Introduction to Finance
For all questions please: Show Formula, Fill in Formula, and Solve
2.A2 If a company reports a 7% profit margin, a total asset turnover of 1.8 and a total debt ratio of 0.72, what are its Return on assets (ROA) and Return on Equity (ROE)?
2.A3 Consider the Following:
Credit Sales 17,465
Cost of goods sold 12,216
Accounts Receivable 3,210
Accounts Payable 2,230
How long does it take this company to collect on its sales? How long to pay its suppliers?
4.1 Currently, Jack Morris makes $85.000 per annum. Next year his income will be $108,000. Jack is a big spender and wants to consume $135,000 a year. The equilibrium interest rate is 7%. What will be Jack’s consumption potential next year if he consumes $135,000 this year?
4.3 Ben earns $4,000 this year and zero income the next year. Ben also has an investment opportunity in which he can invest $2,000 and receive $3,000 next year. Suppose Ben consumes $1,000 this year, invests in the project, and consumes $4,150 next year.
A.) What is the market rate?
B.) Suppose the interest rate increases. What will happen to Ben’s consumption for this year? Is Ben better or worse off than before the interest rate rise?
5.1 First Bank pays 8% simple interest on its savings account balances whereas Second City Bank pays 8% interest compounded annually. If you make a $5,000 deposit in each bank, how much more money would you make from your Second City Bank account at the end of 10 years?
5.2 Compute the future value of $1,000 compounded annulally for
a.) 10 years at 5%
b.) 10 years at 10%
c.) 20 years at 5%
Why is he interest earned in (b) not twice the amount earned in (a)?
5.4 Solve for the unknown interest rate in each of the following
Present Value years interest rate Future Value
$ 242 4 $ 307
410 8 896
51,700 16 162,181
18,750 27 483,500
5.8 Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2010, Deutscher-Menzies sold Arkies under the Shower, a painting by renowned Australian painter Brett Whiteley, at auction for a price of $1,100,000. Unfortunately for the previous owner, he had purchased it three years earlier at a price of $1,680,000. What was his annual rate of return on his painting?
5.9 An investor purchasing a British consol is entitled to receive annual payments from the British Government forever. What is the price of a consol that pays $150 annually if the next payment occurs one year from today? The market interest rate is 4.6%
5.11 Conoly Co. has identified an investment project with the following cash flows. If the discount rate is 10%, what is the PV of these cash flows? What is the PV at 18%? 24%?
Year Cash Flow
1 $ 960
2 840
3 935
4 1,350
5.13 An investment offers $4,900 per year for 15 years, with the first payment occurring one year from now. If the required return is 8%, what is the value of the investment? What would the value be if payments occurred for 40 years? For 75 years? Forever?
5.17 First National Bank charges 11.2% compounded monthly on its business loans. First United Bank charges 11.4% compounded semi-annually. As a potential borrower, to which bank would you go for a new loan?
5.32 Barrett Pharmaceuticals is considering a drug project that costs $2.5 million today and is expected to generate end-of-year annual cash flows of $227,000, forever. At what discount rate would Barrett be indifferent between accepting and rejecting the project?
5.36 You’re prepared to make monthly payments of $350, beginning at the end of this month, into an account that pays 10% interest compounded monthly. How many payments will you have made when your account balance reaches 35,000?
5.39 The PV of the following cash flow stream is $7,300 when discounted at 8% annually. What is the value of the missing cash flow?
Year Cash Flow
1 1,500
2 ?
3 2,700
4 2,900
5.40 You just won the Ontario lottery. You will receive $1 million today plus another 10 annual payments that increase by $275,000 per year. Thus, in one year you receive $1.275 million. In two years, you get $1.55 million, and so on. If the appropriate interest rate is 9%, what is the PV of your winnings?
5.65A Your friend is celebrating her 30th birthday today and wants to start saving for her anticipated retirement at age 65. She wants to be able to withdraw $100,000 from her savings account on each birthday for 25 years following her retirement, with the first withdrawal on her 66th birthday. Your friend intends to invest her money in the local credit union, which offers 8% interest per year. She wants to make equal annual payments on each birthday into the account established at the credit union for her retirement fund.
If she starts making these deposits on her 30th birthday and continues to make deposits until she is 65 (the last deposit will be on her 65th birthday), what amount must she deposit annually to be able to make the desired withdrawals at retirement.