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general business data bank

Question # 00005350
Subject: General Questions
Due on: 12/30/2013
Posted On: 12/14/2013 11:16 AM

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1. Which of the following statements is CORRECT?

a. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to

unlimited liability.

b. It is generally easier to transfer one’s ownership interest in a partnership than in a

corporation.

c. One of the advantages of the corporate form of organization is that it avoids double

taxation.

d. One of the advantages of a corporation from a social standpoint is that every

stockholder has equal voting rights, i.e., “one person, one vote.

e. Corporations of all types are subject to the corporate and personal income tax.

2. Which of the following statements is CORRECT?

a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the

periods.

b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then

the series is by definition an annuity.

c. The cash flows for an annuity due must all occur at the ends of the periods.

d. The cash flows for an annuity must all be equal, and they must occur at regular

intervals, such as once a year or once a month.

e. If some cash flows occur at the beginning of the periods while others occur at the

ends, then we have what the textbook defines as a ‘variable’ annuity.

3. Which of the following statements is most CORRECT?

a. The four most important financial statements provided in the annual report are the

balance sheet, income statement, cash budget, and the statement of stockholders’

equity.

b. The balance sheet gives us a picture of the firm’s financial position at a point in

time.

c. The income statement gives us a picture of the firm’s financial position at a point in

time.

d. The statement of cash flows tells us how much cash the firm has in the form of

currency and demand deposits.

e. The statement of cash needs tells us how much cash the firm will require during

some future period, generally a year or two.

4. The term “additional funds needed (AFN)” is generally defined as follows:

a. Funds that are obtained automatically from routine business transactions.

b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by

borrowing or by selling new stock or bonds to support operations.

c. The amount of assets required per dollar of sales.

d. The amount of internally generated cash in a given year minus the amount of cash

needed to acquire the new assets needed to support growth.

e. A forecasting approach in which the forecasted percentage of sales for each balance

sheet account is held constant.

5. Spontaneous funds are generally defined as follows:

a. Assets required per dollar of sales.

2

b. A forecasting approach in which the forecasted percentage of sales for each item is

held constant.

c. Funds that a firm must raise externally through short-term or long-term borrowing

and/or by selling new common or preferred stock.

d. Funds that arise out of normal business operations from its suppliers, employees,

and the government, and they include immediate increases in accounts payable,

accrued wages, and accrued taxes.

e. The amount of cash raised in a given year minus the amount of cash needed to

finance the additional capital expenditures and working capital needed to support

the firm’s growth.

6. If markets are in equilibrium, which of the following conditions will exist?

a. Each stock’s expected return should exceed its realized return as seen by the

marginal investor.

b. Each stock’s expected return should equal its required return as seen by the

marginal investor.

c. All stocks should have the same expected return as seen by the marginal investor.

d. The expected and required returns on stocks and bonds should be equal.

e. All stocks should have the same realized return during the coming year.

Part B: Simple problems (8 points each, 32 in total)

7.(8 points)To complete your last year in business school and them go through law

school, you will need $10,000 per year for 4 years, starting next year (that is, you will

need to withdraw the first $10,000 one year from today). Your rich uncle offers to put

you through school, and he will deposit in a bank paying 7% interest a sum of money

that is sufficient to provide the 4 payments of $10,000 each. His deposit will be made

today (time “0”).

a. How large must the deposit be?

b. How much will be in the account immediately after you make the first

withdrawal? After the last withdrawal?

8.(8 points)Alexandra Video Product’s sales are expected to increase by 20% from $5

million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010.

Alexandra is already at full capacity, so its assets must grow at the same rate as

projected sales. At the end of 2010, current liabilities were $1 million, consisting of

$250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accruals.

The after tax profit margin is forecasted to be 5%, and the forecasted payout ratio is

70%.Use the EFN equation to forecast Alexandra's additional funds needed for the

coming year.

9.(8 points)Jackson Corporation’s bonds will mature in 10 years. The bonds have a face

value of $1,000, and an 8% coupon rate, paid semi-annually. The price of the bond is

$1,100. The bonds are callable in 5 years at a call premium of 5%.

a. What is their nominal yield to maturity (YTM)?

b. What is their nominal yield to call (YTC)?

10.(8 points)You buy a share of MIT Corporation stock for $21.40, which pays a dividend

of $1.05/share. You expect it to pay dividends of $1.1070, $1.1449, and 1.2250 in Year

1, 2 and 3 respectively, and you expect to sell it at a price of $26.22 at the end of the

year 3.

a. Calculate the growth rate in dividends for the last year.

b. Assuming that the calculated growth rate is expected to continue, what is the

expected dividend yield for the same year?

c. What is this stock’s expected total rate of return at t = 3?

C. Problem solving (13 points each, 39 in total)

10.(13 points) The most recent financial statements for Maritin, Inc. are shown below:

Income Statement Balance sheet

Sales $19,200 Assets $93,000 Debt $20,400

Cost $15,550 Equity $72,600

Taxable income $3,650 Total $93,000 Total $93,000

Taxes (34%) $1,241

Net income $2,409

Assets and costs are changingproportionallyto sales. Debt and common equity do not

change. A dividend of $963.60 was paid and Maritin wishes to maintain a constant

dividend payout ratio of 0.40. Next year’s sales are projected to be $23,040. What external

financing is needed? (Note: construct the pro-forma balance sheet to find EFN).

11.(13 points)A company currently pays a dividend of $2 per share, that is, D0 = $2. It is

estimated that the company’s dividend will grow at a rate of 20% per year for the next 2

years, then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2,

the risk-free rate is 7.5%, and the market return is 11.5%. What is your estimate of the

stock’s current price? What is the stock price in one year if it appreciates with the same

rate as dividends?

12. (13 points)Consider the possible rates of return that you might obtain over the next

year under each state of the economy. You can invest in stockUand stockV.

State of Probability of Stock A Return Stock B Return

Economy State Occurring if State Occurs (%) if State Occurs (%)

Recession 0.20 7.0% -5.0%

Normal 0.50 7.0 10.0

Bull 0.30 7.0 25.0

a. Determine the expected return, variance, and the standard deviation for stockA

andB.

b. Determine the covariance and correlation between the returns of stockAand

stockB.

c. Determine the expected return and standard deviation of an equally weighted

portfolio of stockAand stockB.

7

Part D: Essay question (10 points in total)

List the three forms of market efficiency according to the EMH and give examples for each

of them.

Extract from an excellent student’s answer:

9

Part D: Bonus questions (2 points each, 4 in total)

1. Which of the following classes use case-based learning approach?

a. Corporate finance 1 and 2

b. Political Anthropology

c. Introduction to Music

d. Beginning Drawing

2. Who is the current chair of the Business Department?

a. Lucia Miree

b. Donald Brady

c. Steve Sullivan

d. Cy Reed

Tags bank data busine general cash year expected return rate needed sales flows stocks aets funds stock income statement dividend state following statements bonds years occur equal required yield beginning deposit pointseach current correcta annuity

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Tutorial Preview …Total xxxxxxx Total xxxxxxx Taxes (34%) xxxxxx Net income xxxxxx Assets xxx xxxxx are xxxxxxxxxxxxxxxxxxxxxxxx sales Debt xxx common equity xx not xxxxxx x dividend xx $963 60 xxx paid and xxxxxxx wishes xx xxxxxxxx a xxxxxxxx dividend payout xxxxx of 0 xx Next xxxxxxxx xxxxx are xxxxxxxxx to be xxxxxxx What external xxxxxxxxx is xxxxxxx xxxxxx construct xxx pro-forma balance xxxxx to find xxxx Solution: xx xxxxxxxx of xxxxx to $23,040 xx an increase xxx Sales xxxxxxxx x ($23,040 xxx 19,200) / xxxxxxx Sales increase x 20 xx xxx Assuming xxxxx and assets xxxxxxxx proportionally, the xxx forma xxxxxxxxx xxxxxxxxxx will xxxx like this: xxxxxx Statement Balance xxxxx Sales xxxxxxx x 0 xxxxxx $111,600 Debt xxxxxxx 0 0 xxxx $18,660 x x Equity$72,600 x 0 Taxable xxxxxx $4,380 00 xxxxxxxxx to xx xxxxx 48 xxxxx (34%) $1,489 xx Total $111,600 xxxxx $94,734 x x Net xxxxxx $2,890 80 xxx payout ratio xx constant, xx xxx dividends xxxx this year xx the payout xxxxx from xxxx xxxx times xxx income, or: xxxxxxxxx = 0 xxxxxxxxx 80) xxxxxxxxx x $1,156 xx Addition to xxxxxxxx earnings = xxxxxx 80 xxx xxxxx 32 xxxxxxxx to retained xxxxxxxx = $1,734 xx And xxx xxx equity xxxxxxx is: Equity x $72,600 + xxxxx 48 x xxxxxxx 48 xx the EFN xxx EFN = xxxxx assets xxx xxxxx liabilities xxx equity EFN x $111,600 – xxxxxx 48 x xxxxxxx 52 x 11 (13 xxxxxxxx company currently xxxx a xxxxxxxx xx $2 xxx share, that xxx D0 = xx It xx xxxxxxxxx that xxx company’s dividend xxxx grow at x rate xx xxx per xxxx for the xxxx 2 years, xxxx at x xxxxxxxx rate xx 7% thereafter xxx company’s stock xxx a xxxx xx 1 xx the risk-free xxxx is 7 xxx and xxx xxxxxx return xx 11 5% xxxx is your xxxxxxxx of xxx xxxxxxxxx current xxxxxx What is xxx stock price xx one xxxx xx it xxxxxxxxxxx with the xxxx rate as xxxxxxxxxx Solution: xxxx xxxxxxxxxxx the xxxxxxxx rate of xxxxxx on the xxxxxx Rs= xxxx xxxxxx RRF) x 7 5% x (11 5% xxx 7 xxxx x = xx 3% Step xxxxxxxxxxx the expected xxxxxxxxxx D0= xx xx D1= xx 00(1 20) x $2 4 xxx $2 xxxx xxxxx $2 xx D3= $2 xxxx 07) = xx 0816 xxxx xxxxxxxxxxx the xx of the xxxxxxxx dividends: PVDiv= xx 40/(1 xxxx x $2 xxxxx 123)2= $2 xx + $2 xx = xx xx Step xxxxxxxxxxx P2 : xxxxx D3/(Rs–g) = xx 0816/(0 xxxxxxx xxx = xxx 143 Step xxxxxxxxxxx the PV xxxxxxx PV x xxx 14/(1 xxxxx = $46 xx Step 6: xxx the xxx xx obtain xxx stock’s price: xxxx = $4 xx + xxx xx = xxx 50 Alternatively, xxxxx a financial xxxxxxxxxxx input xxx xxxxxxxxxx CF0= xx CF1= 2 xxx and CF2=…
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Preview: rate xx expected xx continue, what xx theexpected dividend xxxxx for xxx xxxx year?c xxxx is this xxxxxxxxx expected total xxxx of xxxxxx xx t x 3?Solution:a Growth xxxx g = xx 2250/$1 xxxx xxx 1 x 7 0% xxxxxxxxxx solution: Input x = xx xx = xx 1449, PMT x 0, FV x 2 xxxxx xxxx =I x 6 996% x Dividend yield x D4/P3 x xx 225(1+0 xxxxxxx 22 = x 999% c xx s= xx x g x 7 00% x 5 00% x 12 xxx xx Problem xxxxxxx (13 points xxxxx 39 in xxxxxxxx (13 xxxxxxx xxx most xxxxxx financial statements xxx Maritin, Inc xxx shown xxxxxxxxxxxx xxxxxxxxx Balance xxxxxxxxxx $19,200 Assets xxxxxxx Debt $20,400Cost xxxxxxx Equity xxxxxxxxxxxxxx xxxxxx $3,650 xxxxx $93,000 Total xxxxxxxxxxxx (34%) $1,241Net xxxxxx $2,409Assets xxx xxxxx are xxxxxxxx proportionally to xxxxx Debt and xxxxxx equity xx xxxxxxxxx A xxxxxxxx of $963 xx was paid xxx Maritin xxxxxx xx maintain x constantdividend payout xxxxx of 0 xx Next xxxxxxxx xxxxx are xxxxxxxxx to be xxxxxxx What externalfinancing xx needed? xxxxxx xxxxxxxxx the xxxxxxxxx balance sheet xx find EFN) xxxxxxxxxxx increase xx xxxxx to xxxxxxx is an xxxxxxxx of:Sales increase x ($23,040 xxx xxxxxxx / xxxxxxxxxxxx increase = xx or 20%Assuming xxxxx and xxxxxx xxxxxxxx proportionally, xxx pro forma xxxxxxxxxxxxxxxxxxx will look xxxx this:Income xxxxxxxxx xxxxxxx sheetSales xxxxxxx 00Assets $111,600 xxxx $20,400 00Cost xxxxxxx 00Equity$72,600 xxxxxxxxxxxxxxxxxxxxx xx Additions xx RE 1,734 xxxxxxx (34%) $1,489 xx Total xxxxxxxx xxxxx $94,734 xxxxx income $2,890 xxxxx payout ratio xx constant, xx xxx dividends xxxx this year xx the payout xxxxx fromlast xxxx xxxxx net xxxxxxx or:Dividends = x 40($2,890 80)Dividends x $1,156 xxxxxxxxxx xx retained xxxxxxxx = $2,890 xx – 1,156 xxxxxxxxxx to xxxxxxxx xxxxxxxx = xxxxxx 48And the xxx equity balance xxxxxxxxx = xxxxxxx x 1,734 xx = $74,334 xxxx the EFN xxxxxx = xxxxx xxxxxx – xxxxx liabilities and xxxxxxxxx = $111,600 xxx 94,734 xx x $16,865 xxxxx (13 points) x company currently xxxx a xxxxxxxx xx $2 xxx share, that xxx D0 = xx It xxxxxxxxxxx xxxx the xxxxxxxxxxx dividend will xxxx at a xxxx of xxx xxx year xxx the next xxxxxxx then at x constant xxxx xx 7% xxxxxxxxxx The company’s xxxxx has a xxxx of x xxxxx risk-free xxxx is 7 xxx and the xxxxxx return xx xx 5% xxxx is your xxxxxxxx of thestock’s xxxxxxx price? xxxx xx the xxxxx price in xxx year if xx appreciates xxxx xxx samerate xx dividends?Solution:Step 1:Calculate xxx required rate xx.....
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