Day: April 26, 2018

Q4
The company is in the 40 percent tax bracket. Its cost of goods sold always represents 60 percent of its sales. That is, if the company’s sales were to increase to RM1.5 million, its cost of goods sold would increase to RM900,000.

Q5
The company’s CEO is unhappy with the forecast and wants the firm to achieve a net income equal to RM240,000. Assume that Hebat’s interest expense remains constant. At what level of sales the company has to achieve it wants to obtain this net income.

Q6
Nilai Services Bhd. reported RM2.3 million of retained earnings on its balance sheet last year. This year, the company has incurred a loss of RM500,000 (negative RM500,000). Despite the loss, the company still paid RM1.00 dividend per share this year. The company’s earnings per share for this year were -RM2.50 (negative RM2.50). What was the level of retained earnings on the company’s balance sheet this year?

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.

1. Why is it necessary to know about time value of money concepts? Why can’t you just make judgments about future cash flows based purely on the size of the cash flows?

2. Define Future Value.

3. Define Present Value.

4. What are annuities?

5. (calculating future value) You buy an 8 year, 7% CD for $1,000. Interest is compounded annually. How much is it worth at maturity?

6. (calculating present value) What’s the present value of $10,000 to be received in 6 years? (Your required rate of return is 10% a year.)

7. (calculating the rate of return) A friend promises to pay you $500 three years from now if you loan him $400 today. What interest rate is your friend offering you?

8. (calculating the future value of an annuity) If you invest $100 a year for 20 years at 6% annual interest, how much will you have at the end of the 20th year?

9. (calculating the present value of an annuity) How much would you be willing to pay today for an investment that pays $700 a year at the end of the next 5 years? (Your required rate of return is 6% a year.)

10. (Rate of return of an annuity) You would like to have $1,000,000 40 years from now, but the most you can afford to invest each year is $1,000. What annual rate of return will you have to earn to reach your goal?

11. (Monthly compounding) If you bought a $1,000 face value CD that matured in six months, and which was advertised as paying 6% annual interest, compounded monthly, how much would you receive when you cashed in your CD at maturity?

12. (Annualizing a monthly rate) Your credit card statement says that you will be charged 1.03% interest a month on unpaid balances. What is the Effective Annual Rate (EAR) being charged?
13. (Monthly loan payment) Best Buy has a flat-screen HDTV on sale for $1,799. If you could borrow that amount from Carl’s Credit Union at 6% for 1 year, what would be your monthly loan payments?

14. (PV of a perpetuity) If your required rate of return was 6% a year, how much would you pay today for $100 a month forever? (that is, the stream of $100 monthly payments goes on forever, continuing to be paid to your heirs after your death)

15. (PV of an uneven cash flow stream) what is the PV of the following project?
(Assume r = 7%)
Year Cash Flow
1 $1,000
2 $2,000
3 $3,000
4 $4,000

16. (FV of an uneven cash flow stream) what is the FV at the end of year 4 of the following project?
(Assume r = 7%)
Year Cash Flow
1 $1,000
2 $2,000
3 $3,000
4 $4,000

17. Define the Capital Asset Pricing Model (CAPM).

18. Define “beta” as it applies to common stocks.

19. You have two stocks in your portfolio. $20,000 is invested in a stock with a beta of 0.6 and $40,000 is invested in a stock with a beta of 1.4. What is the beta of your portfolio?

20. If the risk-free rate is 2% and the expected rate of return on the stock market is 7%, what is the required rate of return on a stock with a beta of 1.4 according to the CAPM?

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.

1. Why is it necessary to know about time value of money concepts? Why can’t you just make judgments about future cash flows based purely on the size of the cash flows?

2. Define Future Value.

3. Define Present Value.

4. What are annuities?

5. (calculating future value) You buy an 8 year, 7% CD for $1,000. Interest is compounded annually. How much is it worth at maturity?

6. (calculating present value) What’s the present value of $10,000 to be received in 6 years? (Your required rate of return is 10% a year.)

7. (calculating the rate of return) A friend promises to pay you $500 three years from now if you loan him $400 today. What interest rate is your friend offering you?

8. (calculating the future value of an annuity) If you invest $100 a year for 20 years at 6% annual interest, how much will you have at the end of the 20th year?

9. (calculating the present value of an annuity) How much would you be willing to pay today for an investment that pays $700 a year at the end of the next 5 years? (Your required rate of return is 6% a year.)

10. (Rate of return of an annuity) You would like to have $1,000,000 40 years from now, but the most you can afford to invest each year is $1,000. What annual rate of return will you have to earn to reach your goal?

11. (Monthly compounding) If you bought a $1,000 face value CD that matured in six months, and which was advertised as paying 6% annual interest, compounded monthly, how much would you receive when you cashed in your CD at maturity?

12. (Annualizing a monthly rate) Your credit card statement says that you will be charged 1.03% interest a month on unpaid balances. What is the Effective Annual Rate (EAR) being charged?
13. (Monthly loan payment) Best Buy has a flat-screen HDTV on sale for $1,799. If you could borrow that amount from Carl’s Credit Union at 6% for 1 year, what would be your monthly loan payments?

14. (PV of a perpetuity) If your required rate of return was 6% a year, how much would you pay today for $100 a month forever? (that is, the stream of $100 monthly payments goes on forever, continuing to be paid to your heirs after your death)

15. (PV of an uneven cash flow stream) what is the PV of the following project?
(Assume r = 7%)
Year Cash Flow
1 $1,000
2 $2,000
3 $3,000
4 $4,000

16. (FV of an uneven cash flow stream) what is the FV at the end of year 4 of the following project?
(Assume r = 7%)
Year Cash Flow
1 $1,000
2 $2,000
3 $3,000
4 $4,000

17. Define the Capital Asset Pricing Model (CAPM).

18. Define “beta” as it applies to common stocks.

19. You have two stocks in your portfolio. $20,000 is invested in a stock with a beta of 0.6 and $40,000 is invested in a stock with a beta of 1.4. What is the beta of your portfolio?

20. If the risk-free rate is 2% and the expected rate of return on the stock market is 7%, what is the required rate of return on a stock with a beta of 1.4 according to the CAPM?

1. Why is it necessary to know about time value of money concepts? Why can’t you just make judgments about future cash flows based purely on the size of the cash flows?

2. Define Future Value.

3. Define Present Value.

4. What are annuities?

5. (calculating future value) You buy an 8 year, 7% CD for $1,000. Interest is compounded annually. How much is it worth at maturity?

6. (calculating present value) What’s the present value of $10,000 to be received in 6 years? (Your required rate of return is 10% a year.)

7. (calculating the rate of return) A friend promises to pay you $500 three years from now if you loan him $400 today. What interest rate is your friend offering you?

8. (calculating the future value of an annuity) If you invest $100 a year for 20 years at 6% annual interest, how much will you have at the end of the 20th year?

9. (calculating the present value of an annuity) How much would you be willing to pay today for an investment that pays $700 a year at the end of the next 5 years? (Your required rate of return is 6% a year.)

10. (Rate of return of an annuity) You would like to have $1,000,000 40 years from now, but the most you can afford to invest each year is $1,000. What annual rate of return will you have to earn to reach your goal?

11. (Monthly compounding) If you bought a $1,000 face value CD that matured in six months, and which was advertised as paying 6% annual interest, compounded monthly, how much would you receive when you cashed in your CD at maturity?

12. (Annualizing a monthly rate) Your credit card statement says that you will be charged 1.03% interest a month on unpaid balances. What is the Effective Annual Rate (EAR) being charged?
13. (Monthly loan payment) Best Buy has a flat-screen HDTV on sale for $1,799. If you could borrow that amount from Carl’s Credit Union at 6% for 1 year, what would be your monthly loan payments?

14. (PV of a perpetuity) If your required rate of return was 6% a year, how much would you pay today for $100 a month forever? (that is, the stream of $100 monthly payments goes on forever, continuing to be paid to your heirs after your death)

15. (PV of an uneven cash flow stream) what is the PV of the following project?
(Assume r = 7%)
Year Cash Flow
1 $1,000
2 $2,000
3 $3,000
4 $4,000

16. (FV of an uneven cash flow stream) what is the FV at the end of year 4 of the following project?
(Assume r = 7%)
Year Cash Flow
1 $1,000
2 $2,000
3 $3,000
4 $4,000

17. Define the Capital Asset Pricing Model (CAPM).

18. Define “beta” as it applies to common stocks.

19. You have two stocks in your portfolio. $20,000 is invested in a stock with a beta of 0.6 and $40,000 is invested in a stock with a beta of 1.4. What is the beta of your portfolio?

20. If the risk-free rate is 2% and the expected rate of return on the stock market is 7%, what is the required rate of return on a stock with a beta of 1.4 according to the CAPM?

Select a company with which you are familiar, preferably one where you have been employed, and consider a process within that company that could be improved. This could be a business process, a manufacturing process, or a service process that you have observed or been involved with. One option would be to further develop your answer to the Process Improvement discussion question from Week 1. Using library research, prepare a recommended process improvement proposal that incorporates tools and methods learned in this course. Some examples of tools and methods that could be implemented include, but are not limited to, JIT, objective and/or subjective forecasting methods, ABC classification, or project management tools. Your paper should include: A brief description of the company and how the selected process fits into the overall framework of the company. A step by step description of the process. This can follow a similar format to the IBM Credit process description in Section 1.5 of the textbook, though yours may be longer or more detailed depending on the process selected. An analysis of the current process, identifying inefficiencies. A detailed plan for reengineering the process to be more efficient, using appropriate tools and methods learned throughout the course, including a specific description of how the tools and methods will be applied. An identification of possible roadblocks in implementing the process changes. Expected benefits of the improved process. 8 double spaced pages.

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?

11. A man makes a simple discount note with a face value of $2300, a term of 160 days, and a 18% discount rate. Find the discount. (Use the banker’s rule)

12. A man has a simple discount note for $6600, at an ordinary bank discount rate of 8.72%, for 40 days. What is the effective interest rate? Round to the nearest 10th of a percent. (Use banker’s rule)

13. A man holds a note of $5000 that has an interest rate of 13% annually. The note was made on March 16 and is due November 14. He sells the note to a bank on June 12 at a discount rate of 12% annually. Find the proceeds on the third-party discount note. (Use the bankers rule)

16. Tom Bond borrowed $6200 at 5 ½% for three years compounded annually. What is the compound amount of the loan and how much interest will he pay on the loan?

22. Compute the amount of money to be set aside today to ensure a future value of $4300 in one year if the interest rate is 8.5% annually, compounded annually.

23. Ronnie Cox has just inherited $27,000. How much of this money should be set aside today to have $17,000 to pay cash for a Ventura Van, which he plans to purchase in one year? He can invest at 1.7% annually, compounded annually.

Larry is 40 year old and has never married. He wants to retire at age 62 with an 80% wage replacement ratio. Larry currently earns $100,000 as an employee and has managed to save $100,000 towards his retirement goal (including investment assets and cash equivalents). He is currently saving $5,000 per year in his 401(k) plan. His employer’s plan calls for a 50% match for contributions up to an employee elective deferral of 6%.

Financial Goal: Larry’s primary goal, for this example, is to retire at 62 with an 80% wage replacement, including Social Security, projected to be $30,000 in today’s dollars at normal retirement age of 67. He wants to plan for a life expectancy to age 95.

Economic and Investment Information:
General inflation is expected to average 3.0% annually for the foreseeable future.
Larry’s expected investment portfolio rate of return is 8.5%
Larry’s marginal income tax rate is 25%.

Problems:
Calculate how much Larry will need on the day he retires to meet his retirement goal.
Calculate how much he needs to save regularly to meet his retirement goal. (Discuss if he can meet his current retirement goal with his current savings pattern.)
Provide 3 alternatives for Larry to consider and explain why each alternative might work. (Explain why each alternative might or might not work and explain why.)