...Ch. 5 Study Problems Joseph R. Landini University of Phoenix Finance for Business FIN/370 Professor: Jim Hill March 22, 2010 Chapter 5: Financial Management: Principles and Applications 5-1A A. $5,000 invested for 10 years at 10 percent compounded annually: 5,000 10 years @ 10% = 12,968.71 B. $8,000 invested for 7years at 8 percent compounded annually: 8,000 7 yrs. @ 8% = 13,710.59 C. $775 invested for 12 years at 12 percent compounded annually: 775 12 yrs. @ 12% = 3,019.38 D. $21,000 invested for 5 years at 5 percent compounded annually: 21,000 5yrs. @ 5% = 26,801.91 5-4A A. $800 to be received 10yrs from now discounted back to the present at 10% = 308.43 B. $300 to be received 5yrs from now discounted back to the present at 5% = 235.06 C. $1,000 to be received 8yrs from now discounted back to the present at 3% = 789.41 D. $1,000 to be received 8yrs from now discounted back to the present At 20% = 232.57 5-5A A. $500 a yr for 10yrs compounded annually at 5% = 6603.30 B. $100 a yr for 5 yrs compounded annually at 10% = 671.56 C. $35 a yr for 7 yrs compounded annually at7% = 365.26 D. $25 a yr for 3 yrs compounded annually at 2% = 78.04 5-6A A. $2,500 a year for 10 yrs discounted back to the present at 7% = 17,558.95 B. $70 a yr for 3 yrs discounted back to the present at 3 % = 198.00 C. $280 a year for 7yrs discounted back to the present at 7 % = 1,563.07 D. $500 a yr for...
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...Provide detailed descriptions and show all calculations used to arrive at solutions for the following questions: 1. Community Hospital has annual net patient revenues of $150 million. At the present time, payments received by the hospital are not deposited for six days on average. The hospital is exploring a lockbox arrangement that promises to cut the six days to one day. If these funds released by the lockbox arrangement can be invested at 8 percent, what will the annual savings be? Assume the bank fee will be $2,000 per month. 2. St. Luke’s Convalescent Center has $200,000 in surplus funds that it wishes to invest in marketable securities. If transaction costs to buy and sell the securities are $2,200 and the securities will be held for three months, what required annual yield must be earned before the investment makes economic sense? 3. Your firm is considering the following three alternative bank loans for $1,000,000: a) 10 percent loan paid at year end with no compensating balance b) 9 percent loan paid at year end with a 20 percent compensating balance c) 6 percent loan that is discounted with a 20 percent compensating balance requirement Assume that you would normally not carry any bank balance that would meet the 20 percent compensating balance requirement. What is the rate of annual interest on each loan? 4. An important source of temporary cash is trade credit, which does not actually bring in cash, but instead slows its outflow. Vendors often provide discounts...
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...Question 1 Listing on a stock exchange might be highly desirable for a company, but there are a number of requirements, conditions and costs associated with becoming a publicly listed corporation. a) Discuss the ASX profit test and asset test requirements. b) Analyse the advantages and costs that are incurred when a company becomes a publicly listed corporation. a) To meet the profit test requirements of admission, an entity must satisfy each of the following conditions: * The entity must be a going concern, or the successor of a going concern. * The entity must have been engaged in the same principal business activity for the last three full financial years. * The entity must provide audited financial statements for the last three full financial years. The statements must be accompanied by audit reports, which must not be qualified with regard to the entity’s capacity to continue as a going concern, or satisfy the profit levels required. * The entity’s aggregated profit from continuing operations for the last three full financial years must have been at least $1 million. * The entity’s consolidated profit from continuing operations for the twelve months to a date no more than two months before the date the entity applied for admission must exceed $400 000. * The entity must give the ASX a statement from all directors (in the case of a trust, all directors of the responsible entity) confirming that they have made inquiries and nothing has come...
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...True/False questions 1. True 2. True 3. False 4. True 5. False 6. True 7. False 8. False 9. False 10. True Essay questions 1. A highly developed and efficient financial system is essential to ongoing economic growth and prosperity. Discuss the component parts that form a financial system and the relevance of the above statement. A financial system consists of financial institutions, financial instruments and financial markets. Financial institutions are classified into five categories according to where they source their funds from and who uses their funds. These include: depository financial institutions e.g. banks; investment and merchant banks; contractual savings institutions e.g. insurance companies; finance companies and general financiers; unit trusts e.g. property trusts. Financial instruments are documents that entitle holders to future cash flows. They are classified into three categories: equity e.g. ordinary share; debt e.g. loan; derivatives e.g. futures contract. Financial markets are the means by which funds are transferred in financial systems and are broadly divided into money markets and capital markets, which are further split into primary and secondary markets. Examples of financial markets include stock market and foreign exchange market. 1 The primary function of the financial system is to facilitate the flow of funds from those who have surplus funds to those who have a shortage of funds. By providing a range of investment and borrowing...
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...Which of the following statements is CORRECT? A. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. B. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. C. Hedge funds have more in common with investment banks than with any other type of financial institution. D. Hedge funds have more in common with commercial banks than with any other type of financial institution. E. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated" investors (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and such investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. True False Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts. True False You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of: A. A money market transaction. B. A primary market transaction. C. A secondary market transaction. D. A futures market transaction. E. An over-the-counter market transaction. Which...
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...Corporate Finance Final Exam Roll # ___________ BBA Program, IBA, DU, 2013 (Provide your answers on the Question Paper) Indicate T (True) or F (False): 1. Capital leases are an alternate source of financing. 2. Term financing is short-term debt, typically used to purchase short-term assets. 3. In a sale and leaseback arrangement, the seller is the lessee and the buyer is the lessor. 4. In an IPO, Private Placement price is higher than Offer Price. 5. The discount rate used to evaluate lease financing versus debt financing is the firm's cost of capital, the only difference is that the cost of capital is adjusted after-tax for leases. 6. Term loan agreements typically contain a prepayment penalty clause, which banks charge if a debtor pays back earlier than scheduled. 7. Empirically, the shareholders of selling companies benefit more in a merger than the shareholders of the buying companies. 8. A tender offer is a public offer by one firm to directly buy from the shareholders, the shares of another firm. 9. Valuations under FCFF and FCFE methods will yield the same result if the Debt:Equity ratio remains constant over the years. 10. Under FCFE, Interest Expense is not subtracted in the Income Statement, since Repayment is subtracted from Cash Flow Statement. Multiple Choice Questions (MCQ): 11. Under Book-Building method of IPO Listing, the price of the shares is: A) equal to the Indicative Price. B) equal to the Offer Price. C) between the Indicative Price (inclusive) and the Offer...
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...AFIN310 Issues in Applied Finance Financial Planning Assignment: Questions & Answers General Questions 1. Is an introduction / executive summary and conclusion required? No. You are to answer each question and keep to a total maximum of 15 pages, excluding cover page. No marks will be provided for anything written on page 16 or beyond. Students are recommended to refer to the mark allocation when answering each question. 2. Is specific formatting required? Eg The font you can use is Calibri, size 12. The document should have 1.5 spacing There are no specific formatting requirements, unless there are standard university or department formatting criteria of which students should be aware. 3rd year students are expected to submit assignments which are easy to read and look professional. 10 marks are allocated to presentation, length, references and bibliography. Question 1 3. Question 1(a) are real-life examples required or I can simply make-up an example? Personal and/or made-up examples will not be sufficient. There are numerous Australian real cases that can be referenced. The preamble to the question refers to "Australian scandals involving financial planning firms, practices and advice". You are required to limit the use of examples to publically available information about the provision of financial advice in Australia. 4. Question 1(a) How many examples will be considered sufficient? Marks are not allocated based on the number of examples provided, rather on the quality of...
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...Finance coursework Question 1: i) A personal loan from one of their family members or friends could be suitable as they are just a small start up business. It may be advantageous as this loan would be given on flexible terms because friends and family may agree to a longer repayment period than banks and may seek a lower rate of return than other lenders. Also, little or no security may be required and the repayment can be tailored to their financial projections. Moreover, it would be cheaper for them as friends and family members may only have minimal charges as funds are offered at little or no interest. There will also be little or no formalities as the family members or friends already know the business circumstances and so are less likely to demand a detailed business plan. However, disputes may arise if there is a delay or nonpayment and this may break relationships and lead to mistrust. Another source of finance could be leasing, a lease means that the business is paying for the use of a product but do not own it. It is also called hiring. There will be a time period for how long the business could hire the vehicle for, for example two years and after two years the vehicle returns to the owner so if the business does not succeed then they could return the equipment. A lease can be cheaper to arrange rather than having to buy equipment and the company that owns the vehicle is responsible for the maintenance which can help reduce costs for the business. Moreover...
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...FIN10708 Finance and Investment for Business Topic 7 Tutorial Questions 1. Problem 8, p. 383 of the textbook = on excel document 2. Problem 9, p. 383 of the textbook. 0.72 x 0.1062+0.32 +0.15652+2.07 x 0.3 x 0.48 x 0.06 x 00.185 then square root 3. Using information in Questions 1 and 2 above: (a) Calculate the portfolio’s returns in each of the years 2007 through to 2012 (b) Calculate the portfolio’s average annual return (c) Calculate the portfolio’s standard deviation using your results from (a) and (b) and check that this standard deviation equals the one you calculate in Question 2 above. 4. Problem 16, p. 384 of the textbook. 5. A market analyst predicts that the expected return on the All Ordinaries Share Price Index will fall by 10% this year. Telstra has a beta of 0.51 and BHP Billiton has a beta of 1.17. (a) What would you expect to happen this year to the return on an investment in (i) Telstra and (ii) BHP Billiton? (b) If you accept the analyst’s prediction, should your investment portfolio contain shares with mainly high value or low value betas? 6. Problem 21, p. 385 of the textbook. 7. Problem 22, p. 385 of the textbook. 8. Problem 28, p. 385 of the textbook. 9. Company A has a beta of 0.7 and Company B has a beta of 1.4. If the risk-free rate is 4% and the market risk premium is 7%, according to the CAPM what is the expected return on an equally weighted portfolio of A and B? Show how this can be calculated in two different ways...
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...Compound Interest the situation in which interest paid on an investment during the first period is added to the principal. During the second period, interest is earned on the original principal plus the interest earned during the first period. number of years Annuity a series of equal dollar payments made for a specified Annuity Due annuity in which the payments occur at the beginning of each period Perpetuity an annuity with an infinite life Amortized Loan a loan that is paid off in equal periodic payments Risk potential variability in future cash flows standard deviation -a measure of risk when looking at stock in isolation standard deviation -measure of the dispersion of possible outcomes -Company-unique risk (unsystematic risk)-is diversifiable. This type of risk can be reduced through diversification. The result of factors that are unique to a particular firm -Market risk (systematic risk)is nondiversifiable. This type of risk cant be diversified away. -Market risk (systematic risk) -results from factors that affect all stocks. -Diversification investing in more than one security to reduce risk -Holding period returns the return an investor would receive for holding a security for a designated period of time. Beta the relationship between an investment's returns and the market's returns. Measurement of nondiversifiable risk. -Portfolio beta the relationship between a portfolio's returns and the market returns. It is a measure of the portfolio's nondiversifiable...
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...TUTORIAL 1 - TUTORIAL DISCUSSION QUESTIONS 2. (a) Discuss the role of money in a financial system. • money is a financial asset that facilitates financial and economic transactions • a medium of exchange—swapped for goods and services • a store of value—wealth is held or measured in money terms • a standard of deferred payment—used to record indebtedness • a unit of account—transactions are priced in money terms • currency is generally divisible, portable and durable (b) Does money have to be currency? If not, what are some alternatives? • money is anything that is universally acceptable as a medium of exchange • further, money generally has the characteristics of being divisible and a store of value • examples: currency, EFTPOS, digital money. 3. Having recently inherited some money from a rich uncle, you are considering investing the funds in financial assets. You are aware that financial assets exhibit four main attributes. List and discuss these attributes. In your answer give examples to explain your points. Four attributes are: • return or yield • risk • liquidity • time-pattern of the cash flows Examples: 1. Term deposit with a bank: • generally pays a fixed interest rate until maturity • guaranteed by the bank—low risk (low return) • funds usually are not available until maturity (less liquidity) • interest paid periodically; principal repaid at maturity 2. Shares in a corporation: • generally pay a dividend twice a year—amount determined...
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...Finance We have to work with money every day. While balancing your checkbook or calculating your monthly expenditures on espresso requires only arithmetic, when we start saving, planning for retirement, or need a loan, we need more mathematics. Simple Interest Discussing interest starts with the principal, or amount your account starts with. This could be a starting investment, or the starting amount of a loan. Interest, in its most simple form, is calculated as a percent of the principal. For example, if you borrowed $100 from a friend and agree to repay it with 5% interest, then the amount of interest you would pay would just be 5% of 100: $100(0.05) = $5. The total amount you would repay would be $105, the original principal plus the interest. [pic] Example: A friend asks to borrow $300 and agrees to repay it in 30 days with 3% interest. How much interest will you earn? P0 = $300 (the principal) r = 0.03 (3% rate) I = $300(0.03) = $9. You will earn $9 interest. One-time simple interest is only common for extremely short-term loans. For longer term loans, it is common for interest to be paid on a daily, monthly, quarterly, or annual basis. In that case, interest would be earned regularly. For example, bonds are essentially a loan made to the bond issuer (a company or government) by you, the bond holder. In return for the loan, the issuer agrees to pay interest, often annually. Bonds have a maturity date, at which time the issuer pays back...
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...Case 2 -‐ Solution / expected answers Part 1 Question 1 The correct answer is: 20.00% 18.00% Annual Return Annualized Volatility 15.00% Explanation: Using the return from Technical Document 4 we compute the annual return: !"!!"!!"#$ 3314.46 r= −1= − 1 = 20.00% !"!!"!!"#$ 2762.05 Using the same formula we compute the returns between each trading day: !"!!"!!"#$ !"!!"!!"#$ r! = − 1 = 0.0916% … r!"! = − 1 = −0.8024% !"!!"!!"#$ !"!!"!!"#$ After that, we use these returns to compute for the annualized volatility: Market Risk Premium σ= 1 −1 ! ! − ! = 18.00% !!! Finally, we compute the market risk premium: = − = 20.00% − 5.00% = 15.00% Question 2 The correct answer is: Equity Beta Cost of Equity 0.8 17.00% Explanation: We compute the equity Beta using the relevant formula from Technical Document 4. All necessary inputs are already obtained: ...
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...The Financial Environment: Questions & Problems Questions 2.1, 2.2, 2.3, 2.6, 2.8; Problems: 2.1, 2.5 2.1 The three primary forms of businesses are: Proprietorship, Partnership, and Corporation. Benefits: Proprietorship: Easy to create form a legal perspective, inexpensive to create, subject to few governmental regulations Partnership: Low cost and easy to form, income is taxed as personal and not corporate. Corporation: Corporations have unlimited life, easy to transfer ownership, owners have limited liability. Disadvantages of proprietorship and partnership: Selling interest is difficult, owners have unlimited liability, the life of the business is limited to the life of the owners, restricted to small business status. Disadvantages of Corporations: Double taxation, time consuming and costly to set-up the corporation and file periodic reports. 2.2 Differences: Investor owned vs. not for profit: Investor owned: Individulas become owners when they purchase shares of common stock, shares can be either publicly held or privately held, stockholders have the right of control, a claim to residula earnings, and a claim on liquidation proceeds. Not-for-profit corporations: are tax exempt, run exclusively for the public - profits are not used for private gain, no single body...
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...Homework 1 1. Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate. • • The initial outlay equals ________. The annual incremental after-tax cash flow from operations for year 1 is ________. 2. Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The gluing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery schedule and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by $17,000 per year. Training costs of employees who will operate the new machine will be a one-time cost of $5,000 which should...
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