NEW YORK UNIVERSITY
ROBERT F. WAGNER GRADUATE SCHOOL OF PUBLIC SERVICE
P11.1021: Financial Management
Midterm Examination
Lecturer Rogers
Summer 2007
SOLUTIONS
Name: ________________________________________________
Student ID: ____________________________________________
Directions:
1) As a courtesy to your classmates, please turn off electronic devices such as cell phones and
pagers.
2) Print your initials at the top of each page.
3) You may use one page of notes. Place all other written materials on the floor.
4) You may use, but not share, a calculator. Remember to clear your calculator before each
calculation (2
nd
F, then C – CE).
5) Show your work! If you get the wrong answer and you don’t show how you set up the problem,
you won’t receive any partial credit.
6) All calculations and final answers must be written on the exam, no other papers will be
considered when grading.
7) The points for each question are indicated in parentheses next to the question.
8) Hand in your exam plus all other papers (including your one page of notes).
Good Luck!
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1. (1 point) A measure of cost based on the value of the alternatives that are given up in order to
2. (1 point) Marginal costs are equal to variable costs except when there are ____step-fixed or
3. (1 point) The total cumulative amount that the federal government has borrowed and not repaid
4. (1 point) For a given unit of service provided, the revenues arising from providing that service
and the expenses incurred in providing that service are both recorded in the same fiscal period.
This concept is called:
5. (2 points) Which of the following are reasons why capital assets warrant special attention:
6. (2 points) What is a flexible budget and how is it helpful to management?
Summer 2007 Midterm Exam Page 2
7. (6 points) Match the following concepts with the correct definition:
a. Working capital
b. Audit trail
c. General authorization
d. Accounting controls
e. Aging schedule
f. Exception report
Summer 2007 Midterm Exam Page 3
8. (12 points) East Side Theatre (EST) recently completed its 2006-2007 season. Due to popular
demand EST performed a total of 200 shows, 20 more than originally budgeted. EST had
expected the average attendance for each show to be 550; but much to their delight each
performance had an average of 600 attendees. Nevertheless, while EST had projected an
original budget of $7,425,000, it actually ended the season with only $7,200,000.
Calculate the total, volume, quantity and price variances for EST.
Briefly explain to EST’s Artistic Director what each of the variances means to EST and why the
theatre company ended the season with less revenue than expected.
9. (8 points) Let’s Learn! Child Center operates from Monday through Friday. Let’s Learn!
provides childcare and educational services for inner-city kids between the ages of nine
months and five years. Let’s Learn! has fixed staff expenses of $26,000 per week. Rent for
the organization costs $5000 per week and utilities and other fixed costs total $3000 each
week. Let’s Learn! charges parents $8 per day for each child who attends the program. The
city pays the organization $30,000 per week out of its early childhood education fund. It
costs Let’s Learn! $3 per day for supplies and snacks for each child. The Center also offers
an optional early-reading program for children over the age of three. Parents pay an
additional $4 per day to enroll a child in the reading program. It costs the center an additional
$5 per day for each child in the program. Thirty percent of the children attending the center
are enrolled in the reading program. How many children have to come to Let’s Learn! each
week for it to break even?
Summer 2007 Midterm Exam Page 5
10. (12 points) The Miami Art Museum (MAM) is working on the budgets for the 2008 fiscal year,
which runs from January 1 through December 31. During the first half of FY08 MAM expects
its revenues and expenses to be relatively the same as the 2007 fiscal year; however, during the
second half of the 2008 fiscal year MAM plans to open a new gallery focusing on contemporary
art. Currently, MAM pays its Executive Director $80,000; its Curatorial and Educational staff a
total of $230,000; and its administrative and resource development staff $90,000 each year. The
Museum makes fixed rent payments of $12,000 every month, and utilities and other fixed
expenses equal $4000 a month. When the new gallery opens on July 1, 2008 MAM will have to
hire a new Curator, at an annual salary of $50,000. In addition, the new gallery is expected to
increase monthly rent payments by $2500 and monthly utilities and other fixed expenses by
$500.
MAM expects to receive a number of grants from foundations in FY08. Three foundations
have promised grants of $60,000 each in the first half of 2008, and two more foundations have
promised grants of $125,000 each when the new gallery opens. Finally, MAM receives
numerous individual donations from mail and telephone solicitations; on average these
individual supporters provide MAM with $30,000 in unrestricted revenue every quarter.
MAM provides educational materials to its visitors at a cost of $1.20 per visitor. Although
MAM is a free museum, it encourages its visitors to make a donation as they leave the museum.
On average, each visitor donates $2. During the first six months of the new fiscal year MAM
expects the average monthly attendance to be 10,000. When the new gallery opens, the Museum
forecasts that its average monthly attendance will increase to 13,000.
Create a semi-annual operating budget for the Miami Art Museum’s Fiscal Year 2008. (Hint:
the operating budget should show the income and costs of the museum for the first six months
and last six months of FY08.)
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11. The Miami Art Museum is concerned about how much cash it will have on hand when the new
gallery opens. It is hoping to have extra cash on hand in case any unforeseen expenses arise due
to the new gallery. MAM’s cash inflows and outflows are as follows:
All salary and utilities and other fixed costs are paid when they occur.
MAM makes its rent payments at the end of every six months for the previous six months.
Educational materials for visitors are paid for one quarter in advance.
Visitor donations are removed from the collection boxes at the end of each business day and
deposited in the bank.
Individual donations from mail and telephone solicitations are received approximately one
month after they have been pledged. Over the past two years these donations have remained
steady at $10,000 a month.
Of the foundation grants, two foundations will send MAM grant checks of $60,000 each in the
first quarter. Another foundation will send its $60,000 grant in the second quarter. Finally, one
of the foundation grants for the new gallery will be paid in the second quarter.
The Miami Art Museum will start the new fiscal year with a beginning cash balance of $10,000.
a. (13 points) Create a quarterly cash budget for the first two quarters of MAM’s 2008 fiscal
year. Assume there are three months in each quarter.
b. (1 point) Will MAM have a positive ending cash balance in quarter two?
Yes
Summer 2007 Midterm Exam Page 9
12. (8 points) Los Angeles issued a 30-year $60,000,000 education bond in 2006. Due to a call
provision and longer maturity date the bond is issued with a high coupon rate of 10% with
payments made every six months.
a. If the market rate was 8%, how much did the city receive when it issued the bond in 2006?
b. How much would the city have received if it had issued a zero coupon bond. (Assume semi–
annual compounding).
13. Queens County needs to buy 6 new sanitation trucks. The County could buy all of the trucks
for $750,000 today and would expect to use them for 12 years with no ending salvage value. On
the other hand the County could lease the trucks at a rate of $8000 a month for 12 years.
Assume that the lease payments will need to be made at the beginning of each month.
a. (8 points) Using a discount rate of 8%, should Queens County buy or lease the new
sanitation trucks? Support your answer by showing all of your calculations.
b. (1 point) Write the Excel formula you would use to solve this problem, (using the numerical
values).
Summer 2007 Midterm Exam Page 10
14. (12 points) The Coshocton Orchestra needs to purchase new sound boards before its upcoming
summer park series. In the past, the Orchestra has always bought its equipment from Glass
Music, a local vendor. Glass Music will offer the Orchestra a special deal of $12,000 for the
sound equipment, plus $2500 a year for basic maintenance over the ten year life of the boards.
Zanesville Sound is trying to expand its regional customer base, and offers the Orchestra the
sound boards for $18,000, plus $1500 a year for basic maintenance over the eight year life of the
equipment. The Orchestra uses a 7% cost of capital rate. From which company should the
Coshocton Orchestra buy its sound equipment? Support your answer by showing all of your
calculations.
Summer 2007 Midterm Exam Page 11
15. The Los Feliz Free Clinic (LFFC) is thinking about opening a new clinic in the nearby
neighborhood of Silver Lake. To secure and renovate a facility, LFFC will need to pay the
property owner $100,000. In addition, LFFC will need to purchase beds, medical and office
equipment before the clinic opens. These expenses will total $150,000. Over the next six years
LFFC expects to have the following cash flows:
Year
Cash Inflow
Cash Outflow
1
$ 50,000
$ 75,000
2
$ 100,000
$ 90,000
3
$ 150,000
$ 115,000
4
$ 180,000
$ 120,000
5
$ 210,000
$ 125,000
6
$ 250,000
$ 130,000
a. (10 points) Assuming a 6.5% discount rate, should the Los Feliz Free Clinic open the new
clinic? Support your answer by showing all of your calculations.
b. (1 point) Write the Excel formula you would use to solve this problem, (using the numerical
values).
2
$ 100,000
$ 90,000
5
$ 210,000
$ 125,000
6
$ 250,000
$ 130,000