. its inventory turnover is decreasing, and its average age of inventory is increasing.
b. its inventory turnover is decreasing and its average age of inventory is decreasing.
c. its inventory turnover is increasing and its average age of inventory is increasing.
d. its inventory turnover is increasing and its average age of inventory is decreasing.
ANS: D PTS: 1 DIF: M
REF: 16.1 The Cash Conversion Cycle NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
LOC: acquire knowledge of financial analysis and cash flows
1.The amount of time that it takes for a check to clear through the banking system is called
a. mail float
b. processing float
c. clearing float
d. delivery float
ANS: C PTS: 1 DIF: E REF: 17.1 Cash Management
NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows

2. Funds that have been sent by the payer, but are not yet usable by the payee are called
a. tax balance
b. ledger balance
c. float
d. none of the above
ANS: C PTS: 1 DIF: E REF: 17.1 Cash Management
NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows

3. The collection, concentration, and disbursement of funds for the company is called
a. target cash balance
b. cash position management
c. bank account analysis
d. none of the above
ANS: B PTS: 1 DIF: E REF: 17.1 Cash Management
NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows

4. A collection system that is characterized by many collection points with each having a depository account at a local bank is
called
a. field banking system
b. mail based collection system
c. electronic invoice presentment and payment system
d. electronic bill presentment and payment system
ANS: A PTS: 1 DIF: E REF: 17.2 Collections
NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows

5. Special post office boxes set up by the firm to expedite the receipt and processing of its accounts receivables are called
a. safety-deposit boxes
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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I
b. lockboxes
c. float reducers
d. none of the above
ANS: B PTS: 1 DIF: E REF: 17.2 Collections
NAT: Reflective thinking
LOC: acquire knowledge of financial analysis and cash flows
Bavarian Brew Float
Bavarian Brew receives about 350 checks a day with an average check size of $550. Currently customer’s payments spend 2
days in the mail. Once a check is received it takes about 1.5 days to process it and another 4 days to clear the banking system.
The firm’s opportunity cost is 10%. Assume a 365-day year.

6. What is Bavarian Brew’s collection float?

a. 4 days
b. 2 days
c. 1.5 days
d. 7.5 days
ANS: A
2+1.5+4 = 7.5

PTS: 1 DIF: E REF: 17.1 Cash Management

NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

7. What is the availability float of Bavarian Brew?

a. 2 days
b. 4 days
c. 7.5 days
d. 1.5 days
ANS: B PTS: 1 DIF: E REF: 17.1 Cash Management
NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

8. Bavarian Brew is contemplating implementing a collection system that would decrease the collection float by 2.5 days. What
would be the annual benefit of that system?
a. $481,250
b. $48,125
c. $96,250
d. $75,480
ANS: B
reduction in float value = 2.5(350)(550)(.10) = 48125

PTS: 1 DIF: M REF: 17.2 Collections

NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

9. Bavarian Brew is contemplating implementing a lockbox system that would decrease the collection float by 2 days. What
would be the most the company should be willing to pay on an annual basis for the system?
a. $96,250
b. $482,500

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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I
c. $38,500
d. $48,125
ANS: C
2(350)(550)(.10) = 38,500

PTS: 1 DIF: M REF: 17.2 Collections

NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

10. Bavarian Brew is contemplating implementing a lockbox system. If the system has an annual cost of $60,000, by how many
days would the float have to be reduced for the company to implement the system?
a. 2.52 days
b. 3.12 days
c. 3.75 days
d. 4.74 days
ANS: B
x(350)(550)(.10) = 60000
x = 3.12
1.The spot rate for the U.S. dollar relative to the Euro is $1.47/€. The spot rate for the U.S. dollar relative to the Canadian dollar is
$0.765/C$. What is the cross exchange rate for the C$ and €?
a. C$1.922/€
b. €1.922/C$
c. C$0.5204/€
d. €0.5204/C$
ANS: A
The correct answer is C$1.922/€. To figure out the cross exchange rate you need to divide $1.470/€ by $0.765/C$.

PTS: 1 DIF: E REF: 18.1 Exchange Rate Fundamentals

NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates

2. Which of the following may prevent purchasing power parity from holding across different countries?
a. Import taxes
b. transportation costs
c. transaction costs
d. all of the above
ANS: D
All of these factors listed can prevent purchasing power parity from holding true across different countries. It is important to
note that all of these factors are still powerful determinants of exchange rates in the long run.

PTS: 1 DIF: E
REF: 18.2 The Parity Conditions in International Finance NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates

3. A 32-inch television sells in the United States for $157. The same television sells in Canada for C$212. What must the
exchange rate be for Purchasing Power Parity to hold in this example?
a. $1.3503/C$
b. C$1.3053/$
c. $0.7406/C$

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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I
d. C$0.7406/$
ANS: C
In order for Purchasing Power Parity to hold the exchange rate must equal $0.7406/C$. You get this exchange rate by
dividing $157 (the U.S. price) by C$212 (the Canadian price).

PTS: 1 DIF: E
REF: 18.2 The Parity Conditions in International Finance NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates

4. A coffee table in Canada sells for C$134. The same coffee table sells for $92 in the United States. The expected inflation rate
for the next year in Canada is 10% and the expected one year inflation rate for the United States is 8%. What must the
exchange rate be currently for Purchasing Power Parity to hold now, and what must the exchange rate change to in order for
Purchasing Power Parity to hold in one year.
a. $0.6866/C$ and $0.6741/C$
b. C$0.6866/$ and C$0.6741/$
c. $1.4565/C$ and $1.484/C$
d. none of the above
ANS: A
5.Purchasing Power Parity implies that if the law of one price holds at all times then
a. differences in interest rates are associated with expected changes in exchange rates
b. differences in expected inflation rates between two countries are associated with expected
changes in exchange rates.
c. Foreign exchange rates are fixed.
d. neither a or b is correct
ANS: B
Purchasing Power Parity implies that if the law of one price holds at all times then differences in expected inflation between
two countries are associated with expected changes in exchange rates.

PTS: 1 DIF: E
REF: 18.2 The Parity Conditions in International Finance NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates

6. Suppose that the one-year risk-free interest rate is 5% in the United States. The current spot rate is $0.7642/C$ and the one-
year forward rate is $0.7834/C$. What must the Canadian one-year risk-free interest rate be in order for interest rate parity to
hold?
a. 0.929%
b. 0.783%
c. 2.43%
d. 7.64%
ANS: C
The correct answer is 2.43%. You get this answer by applying the interest rate parity formula to the information given. The
formula is ($0.7834/C$) / ($0.7642/C$) = (1.05 / 1 + Canadian rate). Solving this equation yields a one-year risk-free
Canadian rate of 2.43%.

PTS: 1 DIF: E
REF: 18.2 The Parity Conditions in International Finance NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates

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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I
7. The annualized rate of interest on three-month government bonds is 7% in Italy and the annualized rate on three-month
government bonds is 4% in the United States. The current spot rate is $1.12/€. Using interest rate parity what is the implied
three-month forward rate between the U.S. dollar and the Euro.
a. $1.112/€
b. $1.128/€
c. €0.8865/$
d. $1.0886/€
ANS: A
In this problem you need to remember to divide the annualized rate of interest by 4, since we are looking for a three month
forward rate. Once you do that, you just need to plug the information given into the interest rate parity formula. To calculate
the answer you would set up the equation like this (Forward ($/€) / $1.12/€) = (1.01/1.0175). Then you just solve for the
Forward rate.

PTS: 1 DIF: M
REF: 18.2 The Parity Conditions in International Finance NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates

8. The inflation rate in London is expected to be 10% over the next year and the inflation rate in Canada is expected to 6%.
Using Purchasing Power Parity you could say that
a. the £ will appreciate relative to the Canadian dollar
b. the Canadian dollar will appreciate relative to the £
c. the risk-free rate of interest in London will rise to compensate for the higher inflation rate.
d. the risk-free rate of interest in London will fall to compensate for the higher inflation rate.
ANS: B
According to Purchasing Power Parity the Canadian dollar should appreciate relative to the £. Purchasing Power Parity
implies that when a country experiences a higher inflation rate relative to another country, then its currency should depreciate
relative to the other countries currency.

PTS: 1 DIF: E
REF: 18.2 The Parity Conditions in International Finance NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates

9. In the United States the expected rate of inflation is 4% and in Canada the expected rate of inflation is 8%. The risk-free rate
of interest in the U.S. is 3%. What would the risk-free interest rate have to be in Canada for real interest rate parity to hold?
a. 9.05%
b. 3.0%
c. 4.0%
d. 6.96%
ANS: D
To calculate this answer you need to use the real interest rate parity formula. The formula is (1 + Canadian risk free rate) / (1
+ U.S. risk free rate) = (1 + Canadian inflation) / (1 + U.S. inflation). When you plug the numbers into the formula you get an
answer of 6.96%.

PTS: 1 DIF: E
REF: 18.2 The Parity Conditions in International Finance NAT: Analytic skills
LOC: acquire knowledge of financial markets and interest rates

10. The expected rate of inflation in Japan is 12% and the expected rate of inflation in Italy is 9%. In Italy the risk-free rate of
interest is 6%. What does the risk-free rate of interest have to be in Japan for real interest rate parity to hold?
a. 3.16%
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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I
b. 8.92%
c. 6.0%
d. 12.0%
ANS: B
To calculate this answer you need to use the real interest rate parity formula. The formula is (1 + Japanese risk-free rate) / (1
+ Italy risk-free rate) = (1 + Japanese inflation) / (1 + Italy inflation). When you plug the numbers into the formula you get an
answer of 8.92%

1.The option that gives the owner the right to buy an asset at a fixed price at or before a certain date is called a
a. put option
b. call option
c. parity option
d. swaption
ANS: B PTS: 1 DIF: E REF: 19.1 Options Vocabulary
NAT: Reflective thinking LOC: understand derivative markets

2. The price at which the owner of an option can buy or sell the underlying asset is called the
a. market price
b. liquidation value
c. strike price
d. intrinsic value
ANS: C PTS: 1 DIF: E REF: 19.1 Options Vocabulary
NAT: Reflective thinking LOC: understand derivative markets

3. An option that gives the owner the right to buy or sell an asset at a fixed price only on the expiration date, is called a(n)
a. European option
b. American option
c. Asian option
d. exotic option
ANS: A PTS: 1 DIF: E REF: 19.1 Options Vocabulary
NAT: Reflective thinking LOC: understand derivative markets

4. According to the Black and Scholes option pricing model, which of the following will lead to an increase in the value of a
call option?
a. the price of the underlying asset decreases
b. the risk free rate increases
c. the time to expiration decreases
d. none of the above
ANS: B PTS: 1 DIF: M REF: 19.4 Option Pricing Models
NAT: Reflective thinking LOC: understand derivative markets

5. When a call option’s strike price is less than the current price of the underlying asset, the call is said to be
a. at the money
b. in the money
c. out of the money
d. worthless
ANS: B PTS: 1 DIF: E REF: 19.1 Options Vocabulary
NAT: Reflective thinking LOC: understand derivative markets
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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I

6. Smith Enterprises stock currently sells for $17.50. A call option on the stock has a strike price of $15 and currently sells at
$4.50. What is the intrinsic value of the option?
a. $0
b. $2.50
c. $4.50
d. $1.25
ANS: B
17.50-15 = 2.50

PTS: 1 DIF: E REF: 19.1 Options Vocabulary

NAT: Analytic skills LOC: understand derivative markets

7. Smith Enterprises stock currently sells for $17.50. A put option on the stock has a strike price of $15 and currently sells at
$4.50. What is the intrinsic value of the option?
a. $0
b. $2.50
c. $4.50
d. $1.25
ANS: A
the option is out of the money, thus the intrinsic value = 0

PTS: 1 DIF: E REF: 19.1 Options Vocabulary

NAT: Analytic skills LOC: understand derivative markets

8. Smith Enterprises stock currently sells for $17.50. A put option on the stock has a strike price of $15 and currently sells at
$4.50. What is the time value of the option?
a. $0
b. $2.50
c. $4.50
d. $2.00
ANS: C
intrinsic value = 0
time value = 4.50

PTS: 1 DIF: E REF: 19.1 Options Vocabulary

NAT: Analytic skills LOC: understand derivative markets

9. Smith Enterprises stock currently sells for $17.50. A call option on the stock has a strike price of $15 and currently sells at
$4.50. What is the time value of the option?
a. $2.50
b. $0
c. $2.00
d. $4.50
ANS: C
intrinsic value = 17.50 - 15 = 2.50
time value = 4.50-2.50 = 2

PTS: 1 DIF: E REF: 19.1 Options Vocabulary

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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I
NAT: Analytic skills LOC: understand derivative markets

10. Smith Enterprises stock currently sells for $17.50. A call option on the stock has a strike price of $20 and currently sells at
$4.50. What is the intrinsic value of the option?
a. $0
b. $2.50
c. $2.00
d. $4.50
ANS: A
option is out of the money: intrinsic value = 0

PTS: 1 DIF: E REF: 19.1 Options Vocabulary

NAT: Analytic skills LOC: understand derivative markets

11. Smith Enterprises stock currently sells for $17.50. A call option on the stock has a strike price of $20 and currently sells at
$4.50. What is the time value of the option?
a. $0
b. $2.50
c. $2
d. $4.50
ANS: D
intrinsic value = 0
time value = 4.50 - 0 = 4.50

PTS: 1 DIF: E REF: 19.1 Options Vocabulary

NAT: Analytic skills LOC: understand derivative markets

12. Smith Enterprises stock currently sells for $17.50. A put option on the stock has a strike price of $20 and currently sells at
$4.50. What is the time value of the option?
a. $0
b. $2.50
c. $2
d. $4.50
ANS: C
intrinsic value = 20 - 17.50 = 2.50
time value = 4.50-2.50 = 2

PTS: 1 DIF: E REF: 19.1 Options Vocabulary

NAT: Analytic skills LOC: understand derivative markets

13. Smith Enterprises stock currently sells for $17.50. A put option on the stock has a strike price of $20 and currently sells at
$4.50. What is the intrinsic value of the option?
a. $0
b. $2.50
c. $2.00
d. $4.50
ANS: B
intrinsic value = 20 - 17.50 = 2.50

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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I
PTS: 1 DIF: E REF: 19.1 Options Vocabulary
NAT: Analytic skills LOC: understand derivative markets

14. Suppose you bought 10 Smith Enterprise call options with a strike price of $52 at $2.75 per option. If the price of Smith
stock is $50, what is your net profit (or loss)? Ignore transaction costs.
a. $0
b. -$27.50
c. $27.50
d. $500
ANS: B
option expires out of the money
loss = 10(2.75) = 27.50

PTS: 1 DIF: M REF: 19.2 Option Payoff Diagrams

NAT: Analytic skills LOC: understand derivative markets

15. Suppose you bought 10 Smith Enterprise put options with a strike price of $52 at $2.75 per option. If the price of Smith stock
is $48, what is your net profit (or loss)? Ignore transaction costs.
a. $40
b. $0
c. $12.50
d. -$27.50
ANS: C
profit from options = 4(10) = 40
net profit = 40 - 10(2.75) = $12.50

PTS: 1 DIF: M REF: 19.2 Option Payoff Diagrams

NAT: Analytic skills LOC: understand derivative markets

16. Suppose you bought 10 Smith Enterprise put options with a strike price of $52 at $2.75 per option. If the price of Smith stock
is $56, what is your net profit (or loss)? Ignore transaction costs.
a. $40
b. $0
c. -$27.50
d. $12.50
ANS: C
net profit = 0 - 10(2.75) = -27.50

PTS: 1 DIF: M REF: 19.2 Option Payoff Diagrams

NAT: Analytic skills LOC: understand derivative markets

17. Suppose you bought 10 Smith Enterprise call options with a strike price of $52 at $2.75 per option. If the price of Smith
stock is $56, what is your net profit (or loss)? Ignore transaction costs.
a. $0
b. $12.50
c. -$27.50
d. $40
ANS: B
net profit = 10(4) - 10(2.75) = 12.50

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 Manila Tytana Colleges
College of Accountancy and Management
Midterm Examination
Financial Management I

PTS: 1 DIF: M REF: 19.2 Option Payoff Diagrams

NAT: Analytic skills LOC: understand derivative markets

18. A call option with a $50 strike price on Bavarian Sausage stock will expire in one year. If you know that the risk free rate is
4%, that the stock currently sells at $47 and the put on the same stock has a value of $2.75, what is the price of the call?
a. $2.75
b. $3.56
c. $1.67
d. $5.36
ANS: C
B = 50/1.04 = 48.08
47 + 2.75 = 48.08 + C
C = $1.67

PTS: 1 DIF: M REF: 19.2 Option Payoff Diagrams

NAT: Analytic skills LOC: understand derivative markets

19. A put option with a $50 strike price on Bavarian Sausage stock will expire in one year. If you know that the risk free rate is
4%, that the stock currently sells at $47 and the call on the same stock has a value of $2.75, what is the price of the put?
a. $4.67
b. $2.75
c. $3.83
d. $1.56
ANS: C
B = 50/1.04 = 48.08
47 + P = 48.08 + 2.75
P = 3.83

PTS: 1 DIF: M REF: 19.2 Option Payoff Diagrams

NAT: Analytic skills LOC: understand derivative markets

20. A put option with a $50 strike price on Bavarian Sausage stock will expire in one year. If you know a call on the same stock
has a value of $2.75, that the price of the put is $1.26 and the stock is currently selling at $47, what is the implied risk free
rate?
a. 4.56%
b. 3.07%
c. 5.43%
d. 9.87%
ANS: D
47 + 1.26 = B + 2.75
B = 45.51
50/1+r = 48.51
r = .0987

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