# Retained earnings , rate of return, present value

Use the information, below, to answer questions 1 and 2.

Selected items from the financial statements of ABC Company for the year 20X1:

Retained earnings, 01/01/X1 ??

Total assets at 12/31/X1 $950

Net Income, year ended 12/31/ X1 110

Retained earnings 12/31/X1 ??

Total Liabilities at 12/31/X1 400

Common stock at 12/31/X1 120

Other Paid-in capital 12/31/X1 70

No dividend were declared or paid during the year.

1. What was the balance in retained earnings at 1/1/x1?

a. $210

b. $110

c. $400

d. $190

e. None of the above.

2. What was the balance in retained earnings at 12/31/X1?

a. $110

b. $400

c. $190

d. $210

e. None of the above

3. An annuity pays $6,000 at the beginning of each year for 20 years. If present value of the annuity is $45,000. Which of the following answers is closest to the discount rate?

a. 12%

b. 13%

c. 14%

d. 15%

e. None of the above rates corresponds with a present value of annuity within $500 of $45,000. (Provide the correct answer)

4. An annuity pays $8,000 at the end of each year for 15 years. The discount rate is 12%. Which of the following is the closest to present value of this annuity?

a. $54,500

b. $51,750

c. $120,000

d. $57,500

e. None of the above answers are within $500 of the correct answer.

5. Which of the following would be the best investment (i.e. the highest present value)? Assume an annual discount rate of 16%

a. An investment that pays $1,200 at the end of each year for 4 years, assuming annual compounding

b. An investment that pays $290 at the end of each quarter for 4 years, assuming quarterly compounding

c. An investment that pays $290 at the beginning of each quarter 4 years, assuming

quarterly compounding?

d. $2,000 today.

6. Which of the following would be the best investment (i.e. the highest present value)? Assume an annual discount rate of 4%

a. An investment that pays $1,200 at the end of each year for 4 years, assuming annual compounding

b. An investment that pays $290 at the end of each quarter for 4 years, assuming quarterly compounding

c. An investment that pays $290 at the beginning of each quarter 4 years, assuming quarterly compounding?

d. $2,000 today.

Use the following data on ACME stock to solve problems 7 and 8.

Probability Return

0.15 -0.25

0.20 0.05

0.30 0.12

0.20 0.15

0.15 0.55

7. What is the expected rate of return on the investment? (Round to the nearest %)

a. 11%

b. 12%

c. 21%

d. 22%

e. None of the above (Provide the answer)

8. What is the standard deviation of the returns? (Round to the nearest percent)

a. 11 %

b. 12 %

c. 21 %

d. 22%

e. None of the above. (Provide the answer)

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#### Solution Summary

Answers multiple choice questions on retained earnings , discount rate, present value of the annuity, rate of return on investment, standard deviation of the returns