Q1- Future value: Ning Gao is planning to buy a house in five years. She is looking to invest $25,000 today in an index mutual fund that will provide her a return of 12 percent annually. How much will she have at the end of five years? (Round to the nearest dollar.)
Q2---Multiple compounding periods (FV): Normandy Textiles had a cash inflow of $1 million, which it needs for a long-term investment at the end of one year. It plans to deposit this money in a bank CD that pays daily interest at 3.75 percent. What will be the value of the investment at the end of the year? (Round to the nearest dollar.)
Q3-- Ahmet purchased a stock for $45 one year ago. The stock is now worth $65. During the year, the stock paid a dividend of $2.50. What is the total return to Ahmet from owning the stock? (Round your answer to the nearest whole percent.)
Q4-- Present value: Jack Robbins is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.)
Q5-- You have borrowed $10,000 to pay off your Spring Break trips. You plan to make monthly payments over a 10-year period. If the loan's interest rate is 10% compounded monthly, how much interest will you pay over the life of the loan?
Q6-- Your uncle promises to give you $550 per quarter for the next five years starting today. How much is his promise worth right now if the interest rate is 8% compounded quarterly?
Q7-- Emperor Corporation's financial statements for the last year are shown below. All figures are in thousands ($000). The firm paid a $1,000 dividend to its stockholders during the year. Two million shares of stock are outstanding. The stock is currently trading at a price of $50. There were no sales of new stock. Lease payments totaling $400 are included in cost and expense.
ASSETS INCOME STATEMENT
Cash $ 2,000 Sales $100,000
Accounts receivable 12,000 COGS 80,000
Inventory 14,000 Gross Margin $ 20,000
Current Assets $28,000 Cash Expenses $ 8,000
Gross Fixed assets $27,000 Depreciation 1,600
Accumulated depreciation (16,000) EBIT $ 10,400
Net fixed assets 11,000 Interest 800
Total assets $39,000 EBT $ 9,600
LIABILITIES Tax 2,600
Accounts payable $ 3,000 Net Income $ 7,000
Current Liabilities $ 4,000
Long term Debt 10,000
Total liabilities & equity $39,000
Q8-- Use the following information for the next four questions. Norlin Corporation is considering an expansion project that will begin next year (Time 0). Norlin's cost of capital is 12%. The initial cost of the project will be $250,000, and it is expected to generate the following cash flows over its five-year life:
Before you attempt question 1 and 2 you need to note the following excerpt:
The future value of an asset or cash is its value at a specified date in the future that is equivalent in value ...
This solution provides an in depth explanation to a number of finance related questions. Information is included which will help you in calculating the present or future value given a particular situation; the return on a stock; ratios, such as, current ratio, quick ratio, inventory turnover, debt ratio, return on equity and times interest earned; and the net present value, pay-back period and internal rate of return of a project.
1. Financial leverage is beneficial only if the firm can employ the borrowed funds to earn a higher rate of return than the interest rate on the borrowed amount. Generally speaking, the higher the financial leverage, the greater the profits at high levels of operating profit.
2. How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually?
3. How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years (rounded up to the nearest 100th dollar)?
4. What is the YTM of a 7.5 % annual coupon bond, with a $1,000 face value, which matures in 4 years? The market price of the bond is $1,108.32.
5. You just bought new furniture for $5,000. The payment is due in 3 years, same as cash. If you can earn 8% on your money, how much money should you set aside today in order to make the payment when due in three years (rounded to the nearest dollar)?
6. How long must one wait (to the nearest year) for an initial investment of $1,000 to equal $4,500 in value if the investment earns 12% compounded annually?
a) 4 years
b) 6 years
c) 9 years
d) 13 years
7. The present value of cash flows minus initial investments is known as the net present value.
8. The expected rate of return given up by investing in a project is known as:
a) break-even point
b) operating leverage
c) internal rate of return
d) opportunity cost of capital
9. Suppose we can invest $4,000 today and receive $6,200 in 4 years. What is the Net Present Value given a 10% expected return?
10. The payback rule considers all cash flows that arrive after the payback period.
11. The discount rate at which NPV = 0 is known as:
a) degree of operating leverage
b) internal rate of return
c) forward premium
d) Purchasing Power Parity (PPP)
12. The (A) ____________ is the ratio of present value to initial investment, and provides the highest net present value per dollar of investment.
a) forward contract
c) plowback ratio
d) profitability index
13. Hard rationing involves limits on available funds imposed by management.
14. When performing cash flow analysis, you should discount actual cash flows, not accounting income. Using accounting income, rather than cash flow, could lead to erroneous decisions.
15. A stock or bond's real rate of return factors in:
b) the market premium
c) compound interest
d) the cost of capital
16. The place where the sale of new stock first occurs is known as the:
a) initial public offering
b) over the counter market
c) primary market
d) discount market
17. The movement of stock prices from day to day reflects an upward pattern. Statistically speaking, the movement of stock prices reflect a gradual increase.
18. Leverage is using ___________ to magnify the potential return to a firm.
c) fixed costs
19. By decreasing leverage, the firm increases its profit potential, but also increases its risk of failure.
Assume the following data for the next three (3) questions:
Company A Fixed Costs = $100,000
Company A Variable Costs per unit = $0.50
Company A price per unit = $3.00
Company B Fixed Costs = $50,000
Company B depreciation = 10 percent
Company B Contribution Margin = $1.50
20. The break-even point for Company A is:
a) 20,000 units
b) 28,571.43 units
c) 33,333.33 units
d) 40,000 units
21. The break-even point for Company B is:
a) 20,000 units
b) 30,000 units
c) 33,333.33 units
d) 40,000 units
22. As compared to Company A, Company B utilizes low operating leverage. This will work against them when sales are low, but will work in their favor when sales are high.
23. Generally, if the projected return of a potential project is higher than a firm's current Weighted Average Cost of Capital (WACC), then the firm should ACCEPT the project. Conversely, they should REJECT the project if the potential return is lower than the expected rate of return on a portfolio of all the firm's current securities (WACC).
24. Other things equal, stock securities are worth more when they are "with-dividend". Thus when the stock "goes ex," we would expect the stock price to drop by the amount of the dividend.
25. More often than not, the announcement of a stock split results in a rise in the market value of the firm. This is due to the increase in the company's long and short-term assets.
26. You've just been informed that you stand to inherit $60,000 in 10 years. You can't wait that long, and would like to receive the money now. At an interest rate of 8%, how much would you receive?
27. You have $30,400 to invest, and would like to receive $40,000 in 5 years. What interest rate do you need to accomplish this?
28. "The cost of the asset is allocated equally over the periods of an asset's estimated useful life" describes the concept of:
b) Net Present Value
c) straight-line depreciation
d) divided perpetuities
29. If a stock dividend pays out $4.82, there is a 6.5% growth rate, and the discount rate is 12%, the selling price of the stock will be:
30. Gains and losses resulting from the sale of securities in an arm's-length transaction are said to be:
31. Long-run planning includes production process prioritizing and operational budgeting or profit planning.
32. A schedule of all production spending expected to occur during the budget period is known as the selling and administrative expense budget.
33. If your firm is in a mature industry with few, if any, positive NPV projects available, acquisition may be the best use of your funds.
34. If a firm uses the _________ as an investment criterion, one of the risks it takes is that it may ignore some future cash flows.
b) payback rule
35. Costs that have accrued in the past, which should not be included in your decision to abandon or remain with a strategy, are referred to as:
a) variable costs
b) opportunity costs
c) sunk costs
d) financing costs