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Midterm Exam, Summer 2016 Name Question 1 2 3 4 5 6 7 8 9 10 Late Total Score 0 0 0 0 0 0 0 0 0 0 0 0 Question 1 Score 0 Johnathon and Maria want to buy a modest "starter" home. They have $10,000 in a savings account and they want to increase this to $50,000 to use as a down payment. They checked an online bank and found the following three options for saving these funds, each with different rates and requirements. How much would they have to deposit monthly in each account to get to their goal in five years? a A savings account could be accessed at any time but only offers 1.00% NAR with daily compounding. b A Money Market requires a minimum balance of $10,000, that they have, and has a rate of 1.5% NAR with monthly compounding. c A Certificate of Deposit (CD), that has limited withdrawal frequencies, and currently has an NAR of 1.25% with quarterly compounding. Solution Question 2 Score 0 Nina is retiring and has sold her home and now has $800,000 total retirement savings. She plans to move into a retirement center. Her planning horizon is 20 years. Assume end of period payments. a What nominal annual rate of interest from a fund that compounds monthly would she need if she has to pay the monthly $3,000 retirement center fee plus needs $1,000 monthly for other expenses, without reducing the fund balance. b What nominal annual rate of interest from a fund that compounds monthly would she need if she has $100,000 at the end of 20 years, immediately spends $5,000 on a vacation, and withdraws $4,000 at the end of each month. Solution Question 3 Larry created an education fund for his daughter that has a NAR with monthly compounding of 1 3/8% (=1.375%). Today is Dec a If $1,500 is withdrawn on the last day of each upcoming month, what would be the balance on the loan at the end o b If $4,500 is withdrawn on the last day of each upcoming quarter, what would be the balance on the loan at the end Solution Score of 1 3/8% (=1.375%). Today is December 31 and the balance is $70,000. he balance on the loan at the end of four years? he balance on the loan at the end of four years? 0 Question 4 Score Easy-Loans, Inc. will make a pay-day loan at a charge of 5% for a two-week loan. a What is the effective annual rate of the loan? b If, instead of paying off the loan every two weeks, a new loan is taken out with the new loan amount being the previous loan plus interest, what will be the balance of the loan at the end of one year? Solution 0 mount being the previous Question 5 Score 0 Diane runs a summer camp for kids. Diane is getting older and has allocated $5 million to fund the future expenses of the camp, that will be in an account that pays 3.5% NAR with monthly compounding. At the end of each year, funds will be withdrawn from the fund and put in the camps interest bearing checking account that has an NAR of .75% with monthly compounding. Assume that equal monthly payments will be withdrawn from this account at the beginning of each month. If the funding is intended to last forever, how much will the camp have at the beginning of each month for expenses? Solution Question 6 BioProduction, Inc. is considering a new automated production capability that would result in $250,000 of added annual in annually for three years to develop this new capability, and a one time investment of $500,000 for implementation in the 3 are end-of-year values. How many years after the process in implemented would it take for the added revenues to cover th BioProduction, Inc. considers the time value of money in all financial analyses using a 6% effective annual rate of interest. Solution Score 0 in $250,000 of added annual income after put in use. It is expected to cost $350,000 000 for implementation in the 3rd year of development. Assume all costs and income the added revenues to cover the production costs incurred in the first three years. ffective annual rate of interest. Question 7 Nellie inherited $90,000 and is going to invest this. She has narrowed the options to a bond and a stock. a Determine the effective annual rate of return of each based on the data below. b What else besides the EARs could affect her decision between the bond and the stock? Purchase price Face value Maturity Coupon Frequency Coupon Rate Solution Bond $90,000 $100,000 10 semi-annual 6.25% years from today semi-annual Score 0 s to a bond and a stock. below. and the stock? Purchase price Forecasted price Expected dividends Dividend frequency Time horizon Stock $90,000 5% $1,000 quarterly 10 annual % increase total for all shares years Question 8 Score Katrina will retire soon from her accounting position and is looking for a small retirement business. Her present company has a new customer who has special cleanliness requirements and her company would have a hard time accomplishing this in their present environment. Katrina is considering starting a small LLC that would do the packaging for them for a fee. This seems to advantageous for both the company and for Katrina. She has found a facility to rent that can meet the cleanliness requirement She has collected the data shown below. Price Facility rental Equipment lease Utilities Packaging materials Labor $10 $20,000 $450 $800 $0.50 $1.00 each annually monthly monthly each each a If the quantity is 7000 units annually, what would be the annual profit? b What is the break even quantity for the $10 price? c What is the breakeven price for the quantity of 7,000? Solutions 0 er present company has a omplishing this in their for a fee. This seems to be cleanliness requirement. Question 9 Score 0 The Ceynar Company, Inc. has finished their accounting statements except for the working capital considerations. Alter the financial statements shown below to include the following working capital data. Beginning of Year $1,008 $3,330 $5,968 $8,300 $450 $600 Inventory- Materials Inventory- Finished Accounts Receivable Accounts Payable Wages Payable Taxes Payable End of Year $1,800 $4,100 $6,250 $5,750 $650 $1,090 Income Statement Revenue Material Cost Labor Cost Overhead COGS Gross Margin Executive & Staff Salaries Facility Maintenance Marketing S.G.&A. Depreciation EBIT Interest Pre-Tax Income Taxes Net Income $6,626,104 $720,000 $456,000 $282,240 Cash Flow Statement Net income Depreciation Change in Working Capital Total ($1,458,240) $5,167,864 $2,200,000 $800,000 $900,000 Capital Expenditure Asset Purchase Asset Sale Total ($3,900,000) ($325,000) $942,864 ($145,000) $797,864 ($111,470) $686,394 Financial activities Dividends Loan Principal Payment Total Net Change in cash Beginning Cash Balance Ending Cash Balance Balance Sheets Assets Current Assets Cash Inventory- Materials Inventory- Finished Accounts Receivable $426,394 $1,008 $3,330 $5,968 Total Long term Assets Equipment Building $436,700 $11,050 $3,860 Liabilities and Owners' Equit Current liabilities Accounts Payable Wages Payable Taxes Payable Total Long term liabilities Loans - Long term Bonds Total Stockholders Equity Stock Land $4,040 Total Total Assets Solution Retained Earnings $18,950 $455,650 Total Liabilities and Owners' Equity $686,394 $325,000 $0 $1,011,394 ($87,000) $54,000 ($33,000) ($300,000) ($400,000) ($700,000) $278,394 $148,000 $426,394 ilities and Owners' Equity $8,300 $450 $600 $9,350 $1,500 $6,100 $7,600 $26,800 $411,900 $438,700 $455,650 Question 10 Your small company has recently been purchased by a large corporation and the previous owner has been made the gener and says, "The people in the new company keeps talking about this "present value" thing, and you mentioned this in the m explain this to me clearly in terms I can understand, and not with quotes from a textbook or website." Write an explanation for the general manager using an example(s). Limit this to 500 words. Post this in the space below or Score 0