...BUS 530 FINancial Management Exam 1 Sample Questions Part I MULTIPLE CHOICE QUESTIONS ( ) 1. The principal-agent problem A. Occurs when managers have more incentive to maximize profits than the stockholders-owners do. B. Would not arise if the owners of the firm had complete information about the activities of the managers. C. In financial markets helps to explain why equity is a relatively important source of finance for American business. D. All of the above. E. Only A and B of the above. ( ) 2. In a partnership form of organization, income tax liability, if any, is incurred by: A. The partnership itself. B. The partners individually. C. Both the partnership and the partners. D. Neither the partnership nor the partners. ( ) 3. One common reason for partnerships to convert to a corporate form of organization is that the partnership: A. Faces rapidly growing financing requirements. B. Wishes to avoid double taxation of profits. C. Has issued all of its allotted shares. D. Agreement expires after ten years of use. ( ) 4. When a corporation fails, the maximum that can lose by an investor protected by limited liability is: A. The amount of the initial investment. B. The amount of the profit on the investment. C. The amount necessary to pay the corporation's debts. D. The amount of the investor's personal wealth. ( ) 5. Which of the following is not an advantage to incorporating a business? A. Easier access to financial markets...
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...for correct formula. Please consult your syllabi for assignment grading criteria. 1. What is the stock’s value? In order to determine the stock’s value. I used the formula in the text E(P0)= D0 x [1 + E(g)] / R(Re) – E(g). In which D0 represents the most recent dividend, which has already been paid = $, E(g) represents the expected growth rate in dividends in the future=5%, and R(Re) represents the expected rate of return on the stock=15%. Therefore the formula is as follows: E(P0)= $2.00 x [1 + .05] / .15 - .05= E(P0)=$2.00 x 1.05 / .10= E(P0)= $2.10 / .10= $21.00 The stock’s value is $21.00 2. Suppose the riskiness of the stock decreases, which causes the required rate of return to fall to 13%. Under these conditions, what is the stock’s value? The formula used above would again be used in this situation, however the R(Re) which represents the expected rate of return on the stock now=13%. Therefore the formula is now as follows: E(P0)= $2.00 x [1 + .05] / .13 - .05= E(P0)=$2.00 x 1.05 / .08 E(P0)= $2.10 / .08= $26.25 The stock’s value is $26.25 3. Return to the original 15% required rate of return and assume a dividend growth rate estimate increase to 7% per year, what is the stock value? The formula used above would again be used in this situation, however the E(g) which represents the expected growth rate in dividends in the future is now increased to=7%. Therefore the formula is now as follows: E(P0)= $2.00 x [1 + .07] / .15 - .07=...
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...Luo Chapter 9 & 10 Summary In chapter 9 we learned the 9 different formulas, for time value of money. 1. Future value of a single amount a. FV = PV X FVIF 2. Present value of a single amount b. PV = FV X PVIF c. This is to determine the present value of an amount to be received in the future. 3. Future value of an annuity d. FVA = A X FVIFA e. To determine the future value of a series of consecutive, equal payments (an annuity). 4. Present value of an annuity f. PVA= A X PVIFA 5. Annuity equaling a future value g. A = FVA ÷ FVIFA h. To determine the size of an annuity that will equal a future value. 6. Annuity equaling a present value i. A = PVA ÷ PVIFA j. Determines the size of annuity equal to a given present value. 7. Determine the yield on an investment k. PVIF = PV÷ FV (Yield – present value of a single amount) (Appendix B) l. PVIFA = PVA ÷ A (Yield- present value of an annuity) (Appendix D) m. To determine the interest rate that will equate an investment with future benefits 8. Less than annual compounding periods n. If the compounding period is more or less frequent than once a year. 9. Patterns of payment – deferred annuity o. PVA = A X PVIFA (Appendix D) p. PV = FV X PVIF (Appendix B) q. If an annuity begins in the future. For chapter 10, I learned valuation of financial assets: bonds, preferred stock and common...
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... r = 5.33% b. to get anual rate of return for Bill: n = 4 r = ? PV = -$195,000 PMT = 0 FV = $168,000 r = ? PV = r = -3.66% A11. (Calculating the PV and FV of an annuity) Assume an ordinary annuity of $500 at the end of each of the next three years. a. What is the present value discounted at 10%? b. What is the future value at the end of year 3 if cash flows can be invested at 10%? a. to get present value: n = 3 r = ? PV = ? r = 10% PMT = $500.00 FV = 0 PV = PV = $1,243.43 b. to get future value: n = 3 r = ? PV = 0 r = 10% PMT = $500.00 FV = ? FV= FV = $1,655 Chapter 5 A1. (Bond valuation) A $1,000 face value bond has a remaining maturity of 10 years and a required return of 9%. The bond’s coupon rate is 7.4%. What is the fair value of this bond? Calculating PV factor i= required return = 9% = 0.09 n= 10 years Coupon Rate to get value Annuity Cash Flow of $1000 to get present value Cash flow= $1000 * 7.4/100 = $74 Cash flow=...
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...Abstract In this paper, Team C will discuss the concept of the time value of money and the importance of this concept in business. Also, we will provide a demonstration of the use of the formula used to calculate the present and future values of money to get the present value of $100 using different periods of time and interest rates. Time Value of Money In the world of business, it is essential to know what TVM represents and how it helps make better choices in how we spend our money. TVM is also known as Time Value of money which is a given amount of interest earned in a period of time (Wikipedia, 2011). Each member in group “C” will use 100 as our present value and we will choose an interest rate and period. Time value of money concept is used to determine present and future values of money. “The time value of money refers to the relationship between time, money, and the rate of interest.” (Letsche, 2011). The formula consist of four components FV = Future Value, PV = Present Value, i = the interestrate per period and n= the number of compounding periods (TeachMeFinance.com). In business, TVM is used to evaluate expected returns on investments and monitoring the company’s cash flow. “However, understanding the time value of money is also very important for you as an self-employed business person to make sure you are able to realize your spending, purchasing and retirement goals.” (Loughran, 2011). On a personal level, individuals can use TVM to calculate interest...
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...6 Time Value of Money LEARNING OBJECTIVES After reading this chapter, students should be able to: • Convert time value of money (TVM) problems from words to time lines. • Explain the relationship between compounding and discounting, between future and present value. • Calculate the future value of some beginning amount, and find the present value of a single payment to be received in the future. • Solve for time or interest rate, given the other three variables in the TVM equation. • Find the future value of a series of equal, periodic payments (an annuity) as well as the present value of such an annuity. • Explain the difference between an ordinary annuity and an annuity due, and calculate the difference in their values. • Calculate the value of a perpetuity. • Demonstrate how to find the present and future values of an uneven series of cash flows. • Distinguish among the following interest rates: Nominal (or Quoted) rate, Periodic rate, and Effective (or Equivalent) Annual Rate; and properly choose between securities with different compounding periods. • Solve time value of money problems that involve fractional time periods. • Construct loan amortization schedules for both fully-amortized and partially-amortized loans. LECTURE SUGGESTIONS We regard Chapter 6 as the most important chapter in the book, so we spend a good bit of time on it. We approach time value in three...
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...Time Value of Money 1. The present value of money, also referred to as discounted value, is the current worth of a future sum of money or stream of cash flows given a specified rate of return. Future cash flows are discounted at the discounted rate, and the higher the discounted rate, the lower the present value of the future cash flows. Determining the appropriate discount rate is the key to properly valuing future cash flows, whether they be earnings or obligations. (Chapter 9 Page 257 Para 5) 2. The present value of annuity is the value of a stream of expected or promised future payments that have been discounted to a single equivalent value today. (Chapter 9 Page 260 Para 2) 3. Future value of money is the amount that a specified amount of money in the present will be worth at a future date, given a certain interest rate. (Chapter 9 Page 268 Para 1-3) 4. Future value of annuity is the value of a group of payments at a specified date in the future. (Chapter 9 page 268) 5. Provide examples for how each might be used: • Present value of money is the basis that receiving $1,000 now is worth more than $1,000 five years from now, because if you got the money now, you could invest it and receive an additional return over the five years. The formula for present value is: PV = FV [1 / (1+I)^n]. (Chapter 9 Page 258 Para 1) • Present value of annuity is extremely useful for comparing two separate cash flows that differ in some ways. Present...
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...Exercises due Oct 1 The classic transportation problem. You as an employee of the Department of Homeland Security (DHS) are in charge of maintaining the readiness of emergency supplies at various distribution sites within a region that may be subjected to natural or human caused disasters. These supplies come from manufacturers located at other sites within a larger region. These supplies need replacing periodically, whether used or not. The problem you face each month is to determine how much of each kind of item needs to be shipped from each ‘supply or warehouse’ site to each distribution site given a varying demand depending on use and obsolescence. At the end of each month the shortage of each type of item at each customer site is sent to you. You also know the total amount of each type of item available at the supply or warehouse sites. Your job is to fill the demand (remove the shortage) at each distribution site at a minimum cost. a) This is what you know at the end of each month: The cost of shipping an amount of item type i (i = A, B) from a supply or warehouse site j to a distribution site k is C(i,j,k). The total amount of item type i at supply site j is S(i,j). The demand for an amount of item type i at distribution site k is D(i,k). Define a model that when solved will give you the least cost way of meeting the demands of all items at all distribution sites for any particular month, assuming the total supply available at all supply sites equals or exceeds the total...
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...1. What is the present value of the following uneven cash flow stream −$50, $100, $75, and $50 at the end of Years 0 through 3? The appropriate interest rate is 10%, compounded annually. In order to calculate the present value of uneven cash fellow, I would like to identify what is the present value for uneven cash flow means? Although the return or the payment of these cash flow is usually regular, the amounts in most cases is different from period to other period .when we need to determine the present value of certain asst, we cannot use the standard formula, Because using the standard formula assumes that the payment is equal in each period and this now a nurture of the cash flow. The present value of an annuity formula assumes equal cash flows at each time period. However, sometimes cash flows are not even. Learn how to use a formula to calculate the present value of uneven future cash flows. An annuity is an asset that will pay equal amounts of money at regular time periods over its life. Essentially, an annuity can be thought of as a security with equal expected cash flows usually paid annually, semi-annually, quarterly, or monthly. The payment of dividends or payments from a lawsuit settlement are typical annuities. However, expected future cash flows from a security with the uncertainty of market and economic conditions rarely follow such a regular schedule. (Garger &Patsalides, 2010). Now after we exposed to different opinion to uneven present cash...
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...Time Value of Money I recently opened a Roth IRA account in 2014. Being in my 30’s already, I got started a tad bit late but nonetheless I’m planning for my retirement now. My main focus is to maximize contribution each year and allow for it’s steady growth so that I can afford to sustain my lifestyle after I retire. I plan to save at least a million dollar for my retirement. Although there are not any tax deduction provisions for Roth IRA, the earnings are tax-free. So, in the long run it will be beneficial, as I don’t have any plans to withdraw the money until I retire. I opened the Roth IRA account with $3500 at the end of 2014 at the age of 30. I intend to contribute $3500 at end of every year till the age of 65 years, which will be my retirement age. The annual expected return from investment is 7%. Since, I will be making a series of equal payments at fixed intervals for a specified number of time and doing it at the end of every year, the future value will be- PMT= $ 3500 I=7% N=35years FVA=? FVA=PMT [(1+I)^N-1÷I] FVA= 3500[(1+0.07)^35-1÷0.07] = $483829.10 So, if I stick to my current plan, I will only be able to save $483,829 at the age 65. Lets assume if I fulfill the maximum contribution of $5500 each year with same expected annual return of 7%, then my savings will be- PMT= $ 5500 I=7% N=35years FVA=? FVA=PMT [(1+I)^N-1÷I] FVA= 5500[(1+0.07)^35-1÷0.07] = $760302.83 It looks like although I make maximum contribution each year, I won’t...
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...1. Explain how Versatel’s strategy deviates from discovery-driven planning (McGrath and MacMillan, 1995). The discovery-driven planning suggested by McGrath & MacMillan (1995) is a practical tool for entrepreneurs to test and redesign their business models. Since the article beliefs that ventures build on implicit assumptions turn out to be faulty and have a massive losses, discovery-driven planning suggests do research in order to turn assumptions into knowledge. The process, in which the unknown is envisioned, is captured in four documents; (1) reverse income statement that makes the ambitions explicit, (2) pro firma operations specs that lays out the activities needed to run the venture, (3) key assumption checklist that tracks all of the assumptions, and (4) a milestone planning, for monitoring the progress of the venture. (McGratch & MacMillen, 1995). There are limited number of similarities between the discovery-driven planning and the strategy of Versatel as Gary Mesch and Marc van der Heijden did not state and test any assumptions to see if their venture would be sustainable or even profitable. None of the four documents discussed above were taken into consideration when creating Verstales’s strategy. The two men ‘just’ decided “to capitalize on the opportunity created by the liberalization of the European telecommunications market” in February 1995 (Case: Versatel). Even though, it is not incorporated in the four documents, I belief assumption implies the only...
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...Time Value of Money Table of Contents Abstract………………………………………………………………………………3 Time Value of Money………………………………………………………………..4 Future Value and Present Value…………………………………………………......5 Challenges…………………………………………………………………………...6 Summation…………………………………………………………………………..8 References…………………………………………………………………………...9 Abstract Time value of money operations are the backbone of financial decisions in business. The basics of their operation lie in interest calculations that can be used to determine the value of money five years ago, today and even well into the future. These calculations can be tricky and are weighed with outside challenges that can affect them positively and negatively and give a good framework of when, where and how money should be invested and capital allocated. Time Value of Money It is generally stated that money today is worth more than the money of tomorrow. This simple statement of finance is the basis for understanding the time value of money and how it relates to opportunity costs, sunk costs, present and future values and discount rates. (Wilson, 2010). There are many factors which affect money, but predominantly inflation, risk, and opportunity loss are the factors which affect the time value of money and are the influences which directly affect a manager’s ability to understand and use financial information relating to present and future values to make sound decisions. Future Value (Fv) and Present Value (Pv) In economics, the time value...
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...Present value is where the value on a set date of a future payment is discounted to reflect the time value of money and other factors. This can also apply to a series of future payments. Present value calculations are commonly utilized in business and economics to provide a way to compare cash flows at different times. Present value can be described as the current worth of a future sum of money or stream of cash flows given a specified rate of return. (http://www.getobjects.com) Future cash flows are discounted at the discount rate. The higher the discounted rate, the lower the present value of the future cash flows. Determining what the appropriate discount rate is, is important to correctly place value future cash flows. The Present Value of an Ordinary Annuity is the value of a stream of promised or expected future payments that have been discounted to a single equivalent value today. It is extremely useful for comparing two separate cash flows that differ in some way. Present Value of an Ordinary Annuity can also be looked at as the amount you have to invest today at a specific interest rate so that when you withdraw an equal amount each period, the original principal and all accumulated interest will be completely used at the end of the annuity. Present Value of an Ordinary Annuity= Payment [(1 - (1 / (1 + Discount Rate per period)number of periods)) / Discount Rate Per Period] Future value measures the nominal future sum of money that a given sum of money is "worth"...
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...Present Value and Future Value Tables Table A-1 Future Value Interest Factors for One Dollar Compounded at k Percent for n Periods: FVIF k,n = (1 + k) n Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 20% 24% 25% 30% 1 1.0100 1.0200 1.0300 1.0400 1.0500 1.0600 1.0700 1.0800 1.0900 1.1000 1.1100 1.1200 1.1300 1.1400 1.1500 1.1600 1.2000 1.2400 1.2500 1.3000 2 1.0201 1.0404 1.0609 1.0816 1.1025 1.1236 1.1449 1.1664 1.1881 1.2100 1.2321 1.2544 1.2769 1.2996 1.3225 1.3456 1.4400 1.5376 1.5625 1.6900 3 1.0303 1.0612 1.0927 1.1249 1.1576 1.1910 1.2250 1.2597 1.2950 1.3310 1.3676 1.4049 1.4429 1.4815 1.5209 1.5609 1.7280 1.9066 1.9531 2.1970 4 1.0406 1.0824 1.1255 1.1699 1.2155 1.2625 1.3108 1.3605 1.4116 1.4641 1.5181 1.5735 1.6305 1.6890 1.7490 1.8106 2.0736 2.3642 2.4414 2.8561 5 1.0510 1.1041 1.1593 1.2167 1.2763 1.3382 1.4026 1.4693 1.5386 1.6105 1.6851 1.7623 1.8424 1.9254 2.0114 2.1003 2.4883 2.9316 3.0518 3.7129 6 1.0615 1.1262 1.1941 1.2653 1.3401 1.4185 1.5007 1.5869 1.6771 1.7716 1.8704 1.9738 2.0820 2.1950 2.3131 2.4364 2.9860 3.6352 ...
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...questions. Show all your work. Each question has a different point value. PROBLEM 1 (2 points) | | | | | | | Find the following values for a lump sum assuming annual compounding: | | a. The future value of $500 invested at 8 percent for one year | | | b. The future value of $500 invested at 8 percent for five years | | | c. The present value of $500 to be received in one year when the opportunity cost rate is 8 percent | d. The present value of $500 to be received in five years when the opportunity cost rate is 8 percent | | | | | | | | | PROBLEM 2 (2 points) | | | | | Find the following values assuming a regular, or ordinary, annuity: | a. The present value of $400 per year for ten years at 10 percent | b. The future value of $400 per year for ten years at 10 percent | c. The present value of $200 per year for five years at 5 percent | d. The future value of $200 per year for five years at 5 percent | | | | | | | PROBLEM 3 (3 points) | | | | | | | | Consider the following uneven cash flow stream: | | | | | | | | | | | | | | | Year | Cash Flow | | | | | | | | 0 | $0 | | | | | | | | 1 | $250 | | | | | | | | 2 | $400 | | | | | | | | 3 | $500 | | | | | | | | 4 | $600 | | | | | | | | 5 | $600 | | | | | | | | | | | | | | | | a. What is the present (Year 0) value if the opportunity cost (discount) rate is 10 percent? (4 points)...
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