Tutorial 1 HW questions
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May 1, 2024
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Tutorial 1 questions -HW
1.
B
2.
C
3.
A
4.
B
5.
B
6.
B
7.
False
8.
Yes
9.
Investment decision
10.
FB book is the amount of money shareholders would receive. The market value is the value of a FB on stock price and no of outstanding shares.
11.
Company has made sales on credit.
12.
When managers’ and shareholders’ incentives are not aligned.
13.
Takeover should serve the best interest if owners of both bidding and target firms.
Tutorial 2
1.
You invest $100,000 today in an online savings account for 5 years. If the interest rate is 4% p.a., calculate the future value under each of the following scenarios: (a) interest rates are compounded annually FV= 100000(1+0.04)
5
=121665.29
(b) interest rates are compounded monthly
FV= 100000(1+(0.04/12))
60(5 x 12)
= 122099.66
2.
You expect to receive $50,000 from your superannuation in 3 years from today. If the interest rate is 8% p.a., calculate the present value under each of the following scenarios: (a) interest rates are compounded annually
PV = 50000(1+0.08)
-3
=39691.61
(b) interest rates are compounded quarterly
PV = 50000(1+(0.08/4))
-12(-3x12)
=
39424.66
3.
$10,000 is invested for 10 years at an interest rate of 3.75% p.a. with annual compounding. How much interest is earned in: (a) the first year?
I1= 10000 x 0.0375 = $375
(b) the tenth year?
I10 = FV= (10000(1+0.0375)
10
)= 14450.44
I9 = FV =(10000(1+0.0375)
9
)= 13928.13
I10-19= 522.31
4.
You have a student loan of $2,000. How much will be required on 14 December 2026 to repay the loan if it was made on 14 December 2022 at 8% p.a. compounding half-yearly?
PV= $2000
Half yearly = 2
I = 8%
FV= 2000(1 +0.08/2)
8(4x2)
= 2737.138
5.
On your 21st birthday you receive $10,000 as a result of a deposit that your grandparents made on the day you were born. How large was that deposit if it earned interest at 6% p.a.?
PV = 10000(1+0.06)
-21
= 2921.554
6.
A one-bedroom unit in Darwin can be purchased now for $160,000 cash, or an $80,000 cash deposit today and $110,000 cash payable in five years. If interest rates are 9% p.a. compounding monthly, which method of payment is better? Explain.
O1 $160000
O2 $80000
PV of O2
80000+110000(1+0.09/12)
-60(5x12) =
150256.97
Option 2 is cheaper.
7.
To repay a $50,000 debt that accrues interest at 12% p.a., you agree to make two equal-sized payments in one year and two years’ time, respectively. What is the size of each payment?
PV of x1 + PV of x2 =50000
x/(1+0.12)
1
+ x/(1.0.12)
2
= 50000
x(1/(1+0.12)
1
+ 1/(1+0.12)
2
)= 50000
x = 50000/(1+0.12)
1
+ (1+0.12)
2
)= 29584.91
8.
You have $30,000 that you want to invest in an online account for the next 10 years. You are
offered an investment plan that will pay you 3% p.a. for the first 5 years and then 6% p.a. for
the remaining 5 years. What will be the balance in your online account at the end of the 10 years? Assume that the interest rate is compounded semi-annually.
PV= 30000
FV5= 30000(1+0.03/2)
10 (5x2)
= 34816.22
FV10= 34816.22(1+0.06/2)
10 (5x2)
= 46790.09
Tutorial 3
1. How much would you have accumulated after 10 years if you save $2,400 each year in a savings account with an interest rate of 4.8% p.a.?
FV (10) = 2400( (1+0.048)
10
-1)/0.048 = 29906.63
2. You borrow $18,713.49 today. If the loan repayments are made annually over ten years and the interest rate is 4.8% p.a., then what is the dollar value of each annual repayment?
18713= PMT x ((1 – (1.048)
-10
)/0.048 PMT =2400
3. You are an elite sportsperson and are about to sign a contract with a rugby league team reportedly, “worth $10 million over eight years”. The contract reveals you will receive $24,038.46 each week for eight years. A competing team is prepared to offer you $8.5 million cash today for an eight-year playing contract. If interest rates are 4% p.a. compounded weekly, which team’s offer should you accept?
Offer 1: PV (0)= 24038.16 x (1-(1+(0.04/52))
-8 x 52
/0.09/52) = 8.55 million
Offer 2:
PV = 8.5 million
Therefore, Offer 1 Is better.
4. Your eccentric wealthy uncle wants to donate money to you so that you can pursue your hobbies without fulltime employment. If given a choice between the following four income streams, which would you prefer assuming an interest rate of 5% p.a.?
a) PV = 400k
b) PV = 15k/0.05 =500k
c) PV = 30k x (1-(1.005)
-20
/0.005)
d) PV = 600k x (1 +0.05)
-10
5. You invest $800 cash each year with the first deposit made in 2024 and the final deposit made in 2031. What is the future value of your investment? Assume interest rates are 5% p.a. In what year is the future value determined? In what year is the present value determined?
PV(2023) = 800 x (1-(1.05)
-8
)/0.05
PAF
FV (2031) = 800 x ((1.05)
8
-1/0.05
FAF
6. With an 8% p.a. rate, how much would you pay for a business that produces $1,200 per year forever, with the first cash flow occurring in one year’s time?
PV = 1200/ 0.08 = 15k
7. Your budget shows you can afford to service a loan with a maximum repayment of $400 per month over a five-year loan term. If interest rates are 6% p.a. compounded monthly, can you afford to borrow $20,000 for a new car? Explain.
PV = 20k
PV = 400 x (1-(1+(0.06/12))
-5 x 12
/ 0.06/12 = 20.6k
20k = PMT (1-(1+(0.06/12))
-5 x 12
/0.06/12
PMT < 400
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Related Questions
N2
Part of road show to promote a firm’s IPO is called book building where institutional investors submit their intention to how many shares at what price levels. The investment bank will use this information to determine an offer price such that it can raise most capital. It seems that intentionally submitting lower prices would benefit the institutional investors, however the investment bank does not have to worry about this potential cheating behavior.
True
False
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Case Study #3: Chapter 6 Business Analysis -
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How might you use the same idea to value securities, especially the stock of large publicly held companies?
Is there a way to calculate a value that could be compared to the stock’s market price that would tell an investor whether it’s a good buy? (If the market price is lower than the calculated value, the stock is a bargain.)
What financial figures associated with shares of stock might be used in the calculation. Consider the per share figures and ratios discussed in chapter 3 including EPS, dividends, book value per share, etc.
Does one measure make more sense than the others?
What factors would make a stock worth more or less than your calculated value?
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q15
Which type of brokerage account permits the broker to buy and sell shares for the investor without first contacting the investor for approval?
a.
Discretionary Account
b.
All the options are wrong
c.
Margin Account
d.
Cash Management Account
q16
Buying assets that yield a return greater than the minimum acceptable hurdle rate is a part of which core principles of Finance.
a.
Cost principle
b.
Investment principle
c.
Dividend principle
d.
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O To receive bonuses based on reported earnings.
O Because companies do not believe the Efficient Market Hypothesis.
O All of the above.
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B. Why might the two (2) disciplinary mechanisms of shareholders against managers not work?
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Tutorial Questions
Explain to John, your mentor, the primary goal of the organization?
Your manager is requesting you to provide an explanation to the question. Would the role of a financial manager be likely to increase or decrease in importance if the rate of inflation increased?
What is the difference between stock price maximization and profit maximization?
What are the three principal forms of business organization? What are the advantages and
disadvantages of each?
What mechanisms exist to influence managers to act in shareholders’ best interests?
What is an agency relationship?
What agency relationships exist within a corporation?
What are financial intermediaries, and what economic functions do they perform?
How does an efficient capital market help to reduce the prices of goods and services?
What is the term structure of interest rates? What is a yield curve? How should users and savers of…
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Question 16 (:
Which of the following statements is TRUE about the Modigliani and Miller Theory
regarding dividend policy ?
Shareholders are indifferent between receiving a capital gain on their shares or
dividend income
Companies should invest in all available positive NPV projects before paying out
a dividend
Investors in a perfect market may see the cutting of dividends as a bad sign
Some investors liquidity requirements mean that they will respond badly to a cut
in dividends.
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Question
Low-dividend clientele is preferred by firms because _____.
A. they pay more money per share of comparable stock than other types of investors
B. high-dividend clientele are more active shareholders
C. they are less critical of management decisions
D. none of the above. Low dividend clientele are no more preferred than high-dividend clientele.
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Corporate valuation model
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$1,995 million
$2,715 million
$43,481 million
$2,085 million…
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Question 1
(i)
If a company increased its share capital and reduced its long term debt, then gearing
would:
A. Reduce
B. Stay the same
C. Be eliminated
D. Increase
(ii)
A common feature of a business with high gearing is:
A. Shareholders receive lower dividends per share
B. Profits increase when interest rates rise
C. More difficult to raise additional debt finance
D. All of the above
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a.Primary Market
b.Regular Market
c.Secondary Market
d.None of the options
A financial statement which shows the status of the worth of a company on a certain date is known as
a.Cash flow statement
b.Balance Sheet
c.All of the options
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which one is correct please confirm?
QUESTION 21
Finance researcher Myron Gordon argues that ____.
a.
the clientele effect has no influence on share value
b.
the existence of transaction costs has no impact on the dividend decision
c.
dividends reduce uncertainty, and thus the payment of dividends will increase the firm's value
d.
risk-averse shareholders may prefer some dividends over the promise of future capital gains if the interest rate is expected to decline
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Please answer with reason for all why the option is correct and why the other options are incorrectPlease answer correct otherwise skip it
Which of the following strategies should improve the company's ROE?
Check all that apply. MULTIPLE ANSWERS
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B. Increase the interest rate on its notes payable or long-term debt obligations because it will reduce the company's net profit margin.
C. Increase the cost and amount of assets necessary to generate each dollar of sales because it will increase the company's total assets turnover.
D. Reduce the company's operating expenses, its cost of goods sold, and/or the interest rate on its borrowed funds because this will increase the company's net profit margin.
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The use of financial leverage by the firm has a potential impact on which of the following?
(1) The risk associated with the firm's operations.
(2) The risk experienced by the stockholders
(3) The variability of operating income
(4) The variability of net income
(5) The probability of going bankrupt
Group of answer choices:
1, 2, 3
1, 3, 5
3, 4, 5
2, 3, 4
2, 4, 5
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b. One key disadvantage of a residual dividend policy is that it makes it hard for a company to follow a stable dividend policy.
c. The clientele effect suggests that brokerage companies should choose customers whose dividend preferences match those of their client service borkers.
d. The "bird-in-the-hand effect" is the argument that investors prefer dividends to capital gains because dividends are more certain than capital gains.
e. In today's tax environment, gains through stock repurchases and dividend payments are taxed at the same rate
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Question 3
a) Suppose you own stock in a company. The current price per share is $25. Another
company has just announced that it wants to buy your company and will pay $35 per
share to acquire all the outstanding stock. Your company's management immediately
begins fighting off this hostile bid. Is management acting in the shareholders' best
interests? Why or why not?
b) Briefly discuss principal - agent problems as related to a corporation.
c) What items of good corporate governance serve to mitigate the tension between owners
and managers?
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Which one of the following factors may affect stock return but out of the CEO's control?This chould potentially be a problem when trying up the compensation scheme to stock returns/
A.Supply chain risk management
B.Federal monetary policy and regulations
C.The rival firm recruits the company's employees
D.Tte high inflation rate announced in the last quater
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1- Company insiders who can earn excess profits on company stock based on theirprivate knowledge suggest that financial markets are:
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ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Cengage Learning