Esc-Clermont

2nd years,  Bachelor program

Course : Introduction to finance

Teacher : André Cabannes

 

Please write your name in this box :

 

 

 

 

Midterm exam

January, 2009

 

 

1 hour and 30 minutes, 20 questions, each worth 5 points. Read carefully the whole examination before beginning to write your answers. Write them on this document in the boxes and the blank space below each question.

 

 

 

A toy manufacturer A sells toys for 20 000 euros on credit to a retailer B.

 

 

Question 1:

In A’s accounting system, which account is credited?     Sales

 

 

Which account is debited?                                                   Debtor’s account (for B)

 

 

 

 

Question 2: Assume B uses an accounting system with real time inventory monitoring, and therefore no year end adjustments for variation in inventory.

 

In B’s accounting system, which account is credited?    Creditor’s account (for A)

 

 

Which account is debited?                                               Inventory

 

 

 

 

Question 3: Can we say that B issued financial paper?

 

Answer yes or no in the following box                            Yes

 

and explain your answer

B created a piece of paper acknowledging a debt of his. It is a financial security, with a value, a market, etc.

 

 

Question 4: In the XIIth and XIIIth century, in the western world, which famous social group played the role of banker (particularly to finance the Crusades)?

 

The Knights Templar

 

 

 

 

Question 5: During the great medieval trade fairs of the XIIth to the XVIth century (and after), which fundamental financial product was universally used as means of payment?

 

The bill of exchange

 

 

 

Question 6: What is the definition of a financial product?

 

It is a written contract between two agents A and B, stipulating movements of cash between them now, and in the future under certain conditions.

 

 

 

A firm has the following year end documents (figures used in questions 7 to 13):

 

 

 

 

Question 7: What is the capital employed

 

at the end of 2007                                                             520

 

and at the end of 2008                                                      550

 

 

 

 

Question 8: Assuming there was no divestment of assets in 2008, how much money flowed into the cash and bank accounts (lumped together) during the year? 

                                                                                          See lesson 4a

 

Explain your figure:

 

 

 

 

Question 9: How much money flowed out of  the cash and bank accounts (lumped together) during the year 2008?                                                      See lesson 4a

 

Explain your figure:

 

 

 

 

Question 10: What is the Net Worth of the firm at the end of 2008?

                                                                                         400

 

 

 

 

Question 11: What is the interest rate paid by the firm in 2008 on its long term borrowings?

                                                                                        6,7%

 

Explain your calculation

= 10 / 150

 

 

 

Question 12: What is the tax rate?

                                                                                       25%

 

Explain your calculation

= 20 / (90 – 10)

 

 

 

 

 

 

Question 13: If, at the end of 2008, we liquidate the firm by selling all its assets at their balance sheet value, and we pay all its creditors, how much money shall we be left with?

 

                                                                                             400

 

 

 

 

Question 14: Why is the Net Worth of a firm B usually not related to the price a big firm A will pay the shareholders of B to acquire 100% of their firm? (use the example of eBay and Skype to elaborate your explanations)

 

 

The firm B may “trigger” in A cash flows unrelated to the standalone cash flows of B (and possibly much bigger).

 

 

 

 

Question 15: What are the three big types of liabilities in the balance sheet of a bank?

 

                                                                                         Equity (capital and retained earnings)

 

                                                                                         Financial debts

 

                                                                                         Deposits

 

 

 

Question 16: Between 1717 and 1931, with the exception of two periods, one pound sterling had the following relationship to gold:

 

one ounce of gold (at 11/12th purity) was worth  £3  17s  10 ½ p.

 

What were the two exceptional periods when this exchange rate did not prevail?

 

                                                                                             The Napoleonic wars

                                                                                             (1797 up to 1821)

 

                                                                                             World War I

                                                                                             (1914 up to 1925)

 

 

 

Question 17: At time t1, you lend £100 to a friend, with no interest. At time t1, this £100 had the same value as, say, 25oz of gold.

 

At t2, it is time for your friend to refund you. Suppose, at time t2, £100 buy only 22oz of gold.

 

How much pound sterling should your friend give you back, if you agreed that you should still be able to buy 25oz of gold with the money you get back?

                                                                                             £ 113,64

 

Show your calculations

 

25 / 22

 

 

 

Question 18: Explain what lord King, in 1810, asked from the British government?

 

He wanted to be paid back with more pounds sterling than stipulated in the contracts with his farmers, so as to be able to transform them into the same amount of gold as they were able to purchase before 1797 (date of suspension of the convertibility of the pound into gold).

 

The British government refused, and stated that all contracts should be denominated in pound sterling, and enforced as specified in that currency.

 

 

 

Question 19: You decide to invest, at time t (=today), 1000 euros into a 7 year 5% bond to finance a borrower.

Who is the buyer of the bond?                                              You

 

Who is the issuer of the bond?                                              The borrower

 

 

 

 

Question 20: What are all the cash flows, today and in the future, between you and the borrower, stipulated by the bond? Give the series of cash flows, with their date.

 

Today you pay 1000 euros to the issuer, in exchange for the bond.

 

For the next six years you receive every year 50 euros from the issuer.

 

And the seventh year you receive 1050 euros from the issuer (= last coupon + refund of initial face value).