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MBA I
Corporate Finance I
Quiz 1 (A)
Q No 1: Define Partnership and state the difference between types of partnership? (4
Marks)
A business form in which two or more individuals act as owners.
TYPES OF PARTNERSHIPS:
1. GENERAL PARTNERSHIP:
 All partners have unlimited liability and are liable for all obligations of the partnership.
2. LIMITED PARTNERSHIP :
Limited partners have liability limited to their capital contribution (investors only). At least one
general partner is required and all general partners have unlimited liability
Q No 2: Define the Following terms: (2 marks each)
A) Term Structure of Interest Rates
It is the relationship between bond yields and maturity
B) Yield Curve
Yield curve: a graph showing the relationship between bond yield and maturity
A yield curve is a graph of the relationship between yields and term to maturity for particular
securities.
Page 1 of 8
MBA I
Corporate Finance I
Quiz 1 (A)
Q No 3: What is Financial Management and what are the decision functions of financial
management? (4 Marks)
FM concerns the acquisition, financing, and management of assets with some overall goal in
mind.
3 decisions functions:
INVESTMENT DECISION
• Most important of the three decisions.
• What is the optimal firm size?
• What specific assets should be acquired?
• What assets (if any) should be reduced or eliminated
FINANCING DECISION:
• Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet)
• What is the best type of financing?
• What is the best financing mix?
• What is the best dividend policy?
• How will the funds be physically acquired
Asset Management Decisions:
• How do we manage existing assets efficiently?
• Greater emphasis on current asset management than fixed asset management.
Q No 4: Ewert Corporation’s earnings before interest and taxes are 5 times its interest
expense. If earnings after taxes are $3600 and its tax arte is 50%, how much interest did it
pay? (5 Marks)
EBIT = (5) I
EAT = (EBIT – I) (1-T)
$3600 = (5I-I) (1-0.5)
I = $ 1800
Page 2 of 8
MBA I
Corporate Finance I
Quiz 1 (A)
Q No 5: XYZ Company is calculating the depreciation on a machine with a depreciable
basis of $500,000, a 6-year useful life, and a 5-year property class life. (DONOT forget to
write formulae)
1. Calculate depreciation charge using straight line method
(3 marks)
Depreciation = amount of asset / class life of the asset
= $500,000 / 5
= $100,000 per year
2. Calculate depreciation charge using double declining method (5 Marks)
Formula:
Depreciation Amount per year = m *(1/n) *NBV
where
m = multiple (i.e. 2, 3, 4 etc)
n= class life of an asset
NBV = net book value = cost of asset – accumulated depreciation
Calculations:
Year
0
1
2
3
4
5
6
NBV
500,000
500,000
500,000-200,000 = 300,000
300,000-120,000 = 180,000
180,000-72000 =108000
108000-43200 = 64800
64800 – 25920 = 38880
Page 3 of 8
Depreciation amt
2*1/5*500,000 = 200,000
2*1/5*300,000 = 120,000
2*1/5*180,000 = 72000
2*1/5*108000 = 43200
2*1/5*64800 = 25920
2*1/5*38880 = 15552
MBA I
Corporate Finance I
Quiz 1 (A)
Q No 6: ABC Company sells its products for $ 1.50 each. Labor and material for each item
produced cost $1.25. The company’s fixed costs are $1000. How many items should the
company sell to break even (EBIT=0)? (5 Marks)
(P-VC)Q = FC
(1.5 – 1.25) Q = 1000
Q = 4000 TRINKETS
Page 4 of 8
MBA I
Corporate Finance I
Quiz 1 (A)
Q No 1: Explain the role of Financial Intermediaries in an economy with the help of a flow
chart? (4 Marks)
Q No 2: What is Cost of Money and list its five determinants? (4 Marks)
Interest Rate is the cost of debt. Dividend and capital gains are cost of equity
Factors affecting cost of money:
• Production Opportunities: the return available within an economy from investment in
productive assets.
• Time Preferences for Consumption: The preferences of consumer for current
consumption as opposed to saving for future consumption.
• Risk: The chance that an investment will provide a low or negative return.
• Inflation: The amount by which prices increase over time
Interest rates in the economy are determined by the forces of demand and supply of Money. the
level where demand for money is equal to supply of MONEY is dependant on many factors,
which are:
• Risk free rate
• Inflation premium
• default risk premium
• liquidity premium
• maturity risk premium
Page 5 of 8
MBA I
Corporate Finance I
Quiz 1 (A)
Q No 3: XYZ Company is calculating the depreciation on a machine with a depreciable
basis of $1,000,000, a 6-year useful life, and a 5-year property class life. (DONOT forget to
write formulae)
1. Calculate depreciation charge using straight line method (3 Marks)
Depreciation = amount of asset / class life of the asset
= $1,000,000 / 5
= $200,000 per year
2. Calculate depreciation charge using double declining method (5 Marks)
Formula:
Calculations:
Page 6 of 8
MBA I
Corporate Finance I
Quiz 1 (A)
Q No 4: What is Financial Management and what are the decision functions of financial
management? (4 Marks)
FM concerns the acquisition, financing, and management of assets with some overall goal in
mind.
3 decisions functions:
INVESTMENT DECISION
• Most important of the three decisions.
• What is the optimal firm size?
• What specific assets should be acquired?
• What assets (if any) should be reduced or eliminated
FINANCING DECISION:
• Determine how the assets (LHS of balance sheet) will be financed (RHS of balance sheet)
• What is the best type of financing?
• What is the best financing mix?
• What is the best dividend policy?
• How will the funds be physically acquired
Asset Management Decisions:
• How do we manage existing assets efficiently?
• Greater emphasis on current asset management than fixed asset management.
Q No 5: Ewert Corporation’s earnings before interest and taxes are 5 times its interest
expense. If earnings after taxes are $3600 and its tax arte is 50%, how much interest did it
pay? (5 Marks)
Page 7 of 8
MBA I
Corporate Finance I
Quiz 1 (A)
Q No 6: ABC Company sells its products for $ 5 each. Labor and material for each item
produced cost $7. The company’s fixed costs are $5000. How many items should the company
sell to break even (EBIT=0)? (5 Marks)
Page 8 of 8