Assignment- Principles of Finance
1. What is the cycle of money? Who participates in the cycle of money?
2. Describe the difference between financial markets and financial intermediaries?
3. What is the difference between the primary market and the secondary market?
4. Find the operating cash flow for the year for Harper Brothers Incorporated if they had sales revenue of $300,000,000, cost of goods sold of $140,000,000, sales and administrative costs of $40,000,000, depreciation expense of $65,000,000, and a tax rate of 40%.
5. The Portland Stallions professional football team is looking at its future revenue stream from ticket sales. Currently, a season package costs $325 per seat. The Portland Stallions box office has promised season ticket holders this same rate for the next three years. Four years from now, the organization will raise season ticket prices based on the estimated inflation rate of 3.25%. What will the season tickets sell for in four years?
6. Upstate University charges $16,000 a year in graduate tuition. Tuition rates are growing at 4.5% each year. You plan on enrolling in graduate school in five years. What is your expected graduate tuition in five years?
7. The State of Confusion wants to change the current retirement policy for state employees. To do so, however, the state must pay the current pension fund members the present value of their promised future payments. There are 240,000 current employees in the state pension fund. The average employee is twenty-two years away from retirement, and the average promised future retirement benefit is $400,000 per employee. If the state has a discount rate of 5% on all its funds, how much money will the state have to pay to the employees before it can start a new pension plan?
8. Two mutual fund managers, Martha and David, have been bragging about whose fund is the top performer. Martha states that investors bought shares in her mutual fund ten years ago for $21.00, and those shares are now worth $65.00. David states that investors bought shares in his mutual fund for only $3.00 six years ago, and now they are worth $7.30. Which mutual fund manager has had the highest growth rate for the management period? Should this comparison be made over different management periods? Why or why not?
9. Susan Norman seeks your financial advice. She wants to know how long it will take for her to become a millionaire. She tells you that she has $1,330 today and wants to invest it in an aggressive stock portfolio. The historical return on this type of investment is 18% per year. How long will she have to wait if the $1,330 is the only amount she invests and she never withdraws from the market until she reaches her $1 million? (Assume no taxes on the earnings). What if the rate of return is only 14% annually? What if the rate of return is only 10% annually?
10. Let's consider the retirement plan of a couple. Currently, the couple has four different investments: a 401(k) plan, two pension plans, and a personal portfolio. The couple is five years away from retirement. They believe they have sufficient money in their plans today so that they do not have to contribute to the plans over the next five years and will still meet their $2 million retirement goal. Here are the current values and the growth rate of each plan:
401(k): $88,000 growing at 6.5%
Pension plan 1: $304,000 growing at 7%
Pension plan 2: $214,000 growing at 7.25%
Personal portfolio: $149,000 growing at 8.5%
Does the couple have enough already invested to make their goal in five years?
Hint: View each payment as a separate problem and find the future value of each lump sum. Then add up all the future values five years from now.