Day: April 26, 2018

A stock is expected to pay a dividend of $2 per share in one month and in four months. The stock price is $40 and the risk-free rate of interest is 6% per annum with continuous compounding for all maturities. An investor has just taken a short position in a five-month forward contract on the stock.
What are the forward price and the initial value of the forward contract?
Three months later, the price of the stock is $48 and the risk-free rate of interest is still 6% per annum. What are the forward price and the value of the short position in the forward contract?
Make sure that you show or explain all calculations. Make sure you answer all questions above.

Suppose the current spot price for gold is $800 per ounce. The risk-free interest rate available to all investors for borrowing or lending is 0.50% per month (monthly compounding). Forward contracts are available to buy or sell gold for delivery in 1 year; the forward price for gold is $890 per ounce. You have a large inventory of gold.
Assume that storage costs for gold are zero. Is there an arbitrage opportunity? If you answer “YES,” then show step by step how you would make a profit and calculate the profit per ounce of gold. If you answer “NO,” then show why there is no arbitrage opportunity.

Now assume that the present value of the storage cost for gold is $100 per ounce for one year of storage. Is there an arbitrage opportunity? If you answer “YES,” then show step by step how you would make a profit and calculate the profit per ounce of gold. If you answer “NO,” then show why there is no arbitrage opportunity.
Make sure that you show or explain all calculations. Make sure you answer all questions above.

Please work the following problem on an EXCEL spreadsheet. An elegant solution is not required, Just provide all the steps so I will understand the concept and be able to replicate it for similar problems. Also, provide a written description leading me through the solution.

PROBLEM:

A Company must make decisions on weekly production. The Company makes two products; Patio bars and barstools. Each bar contributes $20 and each barstool contributes $8 toward profit. The Company can sell all the products it makes but market demand requires that they must make at least two barstools for each bar that they produce.

There are constraints on production. The Company will have available only 24,000 units of raw materials, 12,000 labor hours, and $20,000 for supplies. Each bar requires 6 units of raw materials, 2 hours of labor, and $3 in supplies. Each barstool requires 3 units of raw material, 4 hours of labor, $3 in supplies. According to the union contract, the Company must produce 4,000 items each week.

The Company plans to maximize profit contribution for the weekly production. How many bars and how many barstools should the Company produce each week?

A stock is expected to pay a dividend of $2 per share in one month and in four months. The stock price is $40 and the risk-free rate of interest is 6% per annum with continuous compounding for all maturities. An investor has just taken a short position in a five-month forward contract on the stock.
What are the forward price and the initial value of the forward contract?
Three months later, the price of the stock is $48 and the risk-free rate of interest is still 6% per annum. What are the forward price and the value of the short position in the forward contract?
Make sure that you show or explain all calculations. Make sure you answer all questions above.

Suppose the current spot price for gold is $800 per ounce. The risk-free interest rate available to all investors for borrowing or lending is 0.50% per month (monthly compounding). Forward contracts are available to buy or sell gold for delivery in 1 year; the forward price for gold is $890 per ounce. You have a large inventory of gold.
Assume that storage costs for gold are zero. Is there an arbitrage opportunity? If you answer “YES,” then show step by step how you would make a profit and calculate the profit per ounce of gold. If you answer “NO,” then show why there is no arbitrage opportunity.

Now assume that the present value of the storage cost for gold is $100 per ounce for one year of storage. Is there an arbitrage opportunity? If you answer “YES,” then show step by step how you would make a profit and calculate the profit per ounce of gold. If you answer “NO,” then show why there is no arbitrage opportunity.
Make sure that you show or explain all calculations. Make sure you answer all questions above.

Disposal of Plant Assets

E 14. Samson Company purchased a computer on January 2, 2009, at a cost of $1,250. The computer is expected to have a useful life of five years and a residual value of $125. Assume that the computer is disposed of on July 1, 2012. Record the depreciation expense for half a year and the disposal under each of the following assumptions:

1. The computer is discarded.
2. The computer is sold for $200.
3. The computer is sold for $550.

Natural Resource Depletion and Depreciation of Related Plant Assets

E 15. Nelson Company purchased land containing an estimated 2.5 million tons of ore for a cost of $4,400,000. The land without the ore is estimated to be worth $250,000. During its first year of operation, the company mined and sold 375,000 tons of ore. Compute the depletion charge per ton. Compute the depletion expense that Nelson should record for the year.

Q7. The zero coupon bonds of Markus Inc. have a market price of RM394.47, a face value of RM1,000, and a yield to maturity of 6.87%. When will this bond mature? (Answer in number of years.)
Q8. Windmill Corp has a 15-year bond issue outstanding that pays a 9% coupon. The bond is currently priced at RM894.60 and has a par value of RM1,000. Interest is paid semiannually. What is the yield to maturity?
Q9. Creative Inc. has a current beta of 1.6. The market risk premium is 7 percent and the risk-free rate of return is 3 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.9?
Q10. The Bystanders Company has 100,000 bonds outstanding that are selling at par value (RM1,000). Bonds with similar characteristics are yielding 7.5 percent. The company also has 1 million preferred stocks and 5 million shares of common stock outstanding. The preferred stock has par value of RM100 and fixed dividend of 10.5 percent and is selling at RM56 per share. The common stock has a beta of 1.2 and sells for RM38 a share. The Treasury bill is yielding 3 percent and the return on the market is 12 percent. The corporate tax rate is 34 percent. What is Bystander’s weighted average cost of capital?

Before there was Paris Hilton, there was Consuelo Vanderbilt Balsan – a Gilded Age heiress and socialite, re-nowned for her beauty and wealth. Now Ms. Balsan’s onetime Hamptons home is slated to hit the market priced at $28 million with Tim Davis of the Corcoran Group.

Located on Ox Pasture Road in Southampton, the shingle-style home was built around 1900 and is known as “Gardenside” or “Cara-Mia”. Ms. Balsan, the great-granddaughter of railroad magnate Cornelius Vanderbilt, owned the house until her death in 1964.

According to public records, the estate is owned by Robert G. Goldstein, executive vice president and president of global gaming operations at Las Vegas Sands Corp, and his wife Sheryl, who purchased the house in 2007 for $17.4 million.” (The Wall Street Journal, August 1, 2014, M2)

1. Calculate the annual compound growth rate of the house price during the period when the house was owned by Robert G. Goldstein (since 2007). (Round the number of years to the whole number).
2. Assume that the growth rate you calculated in question #1 remains the same for the next 20 years. Calculate the price of the house in 20 years.
3. Assume the growth rate that you calculated in #1 prevailed since 1900. Calculate the price of the house in 1900.
4. Assume the growth rate that you calculated in #1 prevailed since 1900. Which price was paid for the house in 1964?
5. You were using the time value of money concept to answer the question #3. What is the time point 0 is this problem?

Net Present Value Practice True false questions

1. The three common discounted cash flow methods are net present value, internal rate of return, and payback.

2. The net present value (NPV) method calculates the return on investment from a project by discounting all expected future cash inflows and outflows back to the present point in time using average cost of capital.

3. Internal rate of return is a method of calculating the expected gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time.

4. A capital budgeting project is accepted if the required rate of return equals or exceeds the internal rate of return.

5. The net present value method can be used in situations where the required rate of return varies over the life of the project.

6. The net present value method accurately assumes that project cash flows can only be reinvested at the discount rate used.

Question 1:
On 1 January 2012, Rose Tremayne opens a bank account in the name of her new trading business, Rose Tremayne Trading (RTT). She puts £112,000 of her own money into the business bank account. The following is a summary of transactions during 2012:
(1) RTT takes out a short-term bank loan of £45,000 cash.
(2) RTT buys non-current assets at the start of January at a cost of £72,000 paying cash.
(3) Buys inventory of £60,000, paying cash.
(4) Inventory costing £48,000 is sold on credit for £72,000.
(5) Purchases inventory on credit for £84,000.
(6) Inventory costing £6,000 is sold for £9,000 cash.
(7) RTT purchases a 12 month insurance policy on April 1 for £4,000 providing cover until March 31 2013.
(8) RTT purchases two lots of land for £60,000 (ie £30,000 per lot). The purchase price of £60,000 is paid after RTT takes out a ten year loan of £34,000.
(9) Sells one of the lots of land for £33,000 cash.
(10) RTT pays rent of £15,000 for the first nine months of 2012 but owes rent of £5,000 on 31 December 2012.
(11) Inventory costing £69 000 is sold for £103,000 cash.
(12) Wages for the period amounting to £30,000 are paid in full.
(13) RTT pays off £15,000 of its short term bank loan.
(14) RTT pays total interest of £4,000 for the long-term bank loan for 2012.
(15) Customers pay £30,000 of cash owing.
(16) RTT pays its trade creditors £48,000.
(17) The equipment purchased for £72,000 at the start of January has an expected useful life of four years and an expected scrap value of zero. Assume straight-line depreciation is to be charged on these assets.

Instructions:
(a) Prepare a balance sheet for RTT as at 31st December 2012.

(b) Prepare an income statement for RTT for 2012 and briefly comment on RTT’s performance during 2012.

(c) Prepare a cash flow statement for RTT for 2012.

Your salary for the coming year is $100,000 (payable one year from now) and you expect to work for another 30 years. You expect your annual base salary to grow at a 4% annual rate during the remainder of your career. Your company’s pension plan calls for you to receive a yearly pension payment after you retire equal to 25% of your final year’s base salary. The first payment will be made one year after your retirement, and you expect to live for twenty years after your retirement. The interest rate is 8% per year.
a) What is the amount of the yearly pension payment that you can expect to receive under this plan (assume that you will receive your $100,000 base salary payment one year from now)?
b) Now suppose you are contemplating a switch to a new employer. The new employer will match your annual base salary, and you can expect this to grow at a 4% annual rate until your retirement. However, the new employer offers no pension plan. The new employer offers to pay you a flat annual bonus, on top of your base salary, to compensate you for the loss of the pension plan. How much of an annual bonus would you require before you were just willing to make the switch?

All answers should be in a single Excel file.
Show the step by step calculations how it was done and explained thoroughly by using excel:

1 If you deposit $15,000 today and earn 8% annual interest, how much will you have in 9 years?
Answer: $29,985.07

2 Tiffany will receive a graduation gift of $10,000 from her parents in 3 years. If the discount rate
is 7%, what is this gift worth today?
Answer: $8,162.98

3 What is the present value of a 20-year ordinary annuity of $30,000 using a 6% discount rate?
Answer: $344,097.64

4 You deposit $5,000 in an account that pays 8% interest per annum. How long will it take to double your money?
Answer: 9 years

5 The Johnsons have $60,000 to use as a down-payment on a house, and they want to borrow $240,000
from the bank. The current mortgage interest rate is 5%. If they make equal monthly payments for 30 years,
how much will the monthly payment be?
Answer: $1,288.37

6 Tim paid $250 per month into his 401K retirement plan. After 30 years, he had accumulated $500,000. What
average annual rate of interest had he earned over the 30 years?
Answer: 9.42%

7 Charlotte’s firm had sales of $525,000 in the year 2001. By 2012, sales had increased to $1,200,000. What was
the average annual rate of increase?
Answer: 7.80%