I'd like to have this document reviewed. It's my finance assignment but the answers are from another student. I'd lke to please have this assignment reviewed and re-worked so it's not plagiarized. Please do so for all the questions, the answers are correct so don't change them, just change the writing style. I understand that there's not much that can be changed for the calculations. Thanks.

Assignment 1 Assignment 1 is due after you complete Lessons 1 to 4. It is worth 20% of your final grade. Prepare your responses to these assignment problems in a word processing file; put financial data in a spreadsheet file. As you complete the assignment problems for each lesson, add your responses to these files. Do not submit your answers for grading until you have completed all parts of Assignment 1. Note: In assignments, show all calculations to 4 decimal places. Lesson 1: Assignment Problems 1.1 Households make four kinds of economic decisions (textbook, pp. 4-5). Suppose you have two households with the same income. Household A has one income earner and Household B has two income earners. How would the four types of economic decisions differ between these two otherwise identical households? (8 marks) The four different types of economic decisions consist of: consumption and saving, investment, financing and risk management. Because the households can differ, household A could potentially be a single person, while household B could be a large family. Due to this the households could have different views on asset allocation, and liabilities could be much greater in household B because there is a higher likelihood that there is more people included in this household. Consumption and savings could differ in the sense that household A may want to spend or save to the extreme, and seeing as there is only one income there is no one else to answer to, whereas in household B there is at least two income earners, so therefore they must communicate and may have different views on their savings and consumption so they will probably be more of a saving household than household A. Investment decisions will differ as well. Household A will more than likely be quicker to make investment decisions because there is no one to communicate with, therefore more of a risk taker and could be more likely to make poor investment opportunities. Household B would have to communicate better to decide what they would like to do with their investing, which could lead to better thought process and more likely to make informative decisions based on the time and thoughts that would go into it, as oppose to household A. Financial decisions would have some differences as well. Household A, because having one income earner may be faster to take on liabilities than household B. Having one individual earning income will leave the single person in charge of decisions so no considerations may be thought about. On the other hand household B is guaranteed to have at least two people living in the household, thus they could possibly have a higher expense amount since there may be more people living in the household. Due to this they may be more prone to take on debt because they may not have the choice. Risk management, household A would be much better at taking charge and reducing financial uncertainties than household B. Because household A is a single income earner that individual may want to reduce uncertainties as fast as possible and do so because they only have to answer to themselves and they may have the self-control to manage resources better to reduce these uncertainties faster. Household B because having numerous earners are going to discuss what they want to do, and because of this are probably more likely that people will not agree on how much they should lower their uncertainties, and may be much slower to act on these decisions FNCE 300 v1 Assignment 1 January 8, 2014 1.2 Three friends have just graduated, each with a B.Mgt. degree. One wants to start a restaurant and another wants to work as a subcontractor in a building trade. The third friend wants to put together a firm with a couple of other graduates to provide several kinds of complementary financial services including insurance, financial planning, and bookkeeping. What form of business organization (textbook, pp. 8-9) would you suggest each of the three friends should use, and why? (12 marks) The one who wishes to start the restaurant should start as a sole proprietorship so that they have full control over the business. Because it is a small business and there is not an extremely large overhead and potential for debt as other business ventures, they should stay by themselves so that they have the ability to make all decisions. There is a limited amount of decisions that need to be made it potentially could create issues with who decides what in the business. Seeing as the profits are going to be smaller, especially in the beginning this will help the individual make a greater profit for them and creates less risk that they will run into financial uncertainties in the future. Lastly there is more tax advantages for the single owner if the business does not do as well in the beginning to help them create a successful business. The second friend that wants to work as a subcontractor should consider going into a partnership. Because this is a larger company there are going to be a much larger amount of expenses and liabilities associated to the company. Therefore with two people owning the business, you are sharing the risk potential in half to yourself. It will make it much more financially feasible to get the business off the ground than on your own trying to cover all the expenses. With a larger business such a subcontracting company profits are much easier to split with someone else and still make a very good income for each of you, not putting either of you in a financial burden outside of the business. It is much easier to divide up responsibilities among the partnering people because it is a much larger company and there are probably far too many decisions for a single person to try and make on their own and successfully get a business off the ground. Like in the sole proprietorships, if the company does not do as well in the beginning there is tax advantages to you and your partner can take advantage of to help you grow into a successful business. The last friend who wishes to start a financial services company would be smart to start a corporation. Because this type of company has a very high risk involved financially. The friend may want to sell shares to bring in capital to the business to be able to support more services. The corporation will also be responsible the all potential risk and he individually is not help accountable for any debts the business takes on. The overhead would be simply too much for any individual to start up, not to mention the potential financial burden that insurance claims could bring onto the owner. Therefore the corporation title would have less burden for the friend, and he would be able to bring in other executives to help with all the major decisions as well as operations of the corporation. Do not submit these questions for grading until you have completed all parts of Assignment 1, due after Lesson 4. Lesson 2: Assignment Problems 2.1 Adam Smith is often called the father of economics. His famous book, The Wealth of Nations, talks about an \"invisible hand\" which automatically allocates goods to the persons most able to put them to good use. The invisible hand operates through the price mechanism for goods and services, so that individuals who trade on the market, while seeking only their own good, are actually efficiently allocating society's FNCE 300 v1 Assignment 1 January 8, 2014 resources. His ideas, if applied to modern capital markets, imply that these markets would efficiently allocate investment capital to the firms that would use the capital most efficiently in producing goods and services for society. But this would happen only if markets were left to operate without state intervention. Do you think modern governments should leave capital markets unregulated? Why or why not? (6 marks) I believe that the capital markets should be left unregulated, or as lots of people I know say be regulated less by corps and more peoples involvement. The only problem I see is that companies managing these particular goods and services could create a monopoly in that specific market. There is still going to be competition between the companies that are managing the resources the best in each industry and these companies are still going to compete for a greater market share, so the potential for a monopoly is a concern. Monopolies can create high prices of goods and services, which people need and have no choice but to purchase. On the other hand I feel that the positives highly outweigh the negatives in this situation. Because North American society is in a free trade economy, I feel that the consumer will set pricing based on supply and demand of the products so you will not see too much of a monopoly market take form, though that doesn't mean its not still happening. Because we are looking at a capital market and this is creating a long term scenario you could potentially see a monopoly take form in certain industries due to competition diminishing. By leaving markets unregulated the prices will be driven down by the economy, production costs will decrease for companies, speeds will increase with getting products to the market. Because we are giving the companies that can manage resources the best, consumers are going to benefit much greater than the negatives could be. Even though I feel that the government should leave capital markets unregulated, I do feel that monopolies become a problem. I feel like the people should get more of a choice, especially in how much the 'invisible hand' is involved. 2.2 Consider a business firm, organized as a proprietorship, which has $100,000 invested in assetsa bank loan of $80,000 and $20,000 personal capital invested by the proprietor. If the firm becomes insolvent, who is at risk? Why? (6 marks) The proprietor because responsible because they are the single owner, and because of the business type they have acquired all business debts or personal debts brought on due to the business. Even though the business may not be able to repay all debts, the debts do not become obsolete; they are simply transferred to the business owner rather than the business itself, even if the business completely goes under and does not exist anymore. This is one of the risks involved with opening a sole proprietorship or a partnership business, is that debts because transferred to the owner if need be. 2.3 In each of the following situations, moral hazard or adverse selection may be present. Indicate which you think is present, if any, and explain your choice. (10 marks) a. An insurance company is thinking about issuing health insurance to a firm's employees. I do not believe that any moral hazard or adverse selection is present. Since the company is just thinking about insuring the company they have yet to actually take on a risk since it is just a thought at this point in time. FNCE 300 v1 Assignment 1 January 8, 2014 b. An insurance company has issued health insurance to a firm's employees on the basis of their medical histories. Moral hazard is present here because although the insurance company is offering insurance to all the firm's employees they are lowering their risk since employees are subject to health records. Assuming they gave insurance to all employees, there would be a much greater risk those employees who are sick to take less care of them because they have the insurance to back them up. c. An investor is asking for a bank loan to support a new business she wants to operate. She is unwilling to submit to a credit check. Adverse selection is present here because since the lady will not consent to a credit check there is a great risk for the company that would be giving out the loan to the lady trying to open her new business. The bank is uncertain as to the actually credit of the individual and it may not be a smart investment if they had all relevant data. d. An investor has purchased shares in a new software company. He is just a shareholder, and is not going to be involved in the daily operations of the firm. Adverse selection could be considered in this scenario since the stockholder has no control over the operations of the company he is not sure as to what is going to be done in the coming time frame. Therefore he is more at risk because he cannot help what the company decides to do. e. A grandfather has just given his grandson $100 as a birthday present. Moral hazard is present because the grandfather as no idea as to where the money is going to be invested after the gift is given. There is no initial plan for the money, not does the party receiving have any idea they are getting this gift. So the uncertainty for this is present. 2.4 In each of the situations considered in question 2.3, what could be done to overcome the problem? (10 marks) An insurance company is thinking about issuing health insurance to a firm's employees. I do not believe there is any moral hazard or adverse selection to begin with thus I do not feel that there is any changes that need to be made to correct the situation. An insurance company has issued health insurance to a firm's employees on the basis of their medical histories. I think that to fix the problem the insurance company should customize all insurance to each of the employee's needs based on health issues and history. But charge different premiums to those that are less healthy that still want selected coverage. This way employees are not trying to abuse their rights nd still take caution to getting sick, but there is less risk involved for the insuring company because the people will try to stay healthy. An investor is asking for a bank loan to support a new business she wants to operate. She is unwilling to submit to a credit check. If she was to allow the credit check to be completed on herself then the bank would get the information it needs to make a well informed decision based on facts and figures and would not be at the same risk they are as if they were to give the loan without running the credit check on the lady. This would inform both parties, and they would have the same information to make well informed decisions based upon. A grandfather has just given his grandson $100 as a birthday present. Again, because the grandfather has no idea where the money will go or be spend on, if the grandfather was to either FNCE 300 v1 Assignment 1 January 8, 2014 tell the kid what he is to do with the money before he gives his the gift or after this would lower the uncertainty of the gift and both parties would know where the funds are being kept or spent. An investor has purchased shares in a new software company. He is just a shareholder, and is not going to be involved in the daily operations of the firm. If he was to try to give his opinion into the daily operations of the company that he has purchased shares in this would give more responsibility to the shareholder and thus increase the care of the individual. He would have more say into how his investment is used and therefore would be more involved and have more relevance to the daily operations. Do not submit these questions for grading until you have completed all parts of Assignment 1, due after Lesson 4. Lesson 3: Assignment Problems 3.1 Use the information in the following table to calculate the following ratios. Use the results to discuss and compare the financial positions of the two firms. (14 marks) Ratios: Total Shareholder Return Dividend = net income X dividend payout ratio / outstanding shares $200,000 X 35% / 150,000 = $.46667 | $100,000 X 40% / 50,000 = $.8 Return on Sales $300,000 / 3,000,000 = .1 or 10% | $190,000 / 2,000,000 = .095 or 9.5% Return on Assets $300,000 / 2,500,000 = .12 or 12% | $190,000 / 1,500,000 = .1267 or 12.67% Return on Equity $200,000 / $1,800,000 = .1111 or 11.11% | $100,000 / $1,000,000 = .1 or 10% Asset Turnover $3,000,000 / $2,500,000 = 1.2 times | $2,000,000 / $1,500,000 = 1.3333 times Times Interest Earned $300,000 / $10,000 = 30 times | $190,000 / $15,000 = 12.6667 times Debt Ratio (You'll need to calculate the average debt during the year.) Interest Expense | 10,000 | 15,000 Net income | 200,000 | 100,000 Dividend payout ratio | 35% | 40% FNCE 300 v1 Assignment 1 January 8, 2014 Retention ratio | 65% | 60% Sales | 3,000,000 | 2,000,000 Average assets during the year | 2,500,000 | 1,500,000 Average shareholders' equity during the year | 1,800,000 | 1,000,000 Beginning of year | 20 | 18 End of year | 15 | 20 Number of shares outstanding | 150,000 | 50,000 FNCE 300 v1 Assignment 1 January 8, 2014 EBIT (Earnings before Interest and Taxes) Interest Expense Net income Dividend payout ratio Retention ratio Sales Average assets during the year Average shareholders' equity during the year Market price per share Beginning of year End of year Number of shares outstanding 3.2 Spaling 300,000 10,000 200,000 35% 65% 3,000,000 2,500,000 1,800,000 20 15 150,000 Preston 190,000 15,000 100,000 40% 60% 2,000,000 1,500,000 1,000,000 18 20 50,000 Assume you have put $1,000 in a savings account at 10% annually compounded interest. a. b. c. How much could you take out each year and still have the original $1,000 in the account? You could take out $100 each year because $1000 compounded at 10% = $100 in interest, so if you were to withdrawal $100 each year you would still maintain your original amount in the bank. If you left half of the interest earnings in the account, at what rate would the balance grow from year to year? The balance would increase at a rate of 5% year over year. Although half the interest earned is being removed the balance is still increasing ata rate of 5% in the next year, the overall balance has just increased a little more each year. If you took out 80% of the interest earnings in the account, at what rate would the balance grow each year? The balance would increase by 2% each year respectively. Like in the last question, even though 80% of all the interest accrued is being withdrawal there is still an increase of 2% per annum. (6 marks) 3.3 Imagine a corporation with $1,000,000 of assets and a debt ratio of 40%. ROE (return on equity) is expected to be 20% for the foreseeable future. Assume the firm keeps the same amount of debt indefinitely (as opposed to keeping the same debt ratio). a. b. c. What do you expect the firm's earnings to be for the next 3 years if the firm doesn't pay out any dividends or re-purchase any shares? Because the ROE is at $20, The firm would expect to make $200,000 ($1,000,000X20%), in the first year. $240,000 ($1,200,000X20%), in the second. Lastly $288,000 ($1,440,000X20%), in the third year. If the firm doesn't pay any dividends or re-purchase any shares, at what rate would the firm grow from year to year? The firm would grow at a rate of 20% per year seeing as the ROE is not altering from year to year. The value would increase $200,000 in the first year and up to $220,000 in the second year, which when all put together gives us an increase of 20% If the firm pays 50% of its earnings as dividends, at what rate would the firm grow from year to year? FNCE 300 v1 Assignment 1 January 8, 2014 d. e. f. The firm would grow at 10% since the ROE is at 20% and with the dividends being paid out there is a left over amount of 10%. Thus the company would continue to grow at a rate of 10% If the firm uses 80% of its earnings to re-purchase shares from its shareholders, at what rate would the firm grow from year to year? The company would still continue to grow at a rate of 20% as even though they are purchasing shares from shareholders they are simply shifting their cash assets to share assets. So even though they are spending cash they are increasing their assets at the same pace as the cash is depleting. If the firm pays 50% of its earnings as dividends, and uses an additional 20% of its earnings to re-purchase shares from its shareholders, at what rate would the firm grow from year to year? The company would increase at a rate of 16%. Since the ROE is 20% and they are using half of their increasing asset level to repurchase shares from people, they are shifting their assets from cash to other assets. Although they are paying out 4% of the total 20% to dividends, thus the other 16% is either in assets or cash assets for the company to grow upon. What does the term \"Sustainable Growth Rate\" mean? Would the amounts you have calculated in parts b. to d. equal the Sustainable Growth Rate for the firm? The maximum growth rate that a firm can sustain without having to increase financial leverage. Calculated as: ROE x (1 - dividend-payout ratio). If the calculations in b and d were done correctly, which I believe they are, then yes, they would equal. (12 marks) Do not submit these questions for grading until you have completed all parts of Assignment 1, due after Lesson 4. Lesson 4: Assignment Problems 4.1 Assume that the correct discount rate for the following cash flows is 8%. What is the present value of the following cash flows? a. $50 at the end of 3 years CFt/ (1+r)t 50/(1+.08)*3 = 138.88 , no rounding b. $50 at the end of 100 years CFt/ (1+r)t 50/(1+.08)*100 = 4629.62 , no rounding c. $50 received at the end of each year for 20 years CFt/ (1+r)t 50/(1+.08)*20 = 925.92 , no rounding Divided annually is 46.29 a year approx. d. $50 received at the beginning of each year, totaling 20 payments 50*20=1000.00 4.2 (8 marks) Assuming an 8% discount rate, what is the future value of the following cash flows? a. future value in 3 years of $50 received now F = P*(1 + r)n FNCE 300 v1 Assignment 1 January 8, 2014 50(1+.08)*3 = 162.00 b. future value in 100 years of $50 received now F =P*(1+r)n 50(1+.08)*100= 5400.00 c. future value at the end of 20 years of $50 received each year at the end of the year F= P*(1+r)n 50(1+.08)*20= 1080.00 d. future value at the end of 20 years of $50 received each year at the beginning of the year, again totaling 20 payments 50(1.08^20-1)/(1.08-1)=2288.098 Economists usually use this formula without knowing anything about a geometric series and simply plug in the parameters (Cash flow amount, period, annual interest rate) into a readymade formula. (8 marks) 4.3 Calculate the following values, assuming a discount rate of 8%: a. present value of a perpetuity (also called a perpetual annuity) of $50 received each year at the end of each year 228.34*1.08*16= 782.28 with payments included total is 877.04 minus the 800 worth of payments. b. present value of an annuity of $50 received at the end of each year for 5 years 246.61*1.08^5= 362.35, deduct (50*5y=250) from 362.35 = 112.35 after receiving payments. c. present value of an annuity of $50 received at the end of each year for 10 years, with the first payment to be received at the end of the 6 th year 246.61*1.08^10= 532.41, deduct (50*10y=500) from 532.41 = 32.41 after receiving payments. d. present value of an annuity of $50, with the first payment received at the end of the 16th year 246.61*1.08^15= 782.28, deduct 50.00 from 782.28 = 732.28 (8 marks) 4.4 a. Show (with a time line, for example) that the perpetuity in 4.3a. is exactly the same as the sum of the annuities and perpetuities in 4.3b. to 4.3d. 1. 228.34*1.08= 246.61 2. 246.61*1.08= 266.34 3. 266.34*1.08= 287.64 4. 287.64*1.08= 310.65 5. 310.65*1.08= 335.50 6. 335.50*1.08= 362.35 7. 362.35*1.08= 391.33 8. 391.33*1.08= 422.64 9. 422.64*1.08= 456.45 10. 456.45*1.08= 492.97 11. 492.97*1.08= 532.41 FNCE 300 v1 Assignment 1 January 8, 2014 12. 13. 14. 15. 16. 532.41*1.08= 575.00*1.08= 621.00*1.08= 670.68*1.08= 724.33*1.08= 575.00 621.00 670.68 724.33 782.28 b. Show that their present values add up to the same amount. Together they add up to 782.28 as shown in above list. Unfortunately they do not include the payments. Including the payments deduct 800 from 877.04 = 77.04 (50+500+250, from the questions). (6 marks) 4.5 a. Jane is 20 years old today. Jane is going to put $1,000 into her savings account on her 21st birthday and again on every birthday for 20 payments (i.e., till her 40 th birthday). She will earn 5%, paid annually. How much money will be in the account after she collects her interest and makes her 20th payment? 1000*(1.05)^20= 2653.30 b. Calculate how much money she could take out each year for the 20 years from her 41st birthday till her 60th birthday, assuming she still earns 5% and takes out the same amount each year, leaving exactly $0 in the account after removing her 20 th payment. 2653.30/20 = 132.666 132.66*20= 2653.30, meaning taking out 132.66 over the period of 20 years between 41 and 60 will bring it back down to 0. (6 marks) Once you complete these questions, check to see that Assignment 1 is complete, and submit it for grading. FNCE 300 v1 Assignment 1 January 8, 2014