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accounting

Questions and Answers of Accounting

What are the roles of the SIPC and the SEC? Can trading in a security be suspended?
A stock sells for $10 per share. You purchase 100 shares for $10 a share (i.e., for $1,000), and after a year the price rises to $17.50. What will be the percentage return on your investment if you
Repeat Problem 1 to determine the percentage return on your investment but in this case suppose the price of the stock falls to $7.50 per share. What generalization can be inferred from your answers
You purchase 100 shares of stock at $100 ($10,000); the margin requirement is 40 percent. What are the dollar and percentage returns if a. You sell the stock for $112 and buy the stock for cash? b.
Investor A buys 100 shares of SLM Inc. at $35 a share and holds the stock for a year. Investor B buys 100 shares on margin. The margin requirement is 60 percent, and the interest rate on borrowed
Investor A makes a cash purchase of 100 shares of AB&C common stock for $55 a share. Investor B also buys 100 shares of AB&C but uses margin. Each holds the stock for one year, during which
Ms. Tejal Gandhi has decided that the stock of SmallCap Inc is overvalued at $4 a share and wants to sell it short. Since the price is relatively low, short sales cannot be executed on margin, so Ms.
An investor sells a stock short for $36 a share. A year later, the investor covers the position at $30 a share. If the margin requirement is 60 percent, what is the percentage return earned on the
A speculator sells a stock short for $50 a share. The company pays a $2 annual cash dividend. After a year has passed, the seller covers the short position at $42. What is the percentage return on
1. What is the percentage return earned by Darin if he acquires 100 shares, holds the stock for a year, and sells the stock for $80? 2. What is the percentage return earned by Victor if he acquires
What is the difference between a lump-sum payment and an annuity? What is the difference between an ordinary annuity and an annuity due? Are all series of payments annuities?
What is the difference between compounding (the determination of future value) and discounting (the determination of present value)?
For a given interest rate, what happens to the following as time increases?a) Future value of $1b) Future value of an annuityc) Present value of $1d) Present value of an annuity
For a given time period, what happens to the following as the interest rate increases?a) Future value of $1b) Future value of an annuityc) Present value of $1d) Present value of an annuity
What does the phrase “discounting the future at a high rate” imply?
As is explained in subsequent chapters, increases in interest rates cause the value of assets to decline. Why would you expect this relationship?
A saver places $1,000 in a certificate of deposit that matures after 20 years and that each year pays 4 percent interest, which is compounded annually until the certificate matures.a) How much
An investor bought a stock ten years ago for $20 and sold it today for $35. What is the annual rate of growth (rate of return) on the investment?
At the end of each year a self-employed person deposits $1,500 in a retirement account that earns 10 percent annually.a) How much will be in the account when the individual retires at the age of 65
A saver wants $100,000 after ten years and believes that it is possible to earn an annual rate of 8 percent on invested funds.a) What amount must be invested each year to accumulate $100,000 if(1)
An investment offers $10,000 per year for 20 years. If an investor can earn 8 percent annually on other investments, what is the current value of this investment? If its current price is $120,000,
Graduating seniors may earn $35,000 each year. If the annual rate of inflation is 4 percent, what must these graduates earn after 20 years to maintain their current purchasing power? If the rate of
A person who is retiring at the age of 65 and who has $200,000 wants to leave an estate of at least $30,000. How much can the individual draw annually on the $200,000 (starting at the end of the
A 40-year-old individual establishes a retirement account that is expected to earn 7 percent annually. Contributions will be $2,000 annually at the beginning of each year. Initially, the saver
You are offered $900 five years from now or $150 at the end of each year for the next five years. If you can earn 6 percent on your funds, which offer will you accept? If you can earn 14 percent on
The following questions illustrate nonannual compounding.a) One hundred dollars is placed in an account that pays 12 percent. How much will be in the account after one year if interest is compounded
At the end of each year, Tom invests $2,000 in a retirement account. Joan also invests $2,000 in a retirement account but makes her deposits at the beginning of each year. They both earn 9 percent on
You purchase a $100,000 life insurance policy for a single payment of $35,000. If you want to earn 9 percent on invested funds, how soon must you die for the policy to have been the superior
You are offered an annuity of $12,000 a year for 15 years. The annuity payments start after five years have elapsed. If the annuity costs $75,000, is the annuity a good purchase if you can earn 9
You purchase a $1,000 asset for $800. It pays $60 a year for seven years at which time you receive the $1,000 principal. Prove that the annual return on this investment is not 9 percent.
You invest $1,000 a year for ten years at 10 percent and then invest $2,000 a year for an additional ten years at 10 percent. How much will you have accumulated at the end of the 20 years?
You are promised $10,000 a year for six years after which you will receive $5,000 a year for six years. If you can earn 8 percent annually, what is the present value of this stream of payments?
A township expects its population of 5,000 to grow annually at the rate of 5 percent. The township currently spends $300 per inhabitant, but, as the result of inflation and wage increments, expects
A financial manager with $1,000 to invest is faced with two competing alternatives, both of which cost $1,000. Alternative A will annually pay $275 for five years while alternative B pays $300 a year
Suppose you purchase a home for $150,000. After making a down payment of $50,000, you borrow the balance through a mortgage loan at 8 percent for 20 years. What is the annual payment required by the
You have an elderly aunt, Aunt Kitty, who has just sold her house for $165,000 and entered a retirement community that charges $30,000 annually. If she can earn 6 percent on her funds, how long will
A widower currently has $107,500 yielding 8 percent annually. Can he withdraw $18,234 a year for the next 10 years? If he cannot, what return must he earn in order to withdraw $18,234 annually?
You want $100,000 after eight years in order to start a business. Currently you have $26,000, which may be invested to earn 7 percent annually. How much additional money must you set aside each year
You have accumulated $325,000 in a retirement account and continue to earn 8 percent on invested funds.a) What amount may you withdraw annually starting today based on a life expectancy of 20 years?
Your first child is now a 1-year-old. It currently costs a total of $60,000 to attend a public college for four years. If these costs rise 5 percent annually, how much must you invest each year to
Which is the better choice when purchasing a $20,000 car:a) A four-year loan at 4 percent,b) An immediate rebate of $2,000 and a four-year loan at 10 percent?
The preceding problems can be solved using the interest tables supplied in Appendix A. To test your ability to construct your own interest factors or to use the computer programs available with this
1. If each individual retires at age 65, how much will his or her estimated pension be?2. Life expectancy for both employees is 15 years at age 65. If the firm buys an annuity from an insurance
What is a progressive tax? Why is the federal estate tax illustrative of a progressive tax?
Does a tax shelter necessarily imply that the investor avoids paying taxes?
What is a capital gain? When are capital gains taxes levied? May capital losses be used to offset capital gains and income from other sources?
Which of the following illustrates a tax shelter?a) Dividend incomeb) Interest earned on a savings accountc) A stock purchased for $10 that is currently worth $25d) Interest earned on a municipal
What are Keogh, 401(k), and IRA plans? What are their primary advantages to investors?
What differentiates a deductible IRA from a Roth (nondeductible) IRA? What conditions favor the nondeductible IRA?
What differentiates term insurance from other types of life insurance? Why is term insurance not an example of a tax shelter?
a) An individual in the 28 percent federal income tax bracket and 15 percent long-term capital gains tax bracket bought and sold the following securities during the year:What are the taxes owed on
An investor is in the 33 percent tax bracket and pays long-term capital gains taxes of 15 percent. What are the taxes owed (or saved in the cases of losses) in the current tax year for each of the
You are in the 28 percent income tax bracket and pay long-term capital gains taxes of 15 percent. What are the taxes owed or saved in the current year for each of the following sets of
You are in the 25 percent income tax bracket. What are the taxes owed or saved if youa) Contribute $2,000 to a 401(k) planb) Contribute $2,000 to a Roth IRAc) Withdraw $2,000 from a traditional IRAd)
Your traditional IRA account has stock of GFH, which cost $2,000 20 years ago when you were 50 years old. You have been very fortunate, and the stock is now worth $23,000. You are in the 35 percent
You are 60 years old. Currently, you have $10,000 invested in an IRA and have just received a lump-sum distribution of $50,000 from a pension plan, which you roll over into an IRA. You continue to
Bob places $1,000 a year in his IRA for ten years and then invests $2,000 a year for the next ten years. Mary places $2,000 a year in her IRA for ten years and then invests $1,000 a year for the next
Bob and Barbara are 55 and 50 years old. Bob annually contributes $1,500 to Barbara’s IRA. They plan to make contributions until Bob retires at age 65 and then to leave the funds in as long as
What are the current maximum tax rates on long-term capital gains and on short-term capital gains?
Are contributions to your college’s alumini fund tax deductible? One way to answer these questions is to go to the IRS Web site at www.irs.ustreas.gov. Other sites you may use for tax information
1. Can Mary set up an IRA and deduct the contribution from her income that is subject to federal income taxation? Does the same apply to Jason? Could Marys or Jasons children have IRA accounts? 2.
What is the difference between nondiversifiable (systematic) risk and diversifiable (unsystematic) risk?
What is a diversified portfolio? What type of risk is reduced through diversification? How many securities are necessary to achieve this reduction in risk? What characteristics must these securities
What are the sources of return on an investment? What are the differences among the expected return, the required return, and the realized return?
If the expected returns of two stocks are the same but the standard deviations of the returns differ, which security is to be preferred?
If an investor desires diversification, should he or she seek investments that have a high positive correlation?
Indifference curves used in portfolio theory relate risk and return. How is the portfolio’s risk measured? If one investor’s indifference curves are steeper than another investor’s, what does
What is a beta coefficient? What do beta coefficients of 0.5, 1.0, and 1.5 mean?
If the correlation coefficient for a stock and the market equals 0, what is the market risk associated with the stock?
How are the capital market line and the security market line different? What does each represent?
How does arbitrage pricing theory advance our understanding of security returns?
You are considering three stocks with the following expected dividend yields and capital gains:a) What is the expected return on each stock?b) How may transactions costs and capital gains taxes
A portfolio consists of assets with the following expected returns:a) What is the expected return on the portfolio?b) What will be the expected return if the individual reduces the holdings of the
You are given the following information concerning two stocks:a) What is the expected return on a portfolio consisting of 40 percent in stock A and 60 percent in stock B?b) What is the standard
You are given the following information:a) What are the expected returns and standard deviations of a portfolio consisting of:1. 100 percent in stock A?2. 100 percent in stock B?3. 50 percent in each
What is the beta of a portfolio consisting of one share of each of the following stocks given their respective prices and beta coefficients?How would the portfolio beta differ if (a) the investor
What is the return on a stock according to the security market line if the risk-free rate is 6 percent, the return on the market is 10 percent, and the stock’s beta is 1.5? If the beta had been
You are considering purchasing two stocks with the following possible returns and probabilities of occurrence:Compare the expected returns and risk (as measured by the standard deviations) of each
Using the material on the standard deviation and the coefficient of variation presented in the appendix to this chapter, rank the following investments with regard to risk.a) Investment Returns b)
This problem illustrates how beta coefficients are estimated and uses material covered in the appendix to this chapter. It may be answered using any program that performs linear regression analysis,
Given the returns on a domestic stock and a foreign stock, what are the correlation coefficients relating the returns for the 15 years and for each five-year time period: 1989€“1993,
1. What will be the expected return and beta for each of the following portfolios?a) Portfolios 1 through 4: All of the funds are invested solely in one asset (the corresponding three stocks or the
1. Why is diversification important? How is diversification achieved?2. Solely on the basis of diversification, is there an argument for selling any of the stocks? In addition to risk reduction
Are mutual funds subject to federal income taxation? Are distributions from mutual funds taxable?
What is a loading charge? Do all investment companies charge this fee?
What is a specialized mutual fund? What differentiates large and small cap funds? Value and growth funds?
What advantage do “families” of funds offer?
Should an investor expect a mutual fund to outperform the market? If not, why should the investor buy the shares?
What are the differences among loading fees, exit fees, and 12b-1 fees?
Why may the annual growth in a fund’s net asset value not be comparable to the return earned by an individual investor?
How may beta coefficients be used to standardize returns for risk to permit comparisons of mutual fund performance?
If a portfolio manager earned 15 percent when the market rose by 12 percent, does this prove that the manager outperformed the market?
How may realized returns be adjusted for risk so that investment performance may be judged on a risk-adjusted basis?
What is the net asset value of an investment company with $10,000,000 in assets, $790,000 in current liabilities, and 1,200,000 shares outstanding?
If a mutual fund’s net asset value is $23.40 and the fund sells its shares for $25, what is the load fee as a percentage of the net asset value?
If an investor buys shares in a no-load mutual fund for $31.40 and the shares appreciate to $44.60 in a year, what would be the percentage return on the investment? If the fund charges an exit fee of
An investor buys shares in a mutual fund for $20 per share. At the end of the year the fund distributes a dividend of $0.58, and after the distribution the net asset value of a share is $23.41. What
Consider the following four investments.a) You invest $3,000 annually in a mutual fund that earns 10 percent annually, and you reinvest all distributions. How much will you have in the account at the
You are given the following information concerning several mutual funds:During the time period the Standard & Poor's stock index exceeded the Treasury bill rate by 10.5 percent (i.e., rm - rf =
1. If Bozena participates and the 401(k) earns 10 percent annually, how much will she have accumulated in 45 years (to age 67) even if her salary does not change?2. If she does not participate and

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