Principles of Agribusiness Finance
I.
1. Which one of the following entities is considered a legal "person"?
a. sole proprietorship
b. general partnership
c. limited partnership
d. corporation
2. The NYSE:
a. is all electronic and has its base of operations in New York City.
b. is best described as a centralized dealer market.
c. has the most stringent listing requirements of any U.S. exchange.
d. exists solely a primary market.
3. Which one of the following best describes the liability a general partner has for the partnership debts?
a. unlimited
b. liability limited to amount invested in the firm
c. liability limited based on percentage ownership
d. none
4. Collateralized Debt Obligations are structured asset-backed securities that are
a. issued by corporations to finance account receivables and inventories
b. guaranteed by the Government
c. split into different risk tranches with senior tranches being the safest
d. sold to the investors only interested in mortgage backed securities
5. The credit default swap (CDS) spread on ABC Corp is 400 basis points. What annual payment does a buyer of credit protection have to pay to insure $1 million of ABC Corp bonds?
a. $10,000.
b. $400,000.
c. $40,000.
d. nothing.
6. (continued from 3) In the event of default, the recovery rate is 50%. If investors are risk-neutral, what is the probability of default per year?
a. 1%
b. 10%
c. 4%
d. 8%
7. Fifteen years ago, your parents opened an investment account with an initial deposit of $5,000. Today, that account is worth $39,533.32. What average annual rate of return did they earn on their investment?
a. 14.47 percent
b. 14.59 percent
c. 14.78 percent
d. 15.03 percent
8. You currently have $7,200 in your investment account. You can earn an average rate of return of 11.7 percent per year. How long will you have to wait until your account is worth $50,000?
a. 9.47 years
b. 11.28 years
c. 14.67 years
d. 17.51 years
9. Bridgewater Bank pays 4 percent simple interest on its savings accounts. Tidewater Bank pays 4 percent interest, compounded annually on its savings accounts. Four years ago, Lew investet $3,000 in each bank. What is the difference, if any, in his account balances today?
a. $17.16
b. $29.58
c. $34.06
d. $35.42
10. Steve invested $2,500 this morning with The Branch Bank at 7 percent interest, compounded annually. After making this investment, he discovered that he could have invested his money with Tyler Bank and earned 7 percent interest, compounded quarterly. How much additional interest could Steve have earned over the next 5 years if he had invested with the Tyler Bank instead of with The Branch Bank?
a. $30.57
b. $48.11
c. $52.60
d. $57.20
II. The financial statements for PCS Corp. for the year ended December 31, 2009, are presented below.
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Income Statement For the Year Ended December 31,2009
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Sales revenue
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$160,000
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Less: Cost of goods sold
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106,000
|
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Gross profits
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$ 54,000
|
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Less: Operating expenses
|
|
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Selling expense
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$ 16,000
|
|
General and administrative expenses
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10,000
|
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Lease expense
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1,000
|
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Depreciation expense
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10,000
|
|
Total operating expense
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$ 37,000
|
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Operating profits
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$ 17,000
|
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Less: Interest expense
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6,100
|
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Net profits before taxes
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$ 10,900
|
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Less: Taxes
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4,360
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Net profits after taxes
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$ 6,540
|
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Balance Sheet December 31,2009
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Assets
|
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Cash
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$ 500
|
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Marketable securities
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1,000
|
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Accounts receivable
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25,000
|
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Inventories
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45,500
|
|
Total current assets
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$ 72,000
|
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Land
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$ 26,000
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Buildings and equipment
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90,000
|
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Less: Accumulated depreciation
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38,000
|
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Net fixed assets
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$ 78,000
|
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Total assets
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$ 150,000
|
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Liabilities and Stockholders' Equity
|
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Accounts payable
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$ 22,000
|
|
Notes payable
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47,000
|
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Total current liabilities
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$ 69,000
|
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Long-term debt
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$ 22,950
|
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Common stocka
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$ 31,500
|
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Retained earnings
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$ 26,550
|
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Total liabilities and stockholders' equity
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$ 150,000
|
|
aThe firm's 3,000 outstanding shares of common stock
closed 2009 at a price of $25 per share.
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a. Use the preceding financial statements to complete the following table
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Ratio
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Industry average
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Actual 2008
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Actual 2009
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Current ratio
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1.80
|
1.84
|
|
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Quick ratio
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0.70
|
0.78
|
|
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Inventory turnovera
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2.50
|
2.59
|
|
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Average collection perioda
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37.5 days
|
36.5 days
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|
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Debt ratio
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65%
|
67%
|
|
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Gross profit margin
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38%
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40%
|
|
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Net profit margin
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3.5%
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3.6%
|
|
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Return on total assets
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4.0%
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4.0%
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|
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Return on common equity
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9.5%
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8.0%
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|
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Market/book ratio
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1.1
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1.2
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a. Based on a 365-day year and on end-of-year figures.
b. Assuming that the industry averages given in the table are applicable for both 2008 and 2009, analyze in a short essay PCS Corp's financial condition as it is related to (1) liquidity, (2) activity, (3) debt, (4) profitability, and (5) market.
III.
Katie is trying to decide how much to save for retirement. Assume that she plans to save $5,000 a year with the first investment made 1 year from now. Katie thinks she can earn a 10% annual rate of return on her investments and she plans to retire in 43 years, immediately after making her last $5,000 investment.
a. How much will Katie have in her retirement account on the day she retires?
b. If instead of investing $5,000 per year, she wanted to make one lump-sum investment today for her retirement that will result in the same retirement saving, how much would that lump-sum need to be?
c. If Katie hopes to live for 20 years in retirement, how much can she withdraw every year in retirement (starting one year after retirement) so that she will just exhaust her savings with the 20th withdrawal (assume her savings will continue to earn 10% annual return in retirement)?
d. If, instead, Katie decides to withdraw $300,000 per year in retirement (again with the first withdrawal one year after retiring), how many years will it take until she exhausts her savings? You can use the NPER () function of Excel to check if your answer is correct--see textbook or Chapter 4 slides for examples of the NPER () function.
IV.
Erin is considering investing in a new plant that is expected to bring in $1 million in revenues per annum provided that it is adequately maintained. According to hired consultants, maintenance costs will start at $50,000 in the first year but are expected to rise at a rate of 5% for each subsequent year. All revenue and maintenance costs will occur at the end of the period (year). Erin's plan is to run the plant as long as annual revenues exceed maintenance costs (positive cash flow). Assume an annual interest rate of 6% per year and that the plant can be built and made operational right away.
- Calculate the present value of revenues and the present value of maintenance costs. (10 points). (Hint: you first need to find the last year of production, that is the year (N) following the first year when revenues exceed maintenance costs)
- Suppose that the initial capital cost to build the plant is $12 million. Would you advise Erin to invest in the project?