# Finance Questions

1.

If you deposit $1,000 each year in a savings account earning 4%, compounded annually, how much will you have in 10 years?

2.

You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years. Assuming an opportunity cost of 12%, what do you estimate that you will have in this account at retirement?

3.

You have borrowed $70,000 to buy a speed boat. You plan to make monthly payments over a 15-year period. The bank has offered you a 9% interest rate, compounded monthly. Create an amortization schedule for the first two months of the loan.

4.

Describe the differences between secured and unsecured short-term credit.

5.

The December 31, 1995 balance sheet for Spitco, Inc. is presented below.

Spitco, Inc. Balance Sheet

December 31, 1995

Current assets $40,000

Net fixed assets 20,000

Total $60,000

Accounts payable 11,000

Notes payable 12,000

Total $23,000

Long-term debt (10%) 12,000

Common equity 25,000

Total $60,000

Partial Income Statement for December 31, 1995

Net operating income $10,291

Less: interest income 1,200

Earnings before taxes $9,091

Less: taxes (34%) 3,091

Net income $ 6,000

a. Calculate Spitco's current ratio, net working capital, and return on total assets.

b. Spitco feels that its current ratio is too far below the industry average of 2.40. To improve their liquidity, the treasurer of Spitco has devised a plan to issue $12,000 in long-term debt at 12% and pay off its notes payable. The funds would be invested in marketable securities at 7% interest when not needed to finance the firm's seasonal asset needs. The notes payable would remain outstanding through the year. Assume this plan had been implemented for 1993. The net income was $5,500. Calculate what the firm's current ratio, net working capital, and return on total assets would have been.

c. Did Spitco improve their liquidity? What about their profitability?

6.

The Basic Sports Company produces graphite surf-casting fishing rods. The average selling price for one of their rods is $132. The variable cost per unit is $80. Basic Sports has average fixed costs per year of $90,000.

a. What is the break-even point in units for Basic Sports?

b. What is the break-even point in dollar sales?

c. What would be the profit or loss associated with the production and

sale of (1) 2,000 rods, and (2) 10,000 rods?

d. Determine the degree of operating leverage for the two levels of

production and sales given in part (c) above.

7

Table 6

Hokie Corporation Comparative Balance Sheet

For the Years Ending March 31, 1995 and 1996

(Millions of Dollars)

Assets 1995 1996

Current assets:

Cash $ 2 $ 10

Accounts receivable 16 10

Inventory 22 26

Total current assets $ 40 $ 46

Gross fixed assets: $120 $124

Less accumulated depreciation 60 64

Net fixed assets 60 60

Total assets $100 $106

Liabilities and Owners' Equity

Current liabilities:

Accounts payable $ 16 $ 18

Notes payable 10 10

Total current liabilities $ 26 $ 28

Long-term debt 20 18

Owners' equity:

Common stock 40 40

Retained earnings 14 20

Total liabilities and owners' equity $100 $106

Hokie had net income of $26 million for 1996 and paid total cash dividends of $20 million to their common stockholders.

Calculate the following financial ratios for the Hokie Corporation using the information given in Table 6 and 1996 information.

current ratio

acid test ratio

debt ratio

long-term debt to total capitalization

return on total assets

return on common equity

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#### Solution Preview

Please see the attached file. All answers/explanations in blue.

1.

If you deposit $1,000 each year in a savings account earning 4%, compounded annually, how much will you have in 10 years?

We have to find the future value of an annuity. The annuity amount is $1,000, period is 10 years and the rate is 4%. We use the FVIFA table to get the FV factor. For 10 years and 4%, the FVIFA factor is 12.006

Amount at the end of 10 years = 1,000 X 12.006 = $12,006

2.

You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years. Assuming an opportunity cost of 12%, what do you estimate that you will have in this account at retirement?

We have to find the future value of an annuity. It is annuity due since the first deposit is made at the beginning. Amount is $500, period is 40 and the rate is 12%. We first find the FV of ordinary annuity and then convert that to annuity due. The FVIFA factor for 40 years and 12% is 767.0914.

The FV of ordinary annuity = 500X767.0914 = $383,545.70

To convert to annuity due we multiply by (1+rate) = (1+12%)

FV of annuity due = 383,545.70 X 1.12 = $429,571.18. This is the amount at retirement.

3.

You have borrowed $70,000 to buy a speed boat. You plan to make monthly payments over a 15-year period. The bank has offered you a 9% interest rate, compounded monthly. Create an amortization schedule for the first two months of the loan.

In an amortization schedule, we show the monthly payment made, its break up in terms of interest and principal and the outstanding loan balance.

We first calculate the monthly payment. The monthly payment would be such that the present value of payments is equal to the loan amount. We use the PV of annuity formula to get the monthly payment

PV = PMT [(1 - (1 / (1 + i)^n)) / i]

Where

PV = loan amount = 70,000

PMT = monthly payment

i = interest rate = 9%/12 = 0.75% per month

n = time period = 15X12 = 180 months

70,000 = PMT [(1-(1/(1+0.75%)^180))/.75%]

PMT = $710 (rounded)

We can now make the amortization table

Month Opening Loan balance Payment Interest Principal Closing Loan Balance

(1) (2) (3) = (1) X 0.75% (4) = (2)-(3) (5) = (1)-(4)

1 70,000.00 710.00 525.00 185.00 69,815.00

2 ...

#### Solution Summary

The solution explains various finance questions relating to time value of money and ratio calculations