NEW YORK UNIVERSITY
ROBERT F. WAGNER GRADUATE SCHOOL OF PUBLIC SERVICE
P11.1021: Financial Management
Midterm Examination SOLUTIONS
Professors Rose, Forsythe, and Calabrese
Fall 2006
Name: ________________________________________________
Student ID: ____________________________________________
PLEASE CIRCLE YOUR SECTION
TUESDAY TUESDAY WEDNESDAY WEDNESDAY
12:30 pm 6:20 pm 12:30 pm 6:20 pm
Directions:
1) As a courtesy to your classmates, please turn off electronic devices such as cell phones
and pagers. You have 135 minutes to complete the exam.
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.
6) The points for each question are indicated in parentheses next to the question.
7) Hand in your exam plus all other papers (including your one page of notes).
Good Luck!
1. (2 points) In one sentence, define a budget.
2. (2 points) Working capital management focuses on making sure that an
organization has sufficient resources to operate:
3. (10 points) The Wagner Student Association (WSA) is planning a fundraising
event for the spring semester. The WSA is planning to hire the Dizzy Gillespie
Heritage Band as entertainment for a fee of $750. The Schomberg Museum was
selected as the site for the event. The Museum will charge the WSA $600 for the
use of its banquet room. Sylvia’s Restaurant was selected to cater the event.
Sylvia’s Restaurant will charge the WSA a flat fee of $400 and an additional
charge of $20 per meal.
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4. (10 points) The Port Authority of New York and New Jersey (PANYNJ) is
deciding whether to purchase cranes manufactured by Paceco or Tripoli for use in
its marine terminals. While the Tripoli cranes have a lower purchase price, they
are more expensive to maintain annually and must be replaced sooner than the
Paceco cranes. The Tripoli cranes have useful lives of 5 years, while the Paceco
cranes have useful lives of 10 years. The cash flows related to each of the choices
are presented below. If the PANYNJ’s cost of capital is 7%, which company’s
cranes should the PANYNJ buy? Show your work.
5. (8 points) Exactly 20 years ago, the State of New York issued a bond with a 30-
year maturity, a 10% coupon, and a face value of $1 million. The bond pays
interest every six months.
a) (5 points) If the current market interest rate is 7%, how much is the bond
worth today?
b) (3 points) Show the Excel formula that would correctly solve this problem.
6. (5 points) Against the odds, you won the New York State Lottery. The jackpot
was advertised as $40 million. As the winner, you are entitled to payments of $2
million at the beginning of each year for 20 years ($2 million x 20 years = $40
million). If you can earn 5% on your savings per year, how much is the lottery
prize worth to you?
7. (13 points) The Gotham City Police Department has an officer labor expense
budget for the month of October 2006 of $360,000. It expects to process 2,400
criminals per month, that each criminal will take 3 hours to process, and that each
officer will be paid $50 per hour. During October 2006, the Gotham City police
actually processed 3,200 criminals, logged 8,000 police hours, and incurred
monthly labor expenses of $448,000.
a) (10 points) Compute the total variance, volume variance, price variance, and
quantity variance for Gotham City’s Police Department. Also indicate whether
each variance was favorable or unfavorable.
b) (3 points) Briefly explain what your variances mean, in plain language.
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8. (25 points) Centers for Bright Horizons (CBH) provide day care services to low-
income families. CBH bills the State for its services under a service contract.
Billings for the first four months of 2007 are anticipated to be as follows:
January February March April
$220,000 $200,000 $240,000 $230,000
CBH finds that it collects 25% of the amounts billed in the month of service, with
the balance collected in the month following service.
CBH is planning to acquire a new building as an additional site for its services in
March 2007. The full $250,000 purchase cost of the building will be financed
with a mortgage loan, with the first payment due in April 2007. CBH anticipates a
February 28, 2007 cash balance of $26,000.
CBH anticipates the following expenses and disbursements for the month of
March 2007:
Personnel Payments $170,000
Personnel Expenses $160,000
Payments to suppliers $ 45,000
Supplies Expense $ 48,000
Depreciation Expense $ 12,000
Interest Expense $ 6,000
(20 points) Prepare an operating budget and a cash budget for CBH for the month
of March 2007.
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(5 points) Which budget gives a better indication of the organization’s operational
sustainability, the operating budget or the cash budget? Why?
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9. (8 points) City Hospital is considering establishing a childhood asthma center in
the Bronx. The cost of purchasing and renovating the building is estimated at $2
million. The projected cash flows generated by the new asthma center over the
next 5 years are:
Year Cash In Cash Out Net Cash Flow
1 1,200,000 800,000 400,000
2 1,200,000 800,000 400,000
3 1,200,000 800,000 400,000
4 1,300,000 900,000 400,000
5 1,300,000 1,000,000 300,000
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11. (2 points) Payables are amounts owed by an organization that have not yet been
paid. Name two specific payables accounts.
12. (8 points) As a manager, you are tasked with cutting $100,000 from your
department’s budget next year. The department has $800,000 in personnel costs
for staff, $150,000 of rent expenses, $125,000 of general administrative expenses
allocated from the executive office, and $50,000 of miscellaneous office-supply
expenses. The administrative expenses exist regardless of your department’s size;
if your department gives up office space, another department will take over the
space and the cost.
13. (3 points) The amount of the original cost of a capital asset allocated as an
expense each year during its useful life is called:
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