Finance 430

Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short-term line of credit?

The acid test ratio

A firm paid out $8,500 of common dividends during the year. It ended the year with $354,000 of retained earnings versus the prior year's retained earnings of $310,000. How much net income did the firm earn during the year?

52,500

How much would you be willing to pay (rounded to the nearest dollar) for a 20-year ordinary annuity if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?

53,777 N=0, PMT=4500, I/Y=5.5, FV=0, CPT PV=?

Bill borrowed $100,000 today that he must repay in 15 annual end-of-year installments of $10,000. What annual interest rate is Bill paying on his loan?

5.556%

If Cindy deposits $12,000 into a bank account that pays 6% interest compounded semi-annually, what will the account balance be in seven years?

18,151 N=7*2=14, I/Y=6/2 =3, PV=-12000, PMT=0, CPT FV=?

If you invest $750 every six months at 8 percent compounded semi-annually, how much would you accumulate at the end of 10 years?

22,334 N =10*2=20, I/Y= 8/2=4, PMT=-750, PV=0, CPT FV=?

You want to make a vacation in Asia in 6 years. The total expense for the trip is about $15,000 today. And the expense may expect to grow at 2% per year. If you decide to save money in the bank account at the end of each year during next 6 years for the vacation . How much you should save every year if the account earns 7% per year?

2361.49 Step 1: find out how much money you need to have in year 6 PV= - 15000, I/Y=2, N=6, PMT =0, THEN COMPUTE FV = 16892.44 OR FV =15000 *(1+2%)^6 =16892.44 Step 2: find out how much you need to save every year in order to have 16892.44 in year 6. FV = 16892.44, N=6, I/Y=7, PV=0, THEN COMPUTE PMT = 2361.49. Or you can use formula (see slides).

How much money do I need to place into a bank account that pays a 6% rate in order to have $500 at the end of 7 years?

332.53

You need to accumulate $8,000. To do so, you plan to make deposits of $2,000 per year - with the first payment being made a year from today - into a bank account that pays 6% annual interest. Your last deposit will be less than $2000 if less is needed to round out to $8,000. How many years will it take you to reach your $8,000 goal? How large will the last deposit be?

4 years; 1251 Step 1, find out the number of years? FV=8000, PMT = - 2000, I/Y=6, PV=0, Then compute N = 3.69 ≈ 4 YEARS - which means every year you have to deposit $2000 for next 3 years and in year 4, you expect to deposit less than 2000 in order to amass $8000 in year 4. Step 2: Find out the future value (in year 4) of $2000 annual deposit for next 3 years FV = 2000 *(1+6%)^3 + 2000*(1+6%)^2 + 2000*(1+6%) = $6749. Which means depositing 2000 dollar every year for next 3 years is equivalent to $6749 in year 4. Step 3: find the last amount you need to have 8000 in year 4. 8000 - 6749 = $1251.

You decide you want your child to be a millionaire. You have a son today and you deposit $15,000 in an investment account that earns 9% per year. The money in the account will be distributed to your son whenever the total reaches $1,000,000. How old will your son be when he gets the money (rounded to the nearest year)?

49 years

How much would you be willing to pay (rounded to the nearest dollar) for a 20-year annuity due if the payments are $4,500 per year and you want to earn a rate of return equal to 5.5% per year?

56,734 Step 1: change the format from END to BEGIN Step 2: N=20, PMT=4500, I/Y=5.5, FV=0, CPT PV=? Step 3: change the format back to END

Auto Loans R Them loans you $24,000 for four years to buy a car. The loan must be repaid in 48 equal monthly payments. The annual interest rate on the loan is 9 percent. What is the monthly payment?

597.24 PV=24000, N=4*12 =48, FV=0, I/Y= 9/12=0.75, CPT PMT=?

The preferred stock pays an annual dividend of $5.50 per share forever. Suppose the required rate of return is 8%,what should be its fundamental value?

68.75 Fundamental value = PV = pp/rate = 5.5/8% =68.75

The present value of $1,000 to be received in 5 years is ________ if the discount rate is 7.8%. (Read Closely)

687

You are ready to retire. A glance at your 401(k) statement indicates that you have $750,000. If the funds remain in an account earning 9.0%, how much could you withdraw at the beginning of each year for the next 25 years?

70,050 Step 1: change the format from END to BEGIN Step 2: N=25, PV=750000, I/Y=9, FV=0, CPT PMT=? Step 3: change the format back to END

10) At what rate must $500 be compounded annually for it to grow to $1,079.46 in 10 years?

8 percent r =[ (1079.46 /500)^(1/10) ] -1 = .08 =8%

What is the present value of an annuity of $12 received at the end of each year for seven years? Assume a discount rate of 11%. The first payment will be received one year from today (round to nearest $1).

`57

All of the following statements about agency problems are true except:

Agency costs are paid by the managers who do not act in the shareholders' best interest.

Disadvantage of a sole proprietorship?

the proprietor is exposed to unlimited liability.

One drawback of switching from a partnership to the corporate form of organization is the following:

It subjects the firm to additional regulations.

Which are correct? 1),Present value is larger the shorter the time period 2), Present value is larger the smaller the interest rate "3), Future value increase with the time period 4), Future value decreases with the interest rate"

c. 1,2,3 Hint: FV is positively correlated with time period and interest rate while PV is negatively correlated with time period and interest rate.

S-type corporations have all of the following advantages except:

distributions are taxed twice, similar to corporate dividend payments.

Three ways that savings can be transferred through the financial markets include all of the following except:

indirect transfer using the venture capital firm.