Why might managers be tempted to violate the revenue principle and the matching principle in financial reporting?

MBA 503 MIDTERM EXAM with ANSWERS

MIDTERM EXAM ANSWERS
MBA 503

1. Indicate on which financial statement you would expect to find each of the following. If an item can be found on more than one statement, list each statement.

2. For each of the following items that appear on the balance sheet, identify each as an asset (A), liability (L), or element of stockholders’ equity (SE). For any item that would not appear on the balance sheet, write the letter, N.

3. (4 points)  Parker Pool Supply, Inc. reported the following items for the year ended December 31, 2008:

 

Required:
Prepare an income statement for the year.
4.  (4 points) National Shops, Inc. reported the following amounts on its balance sheet on December 31, 2009:

Required:

1.   Prepare a balance sheet for National Shops as of December 31, 2009.

2.   National Shops wishes to purchase merchandise from your company on account. The amount of the purchases would probably be about $10,000 per month, and the terms would require National to make payment in full within 30 days. Would you recommend that your company grant credit to National under these terms? Explain the reasoning for your response.

5.  (2 points) For each financial statement element listed, indicate whether a debit or a credit is used to increase the account’s balance.
1. Assets      __________
2. Liabilities   _____________
3. Contributed Capital       ___________
4. Retained Earnings         ___________

6. The Harris TV Store had the following transactions in August:
a. Sold $60,000 of goods to customers, receiving $56,000 in cash with the rest on account.
b. The cost of the inventory sold was $36,000.
c. The store purchased $16,000 of inventory and paid for $12,000 in cash and the rest on account.
d. They paid $16,000 in wages to employees who worked in August.
e. Received a $2,000 bill for utilities for August that will not be paid until September.
f. Received rent for the adjacent store front for the months of August and September in the amount of $4,000.

Based on the information above, Complete the following statements with dollar amounts:

 

7. Explain why a $5,000 revenue collected in advance for service would be recorded as a debit to cash and a credit to a liability account.

 

 

8. Why might managers be tempted to violate the revenue principle and the matching principle in financial reporting?

 

 

9. (2 points) During 2010, Burlington Company incurred operating expenses amounting to $600,000, of which $550,000 was paid in cash; the balance will be paid in January 2011. On the 2010 income statement of the company, what amount should be reported for operating expenses?
A. $550,000.
B. $560,000.
C. $600,000.
D. $1,150,000.

10. (2 points) On December 31, 2009, Avery Corporation paid $10,000 for next year’s insurance policy. This transaction should be recorded as follows by Avery:   Select the correct answer–
A.

B.

C.

D.
11. (2 points) On November 1, 2009, Bug Busters collected $6,000 in advance for three months of service to be provided beginning on that date. It was credited in full to unearned rent revenue. Assuming the accounting year ends December 31, give the adjusting entry required on December 31, 2009 (assuming that no adjusting entries have been made during the year).

12. (2 points) Below are two related transactions for Golden Corporation. The annual accounting period ends December 31. For each date listed, give the required entry in journal format.
A. October 1, 2009–Golden Corporation borrowed $100,000 and signed a note providing for 8% interest. The principal and interest are due in one year (on September 30, 2010).  What journal entry is needed?

B. December 31, 2009–end of the annual accounting period. (Prepare the necessary entry, If no entry is required, explain why).

13. (2 points) Bridge Company keeps a small inventory of supplies used for cleaning and maintenance purposes. On January 1, 2009, the inventory of supplies on hand was $2,000. During the year, supplies purchased were debited to the supplies inventory account in the amount of $6,500. On December 31, 2009, the inventory count of supplies in the storeroom was $1,750. Give the adjusting entry required at December 31, 2009.

14. (2 points)On November 1, 2009, Bruce Company leased some of its office space to Fairlane Company and immediately collected twelve months rent in advance of $600,000. Bruce debited cash and credited unearned rent revenue for $600,000. At December 31, 2009 (the end of the accounting period), give the adjusting entry Bruce should make in respect to the rent.

15. (2 points) On December 1, 2009, Fleet Company paid $30,000 rent for some office space which was debited in full to the prepaid rent expense account. The rent was for three months. Assuming Fleet’s accounting year ends December 31, give the adjusting entry required on December 31, 2009.

 

16. (4 points)Four transactions are given below that were completed during 2009 by Russell Company. The annual accounting period ends December 31. Each transaction requires an adjusting entry at December 31, 2009. You are to provide the adjusting entries required for Russell Company. No adjusting entries have been made during the year.

A. On December 31, 2009, Russell Company owed employees $3,750 for wages that were earned by them during December and were not recorded.  Prepare the necessary entry.

B. During 2009, Russell Company purchased office supplies that cost $1,000 which were placed in the supplies room for use as needed. The purchase was recorded as follows:

At January 1, 2009, the inventory of unused office supplies was $300. At December 31, 2009, a physical count showed unused office supplies in the supply room amounting to $100.  What entry is needed?

 

C. On December 1, 2009, Russell Company rented some office space to another party. Russell Company collected $900 rent for the period December 1, 2009, to March 1, 2010. The rent collected was recorded as follows:

Prepare the necessary entry:

 

D. On July 1, 2009, Russell Company borrowed $2,000 cash on a one-year, 8% interest-bearing, note payable. The interest is payable on the due date, May 31, 2010. The note was recorded as follows:

Prepare the necessary entry:

17. (4 points) Below, to the left, are listed several different account titles that you have studied. Under each column for each cell you are to enter one capital letter which indicates for each account its normal characteristics.

18. On July 1, 2009, Bass Company paid a two-year insurance premium. On that date the following journal entry was made:

 

The annual accounting period ends on December 31.
A. How much of the premium should be reported as expense on the 2009 income statement?   __________

B. What is the amount of prepaid insurance which should be reported on the balance sheet at December 31, 2009?  __________
C. Give the adjusting entry that should be made on December 31, 2009.

 

19. The following income statement was reported for Bauer Inc. for the first year of operations ending December 31, 2009 reported (in thousands of dollars):

 

A. Calculate net profit margin _____________
B. Calculate earnings per share if there are 200,000 shares of common stock outstanding   _____________
20. Explain how adjusting entries provide for potential manipulation by managers. In addition, discuss how compensation arrangements may result in incentives for such manipulation to occur.
 

21. PhotoFly has reported the following information on their income statements for the years 2008 through 2012:

 

A. Compute the gross profit percentage for each year.

2012      2011     2010     2009       2008
_____  _____    _____   ______   _______

B. Has the gross profit ratio for PhotoFly improved over time or worsened?
Explain your answer.

22.   (4 points) On December 31, 2009, Colonial Corporation had the following account balances related to credit sales and receivables prior to recording adjusting entries:

Required:
Present the necessary year-end adjusting entry related to uncollectible accounts for each of the following independent assumptions:
A. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivables outstanding at year-end will be uncollectible.

B. It is estimated that 1% of credit sales for the year will prove to be uncollectible.

C. Assume the same information presented in (1. above except that prior to adjustment, the Allowance for Doubtful Accounts had a debit balance of $200 rather than a credit balance of $200.

23. (4 points) American Company uses the allowance method to account for uncollectible accounts. On January 1, The Allowance for Doubtful Accounts had a credit balance of $3,000. The balance in the Accounts Receivable account on that date was $75,000. On January 2, prior to any credit sales, a $500 account from National Company was deemed to be uncollectible and written off.
Required:
A. Compute the net realizable (A/R – Allowance for Doubtful account) value of American’s receivables on January 1.    _________________

B. Present the journal entry American would record on January 2 related to the write-off of National’s account.

C. Compute the net realizable value of American’s receivables on January 2, immediately following the write-off of National’s account.          _________

24. Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

 

Calculate the accounts receivable turnover for 2011 and 2010:
2010   ______________ 2011  ____________
25. Cyclone Inc. reported the following figures from their financial statements for the years 2009 through 2011:

 

Calculate the days’ sales in receivables for 2011 and 2010:
2010 ______________
2011 ______________

26. A recent annual report for Pap’s Pop contained the following data:

 

A. Calculate the accounts receivable turnover ratio and average days’ sales in receivables for 2011.
A/R turnover _______________
Avg Days sales _______________

B. Explain the meaning of each number.
27. Why is the reconciliation of a company’s cash account to the bank statement so important for effective internal control for cash?

28. (4 points) A comparison of the balance in Cottonwood Company’s cash account (per its books) as of April 30, 2009, and the bank statement dated April 30, 2009, revealed the following information:

 

Required:
Prepare a bank reconciliation using the format below. Complete the form below, then determine the correct cash balance.
Note: If one or more of the items given above should not appear on the reconciliation statement, do not include the item(s).   Item code = item description

29. (5 points) Burke Company has just received its June 30 bank statement from Urban Bank. The bank statement and the cash account, summarized below, are to be reconciled for the month of June.

 

Required:
A. Prepare a bank reconciliation.
B. Give the journal entries that should be made in the accounts of Burke Company as a result of the above bank reconciliation.

30. What are “cash equivalents”? Specifically where would they appear on the financial statements?

 

31. You are the new manager of West Coast Company. The company distributes goods throughout the Rocky Mountain area. Customers are billed after the shipments are sent. Most customers pay within two weeks. You notice that one employee is responsible for opening all incoming payments, recording them in the accounting records, and depositing all receipts in the bank daily. When asked why this one person performed all of these duties, you were told that it was more efficient for one person to handle cash and to keep track of things. If any cash was missing, responsibility could be easily determined. Do you agree with this arrangement? If you were to make changes, what would you do, and why?

32. For each of the accounts listed below, indicate whether the typical or normal balance is a debit or credit.
A. Inventory  ____________
B. Notes payable ____________
C. Retained earnings ____________
D. Equipment ____________
E. Prepaid insurance ____________
F. Accounts receivable ____________
G. Land ____________
H. Contributed capital ____________
I. Accounts payable ____________
J. Unearned revenue  ____________

33.  Give a brief summary of what SOX is why it is important (essay)
Bonus 1 (+6 points max)  Al, Bill and Chad organized the ABC Corporation on January 1, 2009. Each of these owners invested $100,000 cash and received shares of stock. Below are selected transactions that were completed during January.
(A.) Give the entry on ABC’s books for each transaction:
1. Sold stock to the owners.
2. Borrowed $80,000 on one-year note payable.
3. Purchased land by signing a $70,000 note payable.
4. Paid $10,000 of accounts payable.
5. Purchased two service vehicles, $24,000 each; paid cash.
6. Purchased $2,000 of supplies on credit.

What is the net income?

Question 1
1. A firm has a return on equity of 13.1 percent, a net profit margin of 8.4 percent, and total equity of $743.1. What is the net income?
if 2 decimal only then answer will be $97.35 (Kindly check with the instructor about the decimals requirement and whether to mention or not $ symbol.)
1 points
Question 2
1. An investment is acceptable if the profitability index (PI) of the investment is:

greater than a pre-specified rate of return.

greater than one.

greater than the internal rate of return (IRR).

less than the net present value (NPV).

less than one.
1 points
Question 3
1. Suppose an investment offers to triple your money in 35 years. What annual rate of return are you being offered if interest is compounded monthly?
Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

1 points
Question 4
1. ABC Company has a debt-equity ratio of 0.62. What is the debt ratio?
Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

1 points
Question 5
1. Your firm has the following balance sheet statement items: total current liabilities of $325,000; total assets of $3,655,000; fixed and other assets of $1,770,000; and long-term debt of $200,000. What is the amount of the firm’s net working capital?

$325,000

$1,080,000

$1,560,000

$1,685,000

$1,885,000
1 points
Question 6
1. In 2012, ABC had operating income (EBIT) of $31,753, interest expense of $4,192, and dividend expense of $1,405. If the tax rate is 44%, what is the transfer to Retained Earnings?
Enter your answer rounded off to two decimal points.

1 points
Question 7
1. What is the net present value of the following cash flows? Assume an interest rate of 8.99%
Year  CF
0  -$10,981
1   $5,179
2   $6,481
3   $7,025
2.

3. Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answers box.
4.
1 points
Question 8
1. ABC’s current assets comprise of cash, accounts receivables, and inventory. ABC has $12,648 in cash, $6,279 in accounts receivables, and $10,259 in inventory. If the current ratio is 2.1 times, compute the quick ratio.
Note: Enter your answer rounded off to two decimal points. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

1 points
Question 9
1. Consider a taxable bond with a yield of 12.4% and a tax-exempt municipal bond with a yield of 4.2%. At what tax rate would you be indifferent between the two bonds?
Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

1 points
Question 10
1. A project has the following cash flows. What is the internal rate of return?
Year                     0              1                2              3
Cash flow     -$121,000      68,150     $42,200      $39,100

14.82%

13.47%

12.71%

13.85%

14.39%
1 points
Question 11
1. ABC is reviewing a project that will cost $1,324.The project will produce cash flows $457 at the end of each year for the first two years and $636 at the end of each year for the next two years. What is the profitability index? Assume interest rate is 10%.
Note: Enter your answer rounded off to two decimal points. For example, if your answer is 12.345 then enter as 12.35 in the answer box.

1 points
Question 12
1. If you put $238 in a savings account at the beginning of each year for 18 years, how much money will be in the account at the end of the 18th year? Assume that the interest rate is 7.
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

1 points
Question 13
1. ABC recently reported $22,546 of sales, $7,640 of operating costs other than depreciation, and $1,366 of depreciation.  The company had $5,818 of bonds that carry a 4% interest rate, and its income tax rate was 44%.  How much was its net cash flow?
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

1 points
Question 14
1. If you receive $348 at the end of each year for the first three years and $826 at the end of each year for the next three years. What is the present value? Assume interest rate is 6%.
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

1 points
Question 15
1. In its most recent financial statements, ABC reported $57,648 of net income and $640,616 of retained earnings. The previous retained earnings were $787,805. How much in dividends was paid to shareholders during the year?
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

1 points
Question 16
1. ABC Company has net income of $112,484, return on assets of 8.85 percent, and debt-equity ratio of 0.56. What is the return on equity?
Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

1 points
Question 17
1. Assume that a company has $140,022 of taxable income from operations plus $10,532 of interest income and $18,328 of dividend income. What is the company’s federal tax liability?

1 points
Question 18
1. What is the effective rate of 7% compounded monthly?
Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

1 points
Question 19
1. ABC Company earned $438,069 in taxable income for the year. How much tax does the company owe on this income?
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

1 points
Question 20
1. If you receive $1,566 at the end of each year for the first three years and $1,737 at the end of each year for the next two years. What is the future value of this cash flow stream? Assume interest rate is 7%.
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

1 points
Question 21
1. How many years will it take to double your money at 15% compounded semi-annually?
Enter your answer rounded off to TWO decimal points.

1 points
Question 22
1. ABC has the following data for the year ending 12/31/10:  Net income = $600; Net operating profit after taxes (NOPAT) = $3,455; Total assets = $2,500; Short-term investments = $200; Stockholders’ equity = $1,800; Total debt = $700; and Total operating capital = $6,609.  ABC’s weighted average cost of capital is 6%.  What is its economic value added (EVA)?
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

1 points
Question 23
1. ABC Company offers a perpetuity which pays annual payments of $18,791. This contract sells for $273,771 today. What is the interest rate?
Note: Enter your answer rounded off to two decimal points. Do not enter % in the answer box. For example, if your answer is 0.12345 then enter as 12.35 in the answer box.

1 points
Question 24
1. As the required rate of return is decreased, the:

PV decreases, FV decreases

PV increases, FV decreases

PV increases, FV increases

PV decreases, FV increases
1 points
Question 25
1. John invests $15,000 into a retirement account. He expects to earn 12 percent, compounded monthly, on his money for the next 10 years. After that, for the next 15 years, he wants to be more conservative, so he only expects to earn 6 percent, compounded semi-annually. How much money will John have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account?
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

1 points
Question 26
1. You’ve decided to pursue higher education and enroll in a MS in Finance program.  If you borrowed $50,000 at a fixed interest rate of 7.5% and can only make payments of $5,000 per year to pay off the loan, at the end of this and each additional year.  How many years will it take before you can once again live debt-free?
Enter your answer in the answer box rounded off to TWO decimal points.

1 points
Question 27
1. Mansi Inc. is considering a project that has the following cash flow data.  What is the project’s payback?

Year              0        1        2        3
Cash flows      -$750     $300     $325     $350

2.85 years

1.91 years

2.36 years

2.59 years

2.12 years
1 points
Question 28
1. Consider a 7-year loan with annual payments at 5%. If the loan amount is $45,000, compute the principal repaid in the seventh year.
Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

What is the empirical probability of being at or exceeding this salary value?

Problem Set Week One

All statistical calculations will use the Employee Salary Data Set.
For assistance with these calculations, see the Recommended Resources for Week One.Measurement issues. Data, even numerically code variables, can be one of 4 levels – nominal, ordinal, interval, or ratio. It is important to identify which level a variable is, as this impacts the kind of analysis we can do with the data. For example, descriptive statistics such as means can only be done on interval or ratio level data. Please list, under each label, the variables in our data set that belong in each group..
The first step in analyzing data sets is to find some summary descriptive statistics for key variables. For salary, compa, age, Performance Rating, and Service; find the mean and standard deviation for 3 groups: overall sample, Females, and Males. You can use either the Data Analysis Descriptive Statistics tool or the Fx =average and =stdev functions. Note: Place data to the right, if you use Descriptive statistics, place that to the right as well:
What is the probability for a:
Randomly selected person being a male in grade E?
Randomly selected male being in grade E?
Why are the results different?
For each group (overall, females, and males) find::
The value that cuts off the top 1/3 salary in each group.
The z score for each value.
The normal curve probability of exceeding this score.
What is the empirical probability of being at or exceeding this salary value?
The score that cuts off the top 1/3 compa in each group.
The z score for each value.
The normal curve probability of exceeding this score.
What is the empirical probability of being at or exceeding this salary value?
How do you interpret the relationship between the data sets? What do they mean about our equal pay for equal work question?
Equal Pay Conclusions:
What conclusions can you make about the issue of male and male pay equality? Are all of the results consistent?
What is the difference between the salary and compa measures of pay?
Conclusions from looking at salary results:
Conclusions from looking at compa results:
Do both salary measures show the same results?
Can we make any conclusions about equal pay for equal work yet?
Carefully review the Grading Rubric for the criteria that will be used to evaluate your assignment.

Discussion of four items from the management discussion of the firm that support the conclusion formed in your discussion of the financial results.

This Portfolio Project has two parts: calculations and a 4- to 6-page essay. While the calculation requirements of this assignment are important, equally important are your discussion and analysis of the quantitative results. You will submit two documents:
1) a spreadsheet containing your horizontal and vertical analysis (and perhaps your ratios) and
2) a word document containing your essay.
Choose a publicly traded company (e.g Amazon.com, Inc.) and perform an expanded analysis on the financial statements. Please use the most current 10K statements available on www.sec.gov http://www.sec.gov or annual statements in finance.yahoo.com http://finance.yahoo.com. You will submit both parts separately.

Web address to Amazon.com Inc. 10K: http://www.sec.gov/Archives/edgar/data/1018724/000101872414000006/amzn-20131231x10k.htm#s754BEB5134F9D6CAAF6900E925500E94

Part 1: Please complete the following for your chosen firm (Amazon.com, Inc.) in an Excel spreadsheet:

Horizontal and vertical analysis of the Income Statements for the past three years (all yearly balances set as a percentage of total revenues for that year).
Horizontal and vertical analysis of the Balance Sheets for the past three years (all yearly balances set as a percentage of total assets for that year).
Ratio analysis (eight ratios of your choosing) for the past three years PLUS a measurement for the creditworthiness of your firm as measured by Altman’s Z-score. Note that if you used your chosen firm for our ratio-related discussion posts, then you MUST also present industry-average ratios or current year competitor ratios for your ratio analysis. Comparing your firm’s ratios to a close competitor or an industry-average ratio makes your analysis much more meaningful.

Part 2: The Paper:

4-6 pages in length.
Include a proper introduction and conclusion.
Include a reference page.
Your paper should provide your reader with an overall understanding of the financial health of your chosen firm including the following:
Discussion of the ratio analysis results, including rationale for the ratios chosen.
Discussion of all horizontal and vertical analysis from above.
Discussion of four items from the management discussion of the firm that support the conclusion formed in your discussion of the financial results.

Much of this course has concentrated on learning the financial statements, primarily because there was not an accounting prerequisite. Because of this concentration, you may find this assignment challenging. However, if you understand the financial statements, then the horizontal and vertical analysis should (hopefully) be rather intuitive. For example, if you see sales rise by 20%, then shouldn’t you also see net income rise by 20% or more if the managers are effective at controlling costs? If you see sales rise by 20% and assets rise by 40%, we have to ask why this is happening. It would appear that assets have risen too far given the sales that are generated from those assets—why did this occur? You may have to research that type of question and discuss it in your analysis.

What is Roop’s annual before-tax interest savings on the convertible issue versus a straight-debt issue?

19-3 Maese Industries Inc. has warrants outstanding that permit the holders to purchase 1 share of stock per warrant at a price of $28.50.
a. Calculate the exercise value of the firm’s warrants if the common sells at each of the following prices: (1) $20, (2) $25, (3) $30, (4) $100. (Hint: A warrant’s exercise value is the difference between the stock price and the purchase price specified by the warrant if the warrant were to be exercised.)
b. Assume the firm’s stock now sells for $20 per share. The company wants to sell some 20-year, $1,000 par value bonds with interest paid annually. Each bond will have attached 50 warrants, each exercisable into 1 share of stock at an exercise price of $28.50. The firm’s straight bonds yield 11%. Assume that each warrant will have a market value of $3 when the stock sells at $20. What coupon interest rate, and dollar coupon, must the company set on the bonds with warrants if they are to clear the market? (Hint: The convertible bond should have an initial price of $1,000.)

19-4 The Tsetsekos Company was planning to finance an expansion. The principal executives of the company all agreed that an industrial company such as theirs should finance growth by means of common stock rather than by debt. However, they felt that the current $42 per share price of the company’s common stock did not reflect its true worth, so they decided to sell a convertible security. They considered a convertible debenture but feared the burden of fixed interest charges if the common stock did not rise enough in price to make conversion attractive. They decided on an issue of convertible preferred stock, which would pay a dividend of $2.10 per share.
a. The conversion ratio will be 1.0; that is, each share of convertible preferred can be converted into a single share of common. Therefore, the convertible’s par value (and also the issue price) will be equal to the conversion price, which in turn will be determined as a premium (i.e., the percentage by which the conversion price exceeds the stock price) over the current market price of the common stock. What will the conversion price be if it is set at a 18% premium? At a 23% premium?
b. Should the preferred stock include a call provision? Why?

19-5 Fifteen years ago, Roop Industries sold $400 million of convertible bonds. The bonds had a 40-year maturity, a 5.75% coupon rate, and paid interest annually. They were sold at their $1,000 par value. The conversion price was set at $55.00, and the common stock price was $55 per share. The bonds were subordinated debentures and were given an A rating; straight nonconvertible debentures of the same quality yielded about 8.75% at the time Roop’s bonds were issued.
a. Calculate the premium on the bonds—that is, the percentage excess of the conversion price over the stock price at the time of issue.
b. What is Roop’s annual before-tax interest savings on the convertible issue versus a straight-debt issue?
c. At the time the bonds were issued, what was the value per bond of the conversion feature?
d. Suppose the price of Roop’s common stock fell from $55 on the day the bonds were issued to $45.00 now, 15 years after the issue date (also assume the stock price never exceeded $55.00). Assume interest rates remained constant. What is the current price of the straight-bond portion of the convertible bond? What is the current value if a bondholder converts a bond? Do you think it is likely that the bonds will be converted?
e. The bonds originally sold for $1,000. If interest rates on A-rated bonds had remained constant at 8.75% and if the stock price had fallen to $45.00, then what do you think would have happened to the price of the convertible bonds? (Assume no change in the standard deviation of stock returns.)
f. Now suppose that the price of Roop’s common stock had fallen from $55 on the day the bonds were issued to $45.00 at present, 15 years after the issue. Suppose also that the interest rate on similar straight debt had fallen from 8.75% to 7.75%. Under these conditions, what is the current price of the straight-bond portion of the convertible bond? What is the current value if a bondholder converts a bond? What do you think would have happened to the price of the bonds?

19-7 Niendorf Incorporated needs to raise $35 million to construct production facilities for a new type of USB memory device. The firm’s straight nonconvertible debentures currently yield 10%. Its stock sells for $27 per share, has an expected constant growth rate of 5%, and has an expected dividend yield of 6%, for a total expected return on equity of 12%. Investment bankers have tentatively proposed that the firm raise the $25 million by issuing convertible debentures. These convertibles would have a $1,000 par value, carry a coupon rate of 8%, have a 20-year maturity, and be convertible into 35 shares of stock. Coupon payments would be made annually. The bonds would be noncallable for 5 years, after which they would be callable at a price of $1,075; this call price would decline by $5 per year in Year 6 and each year thereafter. For simplicity, assume that the bonds may be called or converted only at the end of a year, immediately after the coupon and dividend payments. Also assume that management would call eligible bonds if the conversion value exceeded 20% of par value (not 20% of call price).
a. At what year do you expect the bonds will be forced into conversion with a call? What is the bond’s value in conversion when it is converted at this time? What is the cash flow to the bondholder when it is converted at this time? (Hint: The cash flow includes the conversion value and the coupon payment, because the conversion occurs immediately after the coupon is paid.)
b. What is the expected rate of return (i.e., the before-tax component cost) on the proposed convertible issue?

Which set of actions by the Fed would be most consistent with this policy?

The change in real GDP resulting from an initial change in spending can be calculated by:

A. Dividing the multiplier by the initial change in spending
B. Dividing the initial change in spending by the multiplier
C. Multiplying the multiplier by the initial change in spending
D. Adding the initial change in spending to the multiplier

The simple multiplier formula assumes the following, except:

A. The economy has excess capacity and room to expand output
B. Firms will raise prices as buyers buy more of their output
C. People will spend more if they earn additional income
D. Business firms will increase production if demand for their output increases

In 2008, the Federal government provided tax rebate checks to taxpayers in the hope that:

A. C would shift down
B. C would shift up
C. G would shift down
D. G would shift up

When the Federal government provides tax rebate checks to taxpayers, as it did in 2008, the intent is to push the aggregate expenditures schedule in the economy upwards.
A. True
B. False

The multiplier measures the change in real GDP that results from a given change in the price level.
A. True
B. False

When the Federal government provides tax rebate checks to taxpayers, as it did in 2008, the intent is to push the aggregate expenditures schedule in the economy upwards.
A. True
B. False

In the Great Recession of 2007-2009, the sector of the economy that decreased the most was G.
A. True
B. False

An economy characterized by high unemployment is likely to be:

A. Experiencing a high rate of economic growth
B. Experiencing hyperinflation
C. In a recessionary expenditure gap
D. In an inflationary expenditure gap

A commercial bank has checkable-deposit liabilities of $500,000, reserves of $150,000, and a required reserve ratio of 20 percent. The amount by which a single commercial bank and the amount by which the banking system can increase loans are respectively:

A. $30,000 and $150,000
B. $50,000 and $250,000
C. $50,000 and $500,000
D. $100,000 and $500,000

Lowering the reserve ratio:

A. increases the discount rate.
B. decreases the discount rate.
C. changes required reserves to excess reserves.
D. decreases the amount of excess reserves banks must keep.

The economy is experiencing a low rate of economic growth and the Fed decides to pursue an expansionary money policy. Which set of actions by the Fed would be most consistent with this policy?

A. Selling government securities and lowering the discount rate
B. Selling government securities and raising the discount rate
C. Buying government securities and raising the discount rate
D. Buying government securities and lowering the discount rate

Inflationary pressure is a growing problem for the economy. Therefore, the Federal Reserve decides to pursue a policy to reduce the inflationary pressure. Which policy changes by the Fed would reinforce each other to achieve that objective?

A. Selling government securities and raising the discount rate
B. Selling government securities and lowering the discount rate
C. Buying government securities and lowering the discount rate
D. Buying government securities and lowering the reserve ratio

The Federal Reserve Banks are owned by the:

A. federal government.
B. Board of Governors.
C. U.S. Treasury. Assignment Print View 7/29/14, 10:57 PM
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1. award:
1.00 point
2. award:
1.00 point
Assume a corporation has earnings before depreciation and taxes of $102,000, depreciation of $40,000,
and that it has a 35 percent tax bracket.
a. Compute its cash flow using the following format. (Input all answers as positive values.)
Earnings before depreciation and taxes $
Depreciation
Earnings before taxes $
Taxes
Earnings after taxes $
Depreciation
Cash flow $
b. How much would cash flow be if there were only $12,000 in depreciation? All other factors are the same.
Cash flow $
c. How much cash flow is lost due to the reduced depreciation from $40,000 to $12,000?
Cash flow lost $
View Hint #1
Worksheet Difficulty: Basic
Learning Objective: 12-02 Cash flow rather
than earnings is used in the capital
budgeting decision.
The Short-Line Railroad is considering a $120,000 investment in either of two companies. The cash flows
are as follows:
Year Electric Co. Water Works
1 $ 60,000 $ 30,000
2 30,000 30,000
3 30,000 60,000
4 – 10 20,000 20,000
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3. award:
2.00 points
a. Compute the payback period for both companies. (Round your answers to 1 decimal place.)
Payback Period
Electric Co. years
Water Works years
b. Which of the investments is superior from the information provided?
Water Works
Electric Co.
rev: 04_16_2014_QC_48106
Worksheet Difficulty: Basic
Learning Objective: 12-03 The payback
method considers the importance of
liquidity, but fails to consider the time value
of money.
X-treme Vitamin Company is considering two investments, both of which cost $44,000. The cash flows are
as follows:
Year Project A Project B
1 $46,000 $38,000
2 17,000 18,000
3 13,000 15,000
Use Appendix B for an approximate answer but calculate your final answer using the formula and financial
calculator methods.
a-1. Calculate the payback period for Project A and Project B. (Round your answers to 2 decimal
places.)
Payback Period
Project A year(s)
Project B year(s)
a-2. Which of the two projects should be chosen based on the payback method?
Project A
Project B
b-1. Calculate the net present value for Project A and Project B. Assume a cost of capital of 8 percent. (Do
not round intermediate calculations and round your final answers to 2 decimal places.)
Net Present Value
Project A $
Project B $
b-2. Which of the two projects should be chosen based on the net present value method?
Project A
Project B
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4. award:
1.00 point
5. award:
1.00 point
c. Should a firm normally have more confidence in the payback method or the net present value
method?
Net present value method
Payback method
View Hint #1
Worksheet
Learning Objective: 12-03 The payback
method considers the importance of
liquidity, but fails to consider the time value
of money.
Difficulty: Basic
Learning Objective: 12-04 The net present
value and internal rate of return are
generally the preferred methods of capital
budgeting analysis.
You buy a new piece of equipment for $30,204, and you receive a cash inflow of $4,100 per year for 14
years. Use Appendix D for an approximate answer but calculate your final answer using the financial
calculator method.
What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a
percent rounded to 2 decimal places.)
Internal rate of return %
View Hint #1
Worksheet Difficulty: Basic
Learning Objective: 12-04 The net present
value and internal rate of return are
generally the preferred methods of capital
budgeting analysis.
Home Security Systems is analyzing the purchase of manufacturing equipment that will cost $95,000. The
annual cash inflows for the next three years will be:
Year Cash Flow
1 $ 48,000
2 46,000
3 41,000
Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the financial
calculator method.
a. Determine the internal rate of return. (Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places.)
Internal rate of return %
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6. award:
2.00 points
7. award:
1.00 point
b. With a cost of capital of 15 percent, should the equipment be purchased?
Yes
No
Worksheet Difficulty: Basic
Learning Objective: 12-04 The net present
value and internal rate of return are
generally the preferred methods of capital
budgeting analysis.
The Pan American Bottling Co. is considering the purchase of a new machine that would increase the
speed of bottling and save money. The net cost of this machine is $69,000. The annual cash flows have the
following projections. Use Appendix B and Appendix D for an approximate answer but calculate your final
answer using the formula and financial calculator methods.
Year Cash Flow
1 $ 29,000
2 29,000
3 29,000
4 34,000
5 20,000
a. If the cost of capital is 13 percent, what is the net present value of selecting a new machine? (Do not
round intermediate calculations and round your final answer to 2 decimal places.)
Net present value $
b. What is the internal rate of return? (Do not round intermediate calculations. Enter your answer as a
percent rounded to 2 decimal places.)
Internal rate of return %
c. Should the project be accepted?
Yes
No
rev: 04_08_2014_48104
View Hint #1
Worksheet Difficulty: Intermediate
Learning Objective: 12-04 The net present
value and internal rate of return are
generally the preferred methods of capital
budgeting analysis.
Turner Video will invest $84,500 in a project. The firm’s cost of capital is 6 percent. The investment will
provide the following inflows. Use Appendix A for an approximate answer but calculate your final answer
Assignment Print View 7/29/14, 10:57 PM
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8. award:
2.00 points
using the formula and financial calculator methods.
Year Inflow
1 $ 28,000
2 30,000
3 34,000
4 38,000
5 42,000
The internal rate of return is 12 percent.
a. If the reinvestment assumption of the net present value method is used, what will be the total value of
the inflows after five years? (Assume the inflows come at the end of each year.) (Do not round
intermediate calculations and round your answer to 2 decimal places.)
Total value of inflows $
b. If the reinvestment assumption of the internal rate of return method is used, what will be the total value
of the inflows after five years? (Use the given internal rate of return. Do not round intermediate
calculations and round your answer to 2 decimal places.)
Total value of inflows $
c. Which investment assumption is better?
Reinvestment assumption of IRR
Reinvestment assumption of NPV
View Hint #1
Worksheet Difficulty: Intermediate
Learning Objective: 12-04 The net present
value and internal rate of return are
generally the preferred methods of capital
budgeting analysis.
Keller Construction is considering two new investments. Project E calls for the purchase of earthmoving
equipment. Project H represents an investment in a hydraulic lift. Keller wishes to use a net present value
profile in comparing the projects. The investment and cash flow patterns are as follows: Use Appendix B for
an approximate answer but calculate your final answer using the formula and financial calculator methods.
Project E Project H
($52,000 investment) ($47,000 investment)
Year Cash Flow Year Cash Flow
1 $ 10,000 1 $ 27,000
2 14,000 2 19,000
3 24,000 3 15,000
4 31,000
a. Determine the net present value of the projects based on a zero percent discount rate.
Net Present Value
Project E $
Project H $
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9. award:
4.00 points
10. award:
2.00 points
b. Determine the net present value of the projects based on a discount rate of 9 percent. (Do not round
intermediate calculations and round your answers to 2 decimal places.)
Net Present Value
Project E $
Project H $
c. If the projects are not mutually exclusive, which project(s) would you accept if the discount rate is 9
percent?
Project E
Project H
Both H and E
Worksheet Difficulty: Challenge
Learning Objective: 12-04 The net present
value and internal rate of return are
generally the preferred methods of capital
budgeting analysis.
Telstar Communications is going to purchase an asset for $620,000 that will produce $300,000 per year for
the next four years in earnings before depreciation and taxes. The asset will be depreciated using the threeyear
MACRS depreciation schedule in Table 12–12. (This represents four years of depreciation based on the
half-year convention.) The firm is in a 30 percent tax bracket.
Fill in the schedule below for the next four years. (Input all amounts as positive values. Round your
answers to the nearest whole dollar amount.)
Year 1 Year 2 Year 3 Year 4
Earnings before depreciation and taxes $ $ $ $
Depreciation
Earnings before taxes $ $ $ $
Taxes
Earnings after taxes $ $ $ $
Depreciation
Cash flow $ $ $ $
View Hint #1
Worksheet Difficulty: Challenge
Learning Objective: 12-02 Cash flow rather
than earnings is used in the capital
budgeting decision.
The Summitt Petroleum Corporation will purchase an asset that qualifies for three-year MACRS
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11. award:
2.00 points
depreciation. The cost is $160,000 and the asset will provide the following stream of earnings before
depreciation and taxes for the next four years: Use Table 12-12.
Year 1 $ 90,000
Year 2 101,000
Year 3 46,000
Year 4 44,000
The firm is in a 30 percent tax bracket and has a cost of capital of 16 percent. Use Appendix B for an
approximate answer but calculate your final answer using the formula and financial calculator methods.
a. Calculate the net present value. (Negative amount should be indicated by a minus sign. Do not
round intermediate calculations and round your answer to 2 decimal places.)
Net present value $
b. Under the net present value method, should Summitt Petroleum Corporation purchase the asset?
Yes
No
View Hint #1
Worksheet Difficulty: Challenge
Learning Objective: 12-04 The net present
value and internal rate of return are
generally the preferred methods of capital
budgeting analysis.
An asset was purchased three years ago for $200,000. It falls into the five-year category for MACRS
depreciation. The firm is in a 40 percent tax bracket. Use Table 12–12.
a. Compute the tax loss on the sale and the related tax benefit if the asset is sold now for $23,060. (Input
all amounts as positive values. Do not round intermediate calculations and round your answers
to whole dollars.)
Tax loss on the sale $
Tax benefit $
b. Compute the gain and related tax on the sale if the asset is sold now for $72,060. (Input all amounts as
positive values. Do not round intermediate calculations and round your answers to whole
dollars.)
Taxable gain $
Tax obligation $
View Hint #1
Assignment Print View 7/29/14, 10:57 PM
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12. award:
3.00 points
Worksheet Difficulty: Challenge
Learning Objective: 12-02 Cash flow rather
than earnings is used in the capital
budgeting decision.
DataPoint Engineering is considering the purchase of a new piece of equipment for $400,000. It has an
eight-year midpoint of its asset depreciation range (ADR). It will require an additional initial investment of
$220,000 in nondepreciable working capital. Seventy-five thousand dollars of this investment will be
recovered after the sixth year and will provide additional cash flow for that year. Income before depreciation
and taxes for the next six are shown in the following table. Use Table 12–11, Table 12–12. Use Appendix B for an
approximate answer but calculate your final answer using the formula and financial calculator methods.
Year Amount
1 $ 233,000
2 192,000
3 162,000
4 147,000
5 111,000
6 101,000
The tax rate is 30 percent. The cost of capital must be computed based on the following:
Cost
(aftertax) Weights
Debt Kd 8.20% 25%
Preferred stock Kp 12.80 15
Common equity
(retained earnings) Ke 17.00 60
a. Determine the annual depreciation schedule. (Do not round intermediate calculations. Round your
depreciation base and annual depreciation answers to the nearest whole dollar. Round your
percentage depreciation answers to 3 decimal places.)
Year
Depreciation
Base
Percentage
Depreciation
Annual
Depreciation
1 $ $
2
3
4
5
6
$
b. Determine the annual cash flow for each year. Be sure to include the recovered working capital in Year
6. (Do not round intermediate calculations and round your answers to 2 decimal places.)
Year Cash Flow
1 $
2
3
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13. award:
5.00 points
4
5
6
c. Determine the weighted average cost of capital. (Do not round intermediate calculations. Enter
your answer as a percent rounded to 2 decimal places.)
Weighted average cost of capital %
d-1. Determine the net present value. (Use the WACC from part c rounded to 2 decimal places as a
percent as the cost of capital (e.g., 12.34%). Do not round any other intermediate calculations.
Round your answer to 2 decimal places.)
Net present value $
d-2. Should DataPoint purchase the new equipment?
No
Yes
View Hint #1
Worksheet Difficulty: Challenge Learning Objective: 12-05 The discount or
cutoff rate is normally the cost of capital.
Hercules Exercise Equipment Co. purchased a computerized measuring device two years ago for $64,000.
The equipment falls into the five-year category for MACRS depreciation and can currently be sold for
$27,800.
A new piece of equipment will cost $154,000. It also falls into the five-year category for MACRS
depreciation.
Assume the new equipment would provide the following stream of added cost savings for the next six
years. Use Table 12–12. Use Appendix B for an approximate answer but calculate your final answer using the
formula and financial calculator methods.
Year Cash Savings
1 $65,000
2 57,000
3 55,000
4 53,000
5 50,000
6 39,000
The firm’s tax rate is 35 percent and the cost of capital is 8 percent.
a. What is the book value of the old equipment? (Do not round intermediate calculations and round
your answer to the nearest whole dollar.)
Book value $
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b. What is the tax loss on the sale of the old equipment? (Do not round intermediate calculations and
round your answer to the nearest whole dollar.)
Tax loss $
c. What is the tax benefit from the sale? (Do not round intermediate calculations and round your
answer to the nearest whole dollar.)
Tax benefit $
d. What is the cash inflow from the sale of the old equipment? (Do not round intermediate
calculations and round your answer to the nearest whole dollar.)
Cash inflow $
e. What is the net cost of the new equipment? (Include the inflow from the sale of the old equipment.)
(Do not round intermediate calculations and round your answer to the nearest whole dollar.)
Net cost $
f. Determine the depreciation schedule for the new equipment. (Round the depreciation base and
annual depreciation answers to the nearest whole dollar. Round the percentage depreciation
factors to 3 decimal places.)
Year
Depreciation
Base
Percentage
Depreciation
Annual
Depreciation
1 $ $
2
3
4
5
6
$
g. Determine the depreciation schedule for the remaining years of the old equipment. (Round the
depreciation base and annual depreciation answers to the nearest whole dollar. Round the
percentage depreciation factors to 3 decimal places.)
Year
Depreciation
Base
Percentage
Depreciation
Annual
Depreciation
1 $ $
2
3
4
h. Determine the incremental depreciation between the old and new equipment and the related tax shield
benefits. (Enter the tax rate as a decimal rounded to 2 decimal places. Round all other answers
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to the nearest whole dollar.)
Year
Depreciation
on New
Equipment
Depreciation
on Old
Equipment
Incremental
Depreciation Tax Rate
Tax Shield
Benefits
1 $ $ $ $
2
3
4
5
6
i. Compute the aftertax benefits of the cost savings. (Enter the aftertax factor as a decimal rounded
to 2 decimal places. Round all other answers to the nearest whole dollar.)
Year Savings (1 – Tax Rate)
Aftertax
Savings
1 $65,000 $
2 57,000
3 55,000
4 53,000
5 50,000
6 39,000
j-1. Add the depreciation tax shield benefits and the aftertax cost savings to determine the total annual
benefits. (Do not round intermediate calculations and round your answers to the nearest whole
dollar.)
Year
Tax Shield
Benefits from
Depreciation
Aftertax
Cost Savings
Total Annual
Benefits
1 $ $
2
3
4
5
6
j-2. Compute the present value of the total annual benefits. (Do not round intermediate calculations
and round your answer to the nearest whole dollar.)
Total annual benefits $
k-1. Compare the present value of the incremental benefits (j) to the net cost of the new equipment (e).
(Do not round intermediate calculations. Negative amount should be indicated by a minus sign.
Round your answer to the nearest whole dollar.)
Net present value $
k-2. Should the replacement be undertaken?
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14. award:
2.00 points
15. award:
2.00 points
Yes
No
View Hint #1
Worksheet Difficulty: Challenge
Learning Objective: 12-04 The net present
value and internal rate of return are
generally the preferred methods of capital
budgeting analysis.
Assume you are risk-averse and have the following three choices.
Expected
Value
Standard
Deviation
A $1,830 $ 970
B 2,760 1,850
C 1,680 1,330
a. Compute the coefficient of variation for each. (Round your answers to 3 decimal places.)
Projects
Coefficient of
Variation
A
B
C
b. Which project will you select?
Project B
Project C
Project A
View Hint #1
Worksheet Difficulty: Basic
Learning Objective: 13-02 Most investors
are risk-averse, which means they dislike
uncertainty.
Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales
and the probabilities of their occurrence are given next:
Possible
Market Reaction
Sales in
Units Probabilities
Low response 30 .30
Moderate response 45 .20
High response 50 .30
Very high response 75 .20
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16. award:
3.00 points
17. award:
2.00 points
a. What is the expected value of unit sales for the new product? (Do not round intermediate calculations
and round your answer to the nearest whole unit.)
Expected value units
b. What is the standard deviation of unit sales? (Do not round intermediate calculations. Round your
answer to 2 decimal places.)
Standard deviation units
View Hint #1
Worksheet Difficulty: Basic
Learning Objective: 13-01 The concept of
risk is based on uncertainty about future
outcomes. It requires the computation of
quantitative measures as well as qualitative
considerations.
Shack Homebuilders Limited is evaluating a new promotional campaign that could increase home sales.
Possible outcomes and probabilities of the outcomes are shown next.
Possible Outcomes
Additional
Sales in Units Probabilities
Ineffective campaign 50 .30
Normal response 110 .30
Extremely effective 130 .40
Compute the coefficient of variation. (Do not round intermediate calculations. Round your answer to 3
decimal places.)
Coefficient of variation
View Hint #1
Worksheet Difficulty: Basic
Learning Objective: 13-01 The concept of
risk is based on uncertainty about future
outcomes. It requires the computation of
quantitative measures as well as qualitative
considerations.
Five investment alternatives have the following returns and standard deviations of returns.
Alternatives
Returns:
Expected Value
Standard
Deviation
A $ 1,820 $ 550
B 860 1,030
C 5,900 1,200
D 1,980 540
E 61,000 22,100
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18. award:
2.00 points
Calculate the coefficient of variation and rank the five alternatives from lowest risk to the highest risk by
using the coefficient of variation. (Round your answers to 3 decimal places.)
Alternatives
Coefficient of
Variation Rank
A (Click to select)
B (Click to select)
C (Click to select)
D (Click to select)
E (Click to select)
Worksheet Difficulty: Basic
Learning Objective: 13-01 The concept of
risk is based on uncertainty about future
outcomes. It requires the computation of
quantitative measures as well as qualitative
considerations.
Tim Trepid is highly risk-averse while Mike Macho actually enjoys taking a risk.
Investments
Returns:
Expected Value
Standard
Deviation
Buy stocks $ 8,880 $ 6,030
Buy bonds 7,720 2,050
Buy commodity futures 17,200 23,200
Buy options 18,700 12,900
a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.)
Coefficient of
Variation
Buy stocks
Buy bonds
Buy commodity futures
Buy options
a-2. Which one of the following four investments should Tim choose?
Buy bonds
Buy stocks
Buy commodity futures
Buy options
b. Which one of the four investments should Mike choose?
Buy bonds
Buy stocks
Buy commodity futures
Buy options
View Hint #1
Assignment Print View 7/29/14, 10:57 PM
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19. award:
2.00 points
20. award:
2.00 points
Worksheet Difficulty: Basic
Learning Objective: 13-02 Most investors
are risk-averse, which means they dislike
uncertainty.
Mountain Ski Corp. was set up to take large risks and is willing to take the greatest risk possible. Lakeway
Train Co. is more typical of the average corporation and is risk-averse.
Projects
Returns:
Expected Value
Standard
Deviation
A $269,000 $143,000
B 734,000 462,000
C 153,000 120,000
D 163,000 298,000
a-1. Compute the coefficients of variation. (Round your answers to 3 decimal places.)
Coefficient of
Variation
Project A
Project B
Project C
Project D
a-2. Which projects should Mountain Ski Corp. choose?
Project A
Project B
Project D
Project C
b. Which one of the four projects should Lakeway Train Co. choose based on the same criteria of using
the coefficient of variation?
Project B
Project A
Project C
Project D
View Hint #1
Worksheet Difficulty: Basic
Learning Objective: 13-02 Most investors
are risk-averse, which means they dislike
uncertainty.
Waste Industries is evaluating a $53,800 project with the following cash flows.
Years Cash Flows
1 $ 9,240
2 15,900
3 22,600
4 21,300
5 33,000
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21. award:
2.00 points
The coefficient of variation for the project is .975.
Coefficient of
Variation Discount Rate
0 − .25 4%
.26 − .50 9%
.51 − .75 10%
.76 − 1.00 12%
1.01 − 1.25 18%
Use Appendix B for an approximate answer but calculate your final answer using the formula and financial
calculator methods.
a. Select the appropriate discount rate.
4%
9%
10%
12%
18%
b. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not
round intermediate calculations and round your answer to 2 decimal places.)
Net present value $
c. Based on the net present value should the project be undertaken?
No
Yes
View Hint #1
Worksheet Difficulty: Intermediate
Learning Objective: 13-03 Because
investors dislike uncertainty, they will
require higher rates of return from risky
projects.
Dixie Dynamite Company is evaluating two methods of blowing up old buildings for commercial purposes
over the next five years. Method one (implosion) is relatively low in risk for this business and will carry a 11
percent discount rate. Method two (explosion) is less expensive to perform but more dangerous and will call
for a higher discount rate of 16 percent. Either method will require an initial capital outlay of $102,000. The
inflows from projected business over the next five years are given next.
Years Method 1 Method 2
1 $32,100 $17,600
2 38,500 25,500
3 47,800 40,400
4 35,100 37,000
5 20,600 72,200
Assignment Print View 7/29/14, 10:57 PM
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22. award:
2.00 points
Use Appendix B for an approximate answer but calculate your final answers using the formula and financial
calculator methods.
a. Calculate net present value for Method 1 and Method 2. (Do not round intermediate calculations and
round your answers to 2 decimal places.)
Net Present Value
Method 1 $
Method 2 $
b. Which method should be selected using net present value analysis?
Method 1
Method 2
Neither of these
View Hint #1
Worksheet Difficulty: Intermediate
Learning Objective: 13-03 Because
investors dislike uncertainty, they will
require higher rates of return from risky
projects.
Debby’s Dance Studios is considering the purchase of new sound equipment that will enhance the
popularity of its aerobics dancing. The equipment will cost $26,300. Debby is not sure how many members
the new equipment will attract, but she estimates that her increased annual cash flows for each of the next
five years will have the following probability distribution. Debby’s cost of capital is 12 percent. Use Appendix
D for an approximate answer but calculate your final answers using the formula and financial calculator
methods.
Cash Flow Probability
$ 3,890 .2
5,190 .3
7,550 .4
9,800 .1
a. What is the expected value of the cash flow? The value you compute will apply to each of the five years.
Expected Cash Flow $
b. What is the expected net present value? (Negative amount should be indicated by a minus sign. Do
not round intermediate calculations and round your answer to 2 decimal places. )
Net Present Value $
c. Should Debby buy the new equipment?
Yes
No
View Hint #1
Assignment Print View 7/29/14, 10:57 PM
http://ezto.mheducation.com/hm.tpx Page 18 of 18
23. award:
2.00 points
Worksheet Difficulty: Intermediate
Learning Objective: 13-01 The concept of
risk is based on uncertainty about future
outcomes. It requires the computation of
quantitative measures as well as qualitative
considerations.
Highland Mining and Minerals Co. is considering the purchase of two gold mines. Only one investment will
be made. The Australian gold mine will cost $1,694,000 and will produce $359,000 per year in years 5
through 15 and $532,000 per year in years 16 through 25. The U.S. gold mine will cost $2,085,000 and will
produce $295,000 per year for the next 25 years. The cost of capital is 11 percent. Use Appendix D for an
approximate answer but calculate your final answers using the formula and financial calculator methods.
(Note: In looking up present value factors for this problem, you need to work with the concept of a deferred
annuity for the Australian mine. The returns in years 5 through 15 actually represent 11 years; the returns in
years 16 through 25 represent 10 years.)
a-1. Calculate the net present value for each project. (Do not round intermediate calculations and
round your answers to 2 decimal places.)
Net Present Value
The Australian mine $
The U.S. mine $
a-2. Which investment should be made?
Australian mine
U.S. mine
b-1. Assume the Australian mine justifies an extra 5 percent premium over the normal cost of capital
because of its riskiness and relative uncertainty of cash flows. Calculate the new net present value
given this assumption. (Negative amount should be indicated by a minus sign. Do not round
intermediate calculations and round your answer to 2 decimal places.)
Net Present Value
The Australian mine $
b-2. Does the new assumption change the investment decision?
Yes
No
View Hint #1
Worksheet Difficulty: Challenge
Learning Objective: 13-01 The concept of
risk is based on uncertainty about future
outcomes. It requires the computation of
quantitative measures as well as qualitative
considerations.
D. member banks.

In the United States, all money is essentially the debt of government, commercial banks, and thrift institutions.
A. True
B. False

Currency and checkable deposits are:

A. debts of the Federal Reserve Banks or of financial institutions.
B. redeemable for gold and silver from the Federal Reserve System.
C. of intrinsic value that determines the relative worth of money.
D. the major components of the M3 definition of the money supply.

Evaluate your industry in terms of the five factors that determine and industry’s intensity of competition. 

CHAPTER 13:

 

Problem 4:  Evaluate your industry in terms of the five factors that determine and industry’s intensity of competition.  Based on this analysis, what are your expectations about the industry’s profitability in the short run ( 1 or 2 years) and the long run ( 5 to 10 years)?

 

Problem 5:  Using Standard and Poor’s Analysts’ Handbook or anopther source, plot the lates 10 years history of the opearating profit margin for the S&P Industrial Index or anothe aggregate market setries versus and industry of your choice.  Is there a positive, negative, or zero correlation?

 

Problem 7:  Prepare a table listing the variable that nfluence the earning multiplier for your chosen industry and the marker index series for the most recent 10 years.

 

(a)   Do the average dvidend payout ratos for your indystrt abd tge narket index differ?  How should the dividend payout influence the difference between the the multipliers?

 

(c)    Analyze and discuss the different components of growth ( retention rate, tatal asset turnover, total assets/equity, and profit margin) for your chosen industry and a market index during the mostrecent 10 years.  Based on this analysis, how would you expect the growth rate for your industry to compare with the growth rate of the market index?  How would this difference in expected growth affect the multipler?

What dividends do you expect for Goodman Industries stock over the next 3 years if you expect you expect the dividend to grow at the rate of 5% per year for the next 3 years?

Directions: Answer the following questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. This homework assignment is worth 100 points.

 

Use the following information for questions 1 through 8:

 

The Goodman Industries’ and Landry Incorporated’s stock prices and dividends, along with the Market

 

Index, are shown below. Stock prices are reported for December 31 of each year, and dividends reflect those paid during the year. The market data are adjusted to include dividends.

 

Goodman Industries   Landry Incorporated Market Index  
Year Stock Price Dividend Stock Price Dividend Includes Dividends
2013 $25.88 $1.73 $73.13 $4.50 17.49 5.97
2012 22.13 1.59 78.45 4.35 13.17 8.55
2011 24.75 1.50 73.13 4.13 13.01 9.97
2010 16.13 1.43 85.88 3.75 9.65 1.05
2009 17.06 1.35 90.00 3.38 8.40 3.42
2008 11.44 1.28 83.63 3.00 7.05 8.96

 

1.      Use the data given to calculate annual returns for Goodman, Landry, and the Market Index, and then calculate average annual returns for the two stocks and the index. (Hint: Remember, returns are calculated by subtracting the beginning price from the ending price to get the capital gain or loss, adding the dividend to the capital gain or loss, and then dividing the result by the beginning price. Assume that dividends are already included in the index. Also, you cannot calculate the rate of return for 2008 because you do not have 2007 data.)

 

2.      Calculate the standard deviations of the returns for Goodman, Landry, and the Market Index. (Hint: Use the sample standard deviation formula given in the chapter, which corresponds to the STDEV function in Excel.)

 

3.      Estimate Goodman’s and Landry’s betas as the slopes of regression lines with stock return on the vertical axis (y-axis) and market return on the horizontal axis (x-axis). (Hint: Use Excel’s SLOPE function.) Are these betas consistent with your graph?

 

4.      The risk-free rate on long-term Treasury bonds is 6.04%. Assume that the market risk premium is 5%. What is the required return on the market using the SML equation?

 

5.      If you formed a portfolio that consisted of 50% Goodman stock and 50% Landry stock, what would be its beta and its required return?

 

6.      What dividends do you expect for Goodman Industries stock over the next 3 years if you expect you expect the dividend to grow at the rate of 5% per year for the next 3 years? In other words, calculate D1, D2, and D3. Note that D0 = $1.50.

 

7.      Assume that Goodman Industries’ stock, currently trading at $27.05, has a required return of 13%. You will use this required return rate to discount dividends. Find the present value of the dividend stream; that is, calculate the PV of D1, D2, and D3, and then sum these PVs.

 

  1. If you plan to buy the stock, hold it for 3 years, and then sell it for $27.05, what is the most you should pay for it?

 

Use the following information for Question 9:

 

Suppose now that the Goodman Industries (1) trades at a current stock price of $30 with a (2) strike price of $35. Given the following additional information: (3) time to expiration is 4 months, (4) annualized risk-free rate is 5%, and (5) variance of stock return is 0.25.

 

9.   What is the price for a call option using the Black-Scholes Model?

Determine whether or not changes in the cost of capital could ever cause a change in the internal rate of return (IRR) ranking of two (2).

Determine whether or not changes in the cost of capital could ever cause a change in the internal rate of return (IRR) ranking of two (2).

Click the link above to respond to the discussion. If you need help with completing discussions please click here for more information.

“Capital Budgeting and Risk Analysis” Please respond to the following:

·         * From the e-Activity, analyze the reasons why the short-term project that you have chosen might be ranked higher under the NPV criterion if the cost of capital is high, while the long-term project might be deemed better if the cost of capital is low. Determine whether or not changes in the cost of capital could ever cause a change in the internal rate of return (IRR) ranking of two (2).

 

·         * From the scenario, take a position for or against TFC’s decision to expand to the West Coast. Provide a rationale for your response in which you cite at least two (2) capital budgeting techniques (e.g., NPV, IRR, Payback Period, etc.) that you used to arrive at your decision.

Use the MRP form supplied and print the spreadsheets (landscape) two to a page (3 pages total). 

BA 357: Summer 2013

 Assignment – 2

Due August 5

 

 

                                                       

Background:

Your company has just acquired a new subsidiary that makes two products, Clodhopper and Clodbuster.  The Clodhopper is intended for the general consumer market and its demand is higher and more seasonal than the Clodbuster, which is intended for the commercial user market. Both products share a number of component parts and subassemblies, primarily differing in their engine and tiller subassemblies.  All of the managers at the acquired company quit the day your company took possession. You are the person who has been assigned to run this acquisition. Since all of the managers quit, the only planning information you have is historical data.

 

 

Assignment:

Your task is to create material requirements plans for items C, E, H, K, P, and L.

  • Use the MRP form supplied and print the spreadsheets (landscape) two to a page (3 pages total).  Fill in all appropriate data (lot size, ordering rule, etc).
  • Do not make any changes to the format/layout of the spreadsheet.  This is one place in industry where creativity in presenting data is not appreciated since many of the cells in the forms are normally linked, and changes can lead to significant errors in the results.
  • Use the comment function to show the formula for “projected on-hand inventory.”  The formula must be understandable (e.g. ”beginning inventory + production…” NOT “D12 + E12…”).
  • Use the header function to show your name in the upper right corner of all pages.
  • Staple the three landscape pages in the upper right corner, in the order C & E on the first page, H & K on the second page, and P & L on the third page (no cover sheet).

 

 

Part 2 Data:

The Assn – 3 Student” spreadsheet contains five different worksheets:

  • MPS approved plans for Clodhopper and Clodbuster for the first three months of 2010.
  • Bill of materials data for ClodHopper and ClodBuster, including quantities required per product and assembly times/lead times
  • Inventory records and lot-sizing rules for all subassemblies and component parts
  • Scheduled receipts (production commitments and purchase orders that have been scheduled by previous MPS and MRP plans for delivery in 2010.
  • MRP form to use for the items requested above

 

Additional information:

  • Remember that the FOQ lot-sizing rule allows multiple orders. That is, if your plan requires 450 units in a given period, current inventory is 75 units, and the FOQ order size is 100 units, then you would request 400 units (four orders) from the vendor or assembly production line.
  • For items purchased using the POQ lot-sizing rule, consider that the time between orders begins at the start of the plans. That is, if the POQ period is 3, you can only have planned receipts (or scheduled receipts) in periods 1, 4, 7, and so on.  Unlike the other ordering schemes where you first determine when a new order must be received and then schedule the order earlier according to the lead time, for POQ you look at future needs that must be satisfied until another POQ order can be placed.
  • Do not schedule MRP planned orders in the line for scheduled receipt items. Scheduled receipts have already been started or ordered on previous MRP plans for delivery in 2010 and you are not allowed to make any additional entries on this line. The values on this line are to be added to the projected on-hand inventory when each scheduled receipt arrives.  Do not reflect the scheduled receipts into planned order releases.
  • Some parts and subassemblies have desired safety stock levels. Be sure to order enough or early enough to ensure these levels are maintained, limited only by any lead-time constraints.  When there is no safety stock, maintain the projected on-hand greater than or equal to zero.
  • Use the power of Excel as much as possible for filling out your MRP forms. Doing so will save you considerable time in completing your assignment and is representative of how these processes are done in industry.  Use the comment function to show the formula for “projected on-hand inventory.”
    Hint: Entering new order quantities (planned receipts) when needed is best done manually whenever the on-hand inventory values indicate that you would not have enough unless an order is placed.

 

 

Part 2 Grading:

There are 75 points possible on this assignment.  Grading criteria include proper application of the planning methods, following all directions, and professional appearance.

 

 

Use the Excel file: Class Assn – 2 Student for the required information and MRP forms