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# Retained earnings , rate of return, present value

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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)