tag:blogger.com,1999:blog-35683959035405065072024-03-16T11:52:59.946-07:00PRINCIPLE OF FINANCEAcademic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.comBlogger10125tag:blogger.com,1999:blog-3568395903540506507.post-52403228354137378912023-03-29T20:07:00.001-07:002023-03-29T20:07:30.798-07:00The use of Internal Rate of Return in business world<p><span style="background-color: #f7f7f8; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; white-space: pre-wrap;">IRR, or Internal Rate of Return, is a financial metric used to calculate the profitability of an investment or project. It represents the rate at which the net present value (NPV) of all cash flows associated with an investment is equal to zero. In other words, it is the discount rate that makes the present value of future cash flows equal to the initial investment.</span></p><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(59,130,246,0.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #f7f7f8; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; margin: 1.25em 0px; white-space: pre-wrap;">IRR is an important tool for financial management as it helps to determine whether an investment is worthwhile or not. It is commonly used to compare different investment opportunities and to make decisions about capital budgeting. A project or investment with a higher IRR is generally considered more profitable and attractive than one with a lower IRR.</p><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(59,130,246,0.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #f7f7f8; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; margin: 1.25em 0px; white-space: pre-wrap;">For example, let's say that a company is considering investing in a new project that requires an initial investment of $100,000. The project is expected to generate cash flows of $30,000 in Year 1, $40,000 in Year 2, and $50,000 in Year 3. To calculate the IRR of this investment, we would first discount the cash flows to their present values using a discount rate. Let's assume a discount rate of 10%.</p><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(59,130,246,0.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #f7f7f8; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; margin: 1.25em 0px; white-space: pre-wrap;">The present value of the cash flows would be:</p><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(59,130,246,0.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #f7f7f8; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; margin: 1.25em 0px; white-space: pre-wrap;">Year 1: $30,000 / (1 + 0.10) ^ 1 = $27,273
Year 2: $40,000 / (1 + 0.10) ^ 2 = $33,057
Year 3: $50,000 / (1 + 0.10) ^ 3 = $38,139</p><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(59,130,246,0.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #f7f7f8; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; margin: 1.25em 0px; white-space: pre-wrap;">The total present value of the cash flows would be $98,470. This is less than the initial investment of $100,000, indicating that the project may not be profitable. To find the IRR of the investment, we would adjust the discount rate until the present value of the cash flows equals the initial investment. In this case, the IRR would be approximately 9.5%.</p><p style="--tw-border-spacing-x: 0; --tw-border-spacing-y: 0; --tw-ring-color: rgba(59,130,246,0.5); --tw-ring-offset-color: #fff; --tw-ring-offset-shadow: 0 0 transparent; --tw-ring-offset-width: 0px; --tw-ring-shadow: 0 0 transparent; --tw-rotate: 0; --tw-scale-x: 1; --tw-scale-y: 1; --tw-scroll-snap-strictness: proximity; --tw-shadow-colored: 0 0 transparent; --tw-shadow: 0 0 transparent; --tw-skew-x: 0; --tw-skew-y: 0; --tw-translate-x: 0; --tw-translate-y: 0; background-color: #f7f7f8; border: 0px solid rgb(217, 217, 227); box-sizing: border-box; color: #374151; font-family: Söhne, ui-sans-serif, system-ui, -apple-system, "Segoe UI", Roboto, Ubuntu, Cantarell, "Noto Sans", sans-serif, "Helvetica Neue", Arial, "Apple Color Emoji", "Segoe UI Emoji", "Segoe UI Symbol", "Noto Color Emoji"; font-size: 16px; margin: 1.25em 0px 0px; white-space: pre-wrap;">If the company's required rate of return for projects like this one was, say, 12%, the IRR of 9.5% would indicate that the project is not profitable enough to warrant investment. However, if the required rate of return was only 8%, the IRR of 9.5% would suggest that the investment is profitable and should be pursued.</p>Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com0tag:blogger.com,1999:blog-3568395903540506507.post-85335839834560630942010-04-26T22:05:00.000-07:002010-04-26T22:06:02.137-07:00NPV and IRR calculations using the TI BAII Plus calculator<object width="480" height="385"><param name="movie" value="http://www.youtube.com/v/Z3xAtg7waEU&hl=en_US&fs=1&"></param><param name="allowFullScreen" value="true"></param><param name="allowscriptaccess" value="always"></param><embed src="http://www.youtube.com/v/Z3xAtg7waEU&hl=en_US&fs=1&" type="application/x-shockwave-flash" allowscriptaccess="always" allowfullscreen="true" width="480" height="385"></embed></object>Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com8tag:blogger.com,1999:blog-3568395903540506507.post-19236011162504230602010-03-26T01:43:00.001-07:002010-03-26T01:47:43.484-07:00CHAPTER 8 – UNDERSTANDING FINANCIAL MARKETS AND INSTITUTIONS<meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Font Definitions */ @font-face {font-family:"WP TypographicSymbols"; 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mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <p class="MsoNormal" style="margin-right: -21.6pt; text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">Questions<o:p></o:p></span></b></span></p> <p class="MsoNormal" style="margin-right: -21.6pt; text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-left: 37.5pt; text-align: justify; text-indent: -19.5pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">1.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">Classify the following transactions as taking place in the primary or secondary markets:<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">a.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">IBM issues $200 million of new common stock – primary market<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">b.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">The New Company issues $50 million of common stock in an IPO – primary market<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">c.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">IBM sells $5 million of GM preferred stock out of its marketable securities portfolio – secondary market<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">d.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">The Magellan Fund buys $100 million of previously issued IBM bonds – secondary market<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">e.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">Prudential Insurance Co. sells $10 million of GM common stock – secondary market</span></p><p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;">
<br /><span lang="EN-US" style="font-size:130%;"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-left: 37.5pt; text-align: justify; text-indent: -19.5pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">2.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">Classify the following financial instruments as money market securities or capital market securities:<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">a.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">Federal Funds – money market security<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">b.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">Common Stock – capital market security<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">c.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">Corporate Bonds – capital market security<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">d.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">Mortgages – capital market security<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">e.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">Negotiable Certificates of Deposit – money market security<span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">f.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">U.S. Treasury Bills – money market security<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">g.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">U.S. Treasury Notes – capital market security<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">h.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">U.S. Treasury Bonds – capital market security<o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">i.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">State and Government Bonds – capital market security<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: 36pt;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: 36pt;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-left: 18pt; text-align: justify; text-indent: -19.5pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">3.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">What are the different types of financial institutions? Include a description of the main services offered by each.</span></p><p class="MsoNormal" style="margin-left: 18pt; text-align: justify; text-indent: -19.5pt;">
<br /><span lang="EN-US" style="font-size:130%;"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style="font-size:130%;"><u><span lang="EN-US">The different types of
<br /></span></u></span></p><p class="MsoNormal" style="text-align: justify;">
<br /><span style="font-size:130%;"><u><span lang="EN-US"><o:p></o:p></span></u></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">Commercial Banks</span></b></span><span lang="EN-US" style="font-size:130%;">: depository institutions whose major assets are loans and whose major liabilities are deposits. Commercial bank loans cover a broader range, including consumer, commercial, and real estate loans, than do loans from other depository institutions. Because they are larger and more likely to have access to public securities markets, commercial bank liabilities generally include more nondeposit sources of funds, such as subordinate notes and debentures, than do those of other depository institutions.</span></p><p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;">
<br /><span lang="EN-US" style="font-size:130%;"><o:p></o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">Thrifts</span></b></span><span lang="EN-US" style="font-size:130%;">: depository institutions including savings associations, savings banks, and credit unions. Thrifts generally perform services similar to commercial banks, but they tend to concentrate their loans in one segment, such as real estate loans or consumer loans. Credit unions often operate on a not-for-profit basis for particular groups of individuals, such as a labor union or a particular company’s employees.<o:p></o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">Insurance Companies</span></b></span><span lang="EN-US" style="font-size:130%;">:<span style=""> </span>protect individuals and corporations (policyholders) from financially adverse events. Life insurance companies provide protection in the event of untimely death or illness, and help in planning retirement. Property casualty insurance protects against personal injury and liability due to accidents, theft, fire, and so on.</span></p><p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;">
<br /><span lang="EN-US" style="font-size:130%;"><o:p></o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">Securities Firms and Investment Banks</span></b></span><span lang="EN-US" style="font-size:130%;">: underwrite securities and engage in related activities such as securities brokerage, securities trading, and making markets in which securities trade.<o:p></o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">
<br /></span></b></span></p><p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">Finance Companies:</span></b></span><span lang="EN-US" style="font-size:130%;"><span style=""> </span>make loans to both individuals and businesses. Unlike depository institutions, finance companies do not accept deposits, but instead rely on short- and long-term debt for funding, and many of their loans are collateralized with some kind of durable good, such as washer/dryers, furniture, carpets and the like.<o:p></o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">Mutual Funds</span></b></span><span lang="EN-US" style="font-size:130%;">:<span style=""> </span>pool many individuals’ and companies’ financial resources and invest those resources in diversified asset portfolios.<o:p></o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">
<br /></span></b></span></p><p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;"><span style="font-size:130%;"><b style=""><span lang="EN-US">Pension Funds:</span></b></span><span lang="EN-US" style="font-size:130%;"> offer savings plans through which fund participants accumulate savings during their working years.<span style=""> </span>Participants then withdraw their pension resources (which have presumably earned additional returns in the interim) during their retirement years. Funds originally invested in and accumulated in a pension fund are exempt from current taxation. Participants pay taxes on distributions taken after age 55, when their tax brackets are (presumably) lower.
<br /></span></p><p class="MsoNormal" style="margin-right: -0.9pt; text-align: justify;">
<br /><span lang="EN-US" style="font-size:130%;"><b style=""><span style=""> </span><o:p></o:p></b></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-left: 18pt; text-align: justify; text-indent: -19.5pt;"><!--[if !supportLists]--><span lang="EN-US" style="font-size:130%;"><span style="">4.<span style="font: 7pt "Times New Roman";"> </span></span></span><!--[endif]--><span lang="EN-US" style="font-size:130%;">How would economic transactions between suppliers of funds (e.g., households) and users of funds (e.g., corporations) occur in a world without FIs?<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">In such a world, suppliers of funds (e.g., households), generating excess savings by consuming less than they earn, would have a basic choice. They could either hold cash as an asset or directly transfer that cash by investing in the securities issued by users of funds (e.g., corporations, governments, or retail borrowers). In general, demanders (users) of funds issue financial claims (e.g., equity and debt securities) to finance the gap between their investment expenditures and their internally generated funds, such as retained earnings or tax receipts. In a world without financial institutions, we would have direct transfers of funds from fund suppliers to fund users. In return, financial claims would flow directly from fund users to fund suppliers.<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style="font-size:130%;"><b style=""><u><span lang="EN-US">
<br /></span></u></b></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-size:130%;"><b style=""><u><span lang="EN-US">Problems<o:p></o:p></span></u></b></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">8-1 <b style="">Determinants of Interest Rate for Individual Securities </b>A particular security</span><span style=";font-family:";font-size:130%;" lang="EN-US" ><span style="">=</span></span><span lang="EN-US" style="font-size:130%;">s default risk premium is 2 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security</span><span style=";font-family:";font-size:130%;" lang="EN-US" ><span style="">=</span></span><span lang="EN-US" style="font-size:130%;">s liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">The security has no special covenants. Calculate the security</span><span style=";font-family:";font-size:130%;" lang="EN-US" ><span style="">=</span></span><span lang="EN-US" style="font-size:130%;">s equilibrium rate of return.<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><span style=""> </span><i style="">i<sub>j</sub>*</i> = 1.75% + 3.50% + 2.00% + 0.25% +0.85% = 8.35%</span></p><p class="MsoNormal" style="text-align: justify;">
<br /><span lang="EN-US" style="font-size:130%;"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">8-2 <b style="">Determinants of Interest Rate for Individual Securities </b>You are considering an investment in 30-year bonds issued by Moore Corporation. The bonds have no special covenants. <i style="">The Wall Street Journal</i> reports that 1-year T-bills are currently earning 3.25 percent. Your broker has determined the following information about economic activity and Moore Corporation bonds:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">Real interest rate = 2.25%<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">Default risk premium = 1.15%<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">Liquidity risk premium = 0.50%<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">Maturity risk premium = 1.75%<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">a. What is the inflation premium?<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">Expected (<i style="">IP</i>) = <i style="">i –</i> <i style="">RIR = </i>3.25% - 2.25% = 1.00%<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">b. What is the fair interest rate on Moore Corporation 30-year bonds?<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style="font-size:130%;"><i style=""><span lang="EN-US">i<sub>j</sub>*</span></i></span><span lang="EN-US" style="font-size:130%;"> = 1.00% + 2.25% + 1.15% + 0.50% + 1.75% = 6.65%</span></p><p class="MsoNormal" style="text-align: justify;">
<br /><span lang="EN-US" style="font-size:130%;"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">8-3 <b style="">Determinants of Interest Rate for Individual Securities </b>Dakota Corporation 15-year bonds have an equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 3.5 percent. The security</span><span style=";font-family:";font-size:130%;" lang="EN-US" ><span style="">=</span></span><span lang="EN-US" style="font-size:130%;">s liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the bond</span><span style=";font-family:";font-size:130%;" lang="EN-US" ><span style="">=</span></span><span lang="EN-US" style="font-size:130%;">s default risk premium.</span></p><p class="MsoNormal" style="text-align: justify;">
<br /><span lang="EN-US" style="font-size:130%;"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">8.00% = 1.75% + 3.50% + DRP + 0.25% + 0.85% <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">=> DRP = 8.00% - (1.75% + 3.50% + 0.25% + 0.85%) = 1.65%</span></p><p class="MsoNormal" style="text-align: justify;">
<br /><span lang="EN-US" style="font-size:130%;"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">8-4 <b style="">Determinants of Interest Rate for Individual Securities </b>A 2-year Treasury security currently earns 4.14 percent. Over the next two years, the real interest rate is expected to be 2.25 percent per year and the inflation premium is expected to be 1.75 percent per year. Calculate the maturity risk premium on the 2-year Treasury security.</span></p><p class="MsoNormal" style="text-align: justify;">
<br /><span lang="EN-US" style="font-size:130%;"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">4.14% = 1.75% + 2.25% + 0.00% + 0.00% + MP <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;">=> MP = 4.14% - (1.75% + 2.25% + 0.00% + 0.00%) = 0.14%<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:130%;"><o:p> </o:p></span></p> <p class="MsoNormal"><span style="font-size:130%;"><b style=""><span lang="EN-US"><o:p> </o:p></span></b></span></p> Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com16tag:blogger.com,1999:blog-3568395903540506507.post-52468356416513216172010-03-26T01:29:00.002-07:002010-03-26T01:42:41.493-07:00CHAPTER 7 – Valuing Stocks<span style="font-size:100%;"><b style=""><span lang="EN-US">CHAPTER 7 – Valuing Stocks<o:p></o:p></span></b></span> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style="font-size:100%;"><b style=""><span lang="EN-US">Questions<o:p></o:p></span></b></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">1.<span style=""> </span>As owners, what rights and advantages do shareholders obtain? </span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">They are able to participate in the economic growth of publicly traded firms without having to manage business entities directly.<span style=""> </span>They have the right to residual cash flows of corporate profits and often receive some of these cash flows through dividends. In addition, shareholders vote on the members for board of directors and other proposals for the company. Shareholder capital losses are capped in that they can only lose their initial investment.<span style=""> </span>Stocks are very liquid and investors can enjoy this liquidity in both their entrance into the stock market and their exit from it.</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">2.<span style=""> </span>Describe how being a residual claimant can be very valuable.<span style=""> </span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">Residual claimant’s are able to delegate the operations of the firm to professional managers, enjoying the possibly vast gains in value that can be created by some firms over time.</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">3.<span style=""> </span>Obtain a current quote of McDonald’s (MCD) from the Internet.<span style=""> </span>Describe what has changed since the quote in Figure 8.1.<span style=""> </span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">As of <st1:date year="2007" day="23" month="11" st="on">November 23, 2007</st1:date>, <st1:stockticker st="on">MCD</st1:stockticker>’s stock price had increased in value to $57.72 per share.<span style=""> </span><st1:stockticker st="on">MCD</st1:stockticker> experienced a modest loss from <st1:date year="2007" day="11" month="7" st="on">July 11, 2007</st1:date> reaching a trough in mid-August 2007 at approximately $47.50 per share.<span style=""> </span>Since that time, it has generally trended upward through the Fall of 2007.</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">4.<span style=""> </span>Get the trading statistics for the three main <st1:country-region st="on"><st1:place st="on">U.S.</st1:place></st1:country-region> stock exchanges.<span style=""> </span>Compare the trading activity to that of Table 8.1.<span style=""> </span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">The table below reflects trading activity on the three main <st1:country-region st="on"><st1:place st="on">U.S.</st1:place></st1:country-region> stock exchanges for <st1:date year="2007" day="26" month="11" st="on">November 26, 2007</st1:date>.<span style=""> </span>Trading volume was particularly high this day compared to the <st1:date year="2007" day="11" month="7" st="on">July 11, 2007</st1:date> activity reflected in Table 8.1.<span style=""> </span>Continued concerns over the home mortgage crises built into a selling frenzy in the markets with the DJIA plummeting 240 points on this day.<span style=""> </span>Volume was also up due to this trading day immediately following the Thanksgiving holiday weekend, since markets were closed the previous Thursday and only light trading volume was experienced in the lightly attended trading session the day after Thanksgiving.</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="background: none repeat scroll 0% 0% rgb(176, 193, 217);"><span style="font-size:100%;"><b><span style="text-transform: uppercase;" lang="EN-US">ADVANCES & DECLINES<o:p></o:p></span></b></span></p> <table class="MsoNormalTable" style="width: 90.74%;" width="90%" border="0" cellpadding="0" cellspacing="0"> <thead> <tr style=""> <td style="background: none repeat scroll 0% 0% rgb(238, 238, 238); padding: 1.3pt;" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US"><o:p> </o:p></span></b></span></p><span style="font-size:100%;"><br /></span></td> <td style="background: none repeat scroll 0% 0% rgb(238, 238, 238); padding: 1.3pt;" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">NYSE<o:p></o:p></span></b></span></p> </td> <td style="background: none repeat scroll 0% 0% rgb(238, 238, 238); padding: 1.3pt;" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">AMEX<o:p></o:p></span></b></span></p> </td> <td style="background: none repeat scroll 0% 0% rgb(238, 238, 238); padding: 1.3pt;" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">NASDAQ<o:p></o:p></span></b></span></p> </td> </tr> </thead> <tbody><tr style=""> <td style="width: 25.18%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span lang="EN-US" style="font-size:100%;">Advancing Issues<o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">834 (24%) <o:p></o:p></span></p> </td> <td style="width: 23.42%; padding: 2.65pt 1.3pt;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">451 (33%) <o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">782 (25%) <o:p></o:p></span></p> </td> </tr> <tr style=""> <td style="width: 25.18%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span lang="EN-US" style="font-size:100%;">Declining Issues<o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">2,565 (74%) <o:p></o:p></span></p> </td> <td style="width: 23.42%; padding: 2.65pt 1.3pt;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">824 (60%) <o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">2,248 (72%) <o:p></o:p></span></p> </td> </tr> <tr style=""> <td style="width: 25.18%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span lang="EN-US" style="font-size:100%;">Unchanged Issues<o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">64 (2%) <o:p></o:p></span></p> </td> <td style="width: 23.42%; padding: 2.65pt 1.3pt;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">96 (7%) <o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">104 (3%) <o:p></o:p></span></p> </td> </tr> <tr style=""> <td style="width: 25.18%; border-width: 1.5pt medium medium; border-style: solid none none;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span style="font-size:100%;"><b><span lang="EN-US">Total Issues<o:p></o:p></span></b></span></p> </td> <td style="width: 25.7%; border-width: 1.5pt medium medium; border-style: solid none none;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">3,463<o:p></o:p></span></b></span></p> </td> <td style="width: 23.42%; border-width: 1.5pt medium medium; border-style: solid none none;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">1,371<o:p></o:p></span></b></span></p> </td> <td style="width: 25.7%; border-width: 1.5pt medium medium; border-style: solid none none;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">3,134<o:p></o:p></span></b></span></p> </td> </tr> <tr style=""> <td style="width: 25.18%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span style="font-size:100%;"><b><span lang="EN-US">New Highs<o:p></o:p></span></b></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">45<o:p></o:p></span></b></span></p> </td> <td style="width: 23.42%; padding: 2.65pt 1.3pt;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">48<o:p></o:p></span></b></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">54<o:p></o:p></span></b></span></p> </td> </tr> <tr style=""> <td style="width: 25.18%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span style="font-size:100%;"><b><span lang="EN-US">New Lows<o:p></o:p></span></b></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">340<o:p></o:p></span></b></span></p> </td> <td style="width: 23.42%; padding: 2.65pt 1.3pt;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">128<o:p></o:p></span></b></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">286<o:p></o:p></span></b></span></p> </td> </tr> <tr style=""> <td style="width: 25.18%; padding: 9.9pt 1.3pt 2.65pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span lang="EN-US" style="font-size:100%;">Up Volume<o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 9.9pt 1.3pt 2.65pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">463,831,873 (13%) <o:p></o:p></span></p> </td> <td style="width: 23.42%; padding: 9.9pt 1.3pt 2.65pt;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">102,173,146 (13%) <o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 9.9pt 1.3pt 2.65pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">339,948,056 (17%) <o:p></o:p></span></p> </td> </tr> <tr style=""> <td style="width: 25.18%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span lang="EN-US" style="font-size:100%;">Down Volume<o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">3,149,651,823 (86%) <o:p></o:p></span></p> </td> <td style="width: 23.42%; padding: 2.65pt 1.3pt;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">667,962,524 (86%) <o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">1,599,678,727 (82%) <o:p></o:p></span></p> </td> </tr> <tr style=""> <td style="width: 25.18%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span style="font-size:100%;"><b><span lang="EN-US">Unchanged Volume</span></b></span><span lang="EN-US" style="font-size:100%;"><o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">38,646,084 (1%) <o:p></o:p></span></p> </td> <td style="width: 23.42%; padding: 2.65pt 1.3pt;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">8,138,296 (1%) <o:p></o:p></span></p> </td> <td style="width: 25.7%; padding: 2.65pt 1.3pt;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span lang="EN-US" style="font-size:100%;">8,948,642 (0%) <o:p></o:p></span></p> </td> </tr> <tr style=""> <td style="width: 25.18%; border-width: 1.5pt medium medium; border-style: solid none none;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt;"><span style="font-size:100%;"><b><span lang="EN-US">Total Volume<o:p></o:p></span></b></span></p> </td> <td style="width: 25.7%; border-width: 1.5pt medium medium; border-style: solid none none;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">3,652,129,780<sup>1</sup><o:p></o:p></span></b></span></p> </td> <td style="width: 23.42%; border-width: 1.5pt medium medium; border-style: solid none none;" width="23%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">778,273,966<sup>1</sup><o:p></o:p></span></b></span></p> </td> <td style="width: 25.7%; border-width: 1.5pt medium medium; border-style: solid none none;" width="25%" nowrap="nowrap"> <p class="MsoNormal" style="margin-bottom: 6.6pt; text-align: right;" align="right"><span style="font-size:100%;"><b><span lang="EN-US">1,948,575,425<sup>1</sup><o:p></o:p></span></b></span></p> </td> </tr> </tbody></table> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">5.<span style=""> </span>Why might the Standard & Poor’s 500 Index be a better measure of stock market performance than the Dow Jones Industrial Average? Why is the DJIA more popular than the S&P 500?</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">The S&P 500 is a broad market index that includes stocks of the 500 largest <st1:country-region st="on"><st1:place st="on">US</st1:place></st1:country-region> firms from ten sectors of the economy.<span style=""> </span>It captures 80% of the overall stock market capitalization and is a good proxy for what is occurring in the overall stock market. <span style=""> </span>The DJIA has been used for a longer period, since the mid-1880’s, and represents the activity of the 30 largest corporations in the <st1:country-region st="on"><st1:place st="on">US</st1:place></st1:country-region>, covering 30% of the stock market.<span style=""> </span>Its popularity arises from it being the first index used by the media.<span style=""> </span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">6.<span style=""> </span>Explain how it is possible for the DJIA to increase one day while the Nasdaq Composite decreases during the same day.<span style=""> </span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="font-size:100%;">The components of the DJIA and the Nasdaq Composite index are mostly different companies.<span style=""> </span>The DJIA includes the 30 industry leaders across all sectors of the economy.<span style=""> </span>The Nasdaq is comprised of predominantly technology related firms and emits a noisy signal of technology performance on any given day.</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="font-size:100%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style="font-size:100%;"><b style=""><span lang="EN-US">Problems<o:p></o:p></span></b></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-1 <b style="">Stock Index Performance</b> On January 16, 2007, the Dow Jones Industrial Average set a new high.<span style=""> </span>The index closed at 12,582.59, which was up 26.51 that day.<span style=""> </span>What was the return (in percent) of the stock market that day?<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -14.4pt;"><span lang="NO-BOK" style="font-size:100%;">FV<span style=""> </span>= PV × (1 + i)<span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 36pt; text-align: justify; text-indent: 36pt;"><span lang="NO-BOK" style="font-size:100%;">12,582.59<span style=""> </span>= (12,582.59-26.51) × (1 + i) <o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 36pt; text-align: justify; text-indent: 36pt;"><span lang="NO-BOK" style="font-size:100%;">i =<span style=""> </span>(12,582.59/12,556.08)-1 = 0.2111%<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="NO-BOK" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-2 <b style="">Stock Index Performance</b> On January 16, 2007, the Standard & Poor’s 500 Index reached the highest it had been since 2000.<span style=""> </span>The index closed at 1,431.90, which was up 1.17 that day.<span style=""> </span>What was the return (in percent) of the stock market that day? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -14.4pt; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="NO-BOK" ><span style=""> </span></span><span lang="NO-BOK" style="font-size:100%;">FV<span style=""> </span>= PV × (1 + i)<span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 36pt; text-align: justify; text-indent: 36pt;"><span lang="NO-BOK" style="font-size:100%;">1,431.90<span style=""> </span>= (1,431.9-1.17) × (1 + i) <o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 36pt; text-align: justify; text-indent: 36pt;"><span lang="NO-BOK" style="font-size:100%;">i =<span style=""> </span>(1.431.90/1,430.73)-1 = 0.08178%<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="NO-BOK" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-3 <b style="">Buying Stock with Commissions</b> At your discount brokerage firm, it costs $8.95 per stock trade. How much money do you need to buy 200 shares of Pfizer, Inc. (PFE), which trades at $27.22? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><span style=""> </span>($27.22/share </span><span lang="EN-US" style="font-size:100%;">× 200 shares) + $8.95 = $5,452.95<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-4 <b style="">Buying Stock with Commissions</b> At your discount brokerage firm, it costs $9.50 per stock trade. How much money do you need to buy 300 shares of Time Warner, Inc. (TWX), which trades at $22.62? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><span style=""> </span>($22.62/share </span><span lang="EN-US" style="font-size:100%;">× 300 shares) + $9.50 = $6,795.50<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-5 <b style="">Selling Stock with Commissions</b> At your full-service brokerage firm, it costs $120 per stock trade. How much money do you receive after selling 150 shares of Nokia Corporation (NOK), which trades at $20.13? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><span style=""> </span>($20.13/share </span><span lang="EN-US" style="font-size:100%;">× 150 shares) - $120 = $2,899.50<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-6 <b style="">Selling Stock with Commissions</b> At your full-service brokerage firm, it costs $135 per stock trade. How much money do you receive after selling 250 shares of International Business Machines (IBM), which trades at $96.17? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><span style=""> </span>($96.17/share </span><span lang="EN-US" style="font-size:100%;">× 250 shares) - $135 = $23,907.50<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-7 <b style="">Buying Stock with a Market Order</b> You would like to buy shares of Sirius Satellite Radio (SIRI).<span style=""> </span>The current ask and bid quotes are $3.96 and $3.93 respectively. You place a market buy-order for 500 shares that executes at these quoted prices.<span style=""> </span>How much money did it cost to buy these shares? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><span style=""> </span>($3.96/share </span><span lang="EN-US" style="font-size:100%;">× 500 shares) = $1,980.00<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-8 <b style="">Buying Stock with a Market Order</b> You would like to buy shares of Coldwater Creek, Inc. (CWTR).<span style=""> </span>The current ask and bid quotes are $20.70 and $20.66 respectively. You place a market buy-order for 200 shares that executes at these quoted prices.<span style=""> </span>How much money did it cost to buy these shares? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><span style=""> </span>($20.70/share </span><span lang="EN-US" style="font-size:100%;">× 200 shares) = $4,140.00<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-9 <b style="">Selling Stock with a Limit Order</b> You would like to sell 200 shares of WorldSpace, Inc. (WRSP).<span style=""> </span>The current ask and bid quotes are $4.66 and $4.62 respectively. You place a limit sell-order at $4.65. If the trade executes, how much money do you receive from the buyer? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><span style=""> </span>($4.65/share </span><span lang="EN-US" style="font-size:100%;">× 200 shares) = $930.00<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-10 <b style="">Selling Stock with a Limit Order</b> You would like to sell 100 shares of eCollege.com (ECLG).<span style=""> </span>The current ask and bid quotes are $15.33 and $15.28 respectively. You place a limit sell-order at $15.31. If the trade executes, how much money do you receive from the buyer? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><span style=""> </span>($15.31/share </span><span lang="EN-US" style="font-size:100%;">×100 shares) = $1,531.00<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-11 <b style="">Value of a Preferred Stock</b> A preferred stock from Duquesne Light Company (DQUPRA) pays $2.10 in annual dividends.<span style=""> </span>If the required return on the preferred stock is 5.4 percent, what’s the value of the stock? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >Use equation 7-6, noting that for preferred stock, the growth rate g equals zero:</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-size:100%;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilOuJFjUUjacO5moN_TiDrfz-6_xoruH4DE9nKButkxSriI8ZCcfBTqZzdAaHVvAGL-wgdq0czxNCDLwBfviGhqKZ25TnZYH3B6YFt2cHQfzaHrS4gjT18JdAsjFUQpBMLBKYOSd8Fs58/s1600/Untitled.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 302px; height: 37px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEilOuJFjUUjacO5moN_TiDrfz-6_xoruH4DE9nKButkxSriI8ZCcfBTqZzdAaHVvAGL-wgdq0czxNCDLwBfviGhqKZ25TnZYH3B6YFt2cHQfzaHrS4gjT18JdAsjFUQpBMLBKYOSd8Fs58/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5452859107957842946" border="0" /></a></span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-size:100%;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtDPfkZghAIaOy9a32FNw9_HKh9Q9EJ7RWjRkOuQX-fj3qhB4HKrmAnFx5XJEcVh76IKbJGrjEnjsZ8TD0rUegEL6Fw4ozj19imQv9yMyNasiDoI7bAXt0gMnyQLi060QWk8kAGe5faek/s1600/Untitled.jpg"><br /></a></span><span style=";font-size:100%;color:black;" lang="EN-US" >7-12 <b style="">Value of a Preferred Stock</b> A preferred stock from Hecla Mining Co. (HLPRB) pays $3.50 in annual dividends.<span style=""> </span>If the required return on the preferred stock is 6.8 percent, what is the value of the stock? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >Use equation 7-6, noting that for preferred stock, the growth rate g equals zero:</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-size:100%;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYRTt4r5OJ7fgiyjkjoARLxUuPnlheM4W1wdTJmiarMhjM8gDPHxBVWQGvVV85L0rBWIG7apkVyNH5soee37s2Zzx_TLam6bS_vpmaYShpDbFflQkzW5yTn-ntQ-K3-ZeCt7V6TP2w21M/s1600/Untitled.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 302px; height: 37px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgYRTt4r5OJ7fgiyjkjoARLxUuPnlheM4W1wdTJmiarMhjM8gDPHxBVWQGvVV85L0rBWIG7apkVyNH5soee37s2Zzx_TLam6bS_vpmaYShpDbFflQkzW5yTn-ntQ-K3-ZeCt7V6TP2w21M/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5452858576967628322" border="0" /></a></span><span style=";font-size:100%;color:black;" lang="EN-US" >7-13 <b style="">P/E Ratio and Stock Price</b> Ultra Petroleum (UPL) has earnings per share of $1.56 and a P/E ratio of 32.48.<span style=""> </span>What’s the stock price?<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >Use equation 7-10:</span></p><p class="MsoNormal" style="text-align: justify;"><span style="font-size:100%;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-hJYWxMC3xGDZYXdOrzlz5aTxRu2fiTXtoru52VdlCQJlEnr6cRYXHb_AATKzNk-jeemlM3pgQ058lH-mB_I_E-gOJZl_J6CMpHWgtCD7-tOBgs9K4muFTUvJ6eWn8cRGVxvb6qdMW4U/s1600/Untitled.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 248px; height: 29px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg-hJYWxMC3xGDZYXdOrzlz5aTxRu2fiTXtoru52VdlCQJlEnr6cRYXHb_AATKzNk-jeemlM3pgQ058lH-mB_I_E-gOJZl_J6CMpHWgtCD7-tOBgs9K4muFTUvJ6eWn8cRGVxvb6qdMW4U/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5452859369234752146" border="0" /></a></span><span style="font-size:100%;"><br /></span><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-14 <b style="">P/E Ratio and Stock Price</b> JP Morgan Chase Co. (JPM) has earnings per share of $3.53 and a P/E ratio of 13.81.<span style=""> </span>What is the price of the stock? <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >Use equation 7-10:</span></p><p class="MsoNormal" style="margin-left: 36pt; text-align: justify; text-indent: 36pt;"><span style="font-size:100%;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXWtdr3oI54YZOMy-SHiJlWvYHPqlxoor16-6ENC1qPH3UGQVKd4PUuY0QIDUnRg0ObGLue93xJGgmW1qhhPfS2TA94xD7tMoLcnJJfbJjpw7dGFbNigQfWHgQLA26YQgBDxGYAWS93yE/s1600/Untitled.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 248px; height: 29px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXWtdr3oI54YZOMy-SHiJlWvYHPqlxoor16-6ENC1qPH3UGQVKd4PUuY0QIDUnRg0ObGLue93xJGgmW1qhhPfS2TA94xD7tMoLcnJJfbJjpw7dGFbNigQfWHgQLA26YQgBDxGYAWS93yE/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5452859608195055730" border="0" /></a></span><span lang="EN-US" style="font-size:100%;"><span style="position: relative; top: 9pt;"><br /><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1028" drawaspect="Content" objectid="_1331126071"> </o:OLEObject> </xml><![endif]--><span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-15 <b style="">Value of Dividends and Future Price</b> A firm is expected to pay a dividend of $1.35<span style=""> </span>next year and $1.50 the following year.<span style=""> </span>Financial Analysts believe the stock will be at their price target of $75 in two years. Compute the value of this stock with a required return of 11.5 percent. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal" style="line-height: 200%;"><span style=";font-size:100%;color:black;" lang="EN-US" >Use equation </span><span lang="EN-US" style="font-size:100%;">7-3:</span></p><p class="MsoNormal" style="line-height: 200%;"><span lang="EN-US" style="font-size:100%;"><span style=""> </span></span><span style="font-size:100%;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEga4mv-YbVFhIw-hAcGSAoBymuTsUCopYLbVxmXW4TSqXdGoFQ-VoEXEs2mV46q4gkae07LgQezruG6r-jjhOCR-7ai2aT-Ga9ZRH1_dN6C7A9OtXkegNBwBvrYSSp0V2AQt-ig20ExI7s/s1600/Untitled.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 320px; height: 43px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEga4mv-YbVFhIw-hAcGSAoBymuTsUCopYLbVxmXW4TSqXdGoFQ-VoEXEs2mV46q4gkae07LgQezruG6r-jjhOCR-7ai2aT-Ga9ZRH1_dN6C7A9OtXkegNBwBvrYSSp0V2AQt-ig20ExI7s/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5452859865824341618" border="0" /></a></span></p><p class="MsoNormal" style="line-height: 200%;"><span style="line-height: 200%;font-size:100%;" lang="EN-US" ><span style="position: relative; top: 16pt;"><br /><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1029" drawaspect="Content" objectid="_1331126072"> </o:OLEObject> </xml><![endif]--><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style=";font-size:100%;color:black;" lang="EN-US" >7-16 <b style="">Value of Dividends and Future Price</b> A firm is expected to pay a dividend of $2.05 next year and $2.35 the following year.<span style=""> </span>Financial Analysts believe the stock will be at their price target of $110 in two years. Compute the value of this stock with a required return of 12 percent.<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span style=";font-size:100%;color:black;" lang="EN-US" ><o:p> </o:p></span></p> <p class="MsoNormal"><span style=";font-size:100%;color:black;" lang="EN-US" >Use equation </span><span lang="EN-US" style="font-size:100%;">7-3:<span style=""><br /></span></span></p><p class="MsoNormal"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_P3xrJdC6bC2nxN6aM8b9S-oqI6ae2DGKb0xNZBqnoBGXVJJau0SLx9qYWqhOWcOLsvnqJwH59T9l76twwAeP2rfKP7bNSZrQNhLMxhxeOqdvZzHspIo1up5WftrzsN6FUreeluFxCQM/s1600/Untitled.jpg"><img style="display: block; margin: 0px auto 10px; text-align: center; cursor: pointer; width: 315px; height: 40px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_P3xrJdC6bC2nxN6aM8b9S-oqI6ae2DGKb0xNZBqnoBGXVJJau0SLx9qYWqhOWcOLsvnqJwH59T9l76twwAeP2rfKP7bNSZrQNhLMxhxeOqdvZzHspIo1up5WftrzsN6FUreeluFxCQM/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5452860144668255858" border="0" /></a><span lang="EN-US" style="font-size:100%;"><span style=""> </span><span style="position: relative; top: 15pt;"><!--[if gte vml 1]><v:shape id="_x0000_i1030" type="#_x0000_t75" style="'width:235.5pt;height:29.25pt'" ole=""> <v:imagedata src="file:///C:\Users\almansor\AppData\Local\Temp\msohtml1\01\clip_image011.wmz" title=""> </v:shape><![endif]--><!--[if !vml]--><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1030" drawaspect="Content" objectid="_1331126073"> </o:OLEObject> </xml><![endif]--></span></p>Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com5tag:blogger.com,1999:blog-3568395903540506507.post-25212031112010651352010-03-26T01:29:00.001-07:002010-03-26T01:29:37.436-07:00CHAPTER 6 – Valuing BondsCHAPTER 6 – Valuing Bonds<br /><br /><br /> Questions<br />1. What does a call provision allow the issuer to do, and why would they do it?<br /><br /> A call provision on a bond issue allows the issuer to pay off the bond debt early at a cost of the principal plus any call premium. Most of the time a bond issuer is called, it is because interest rates have substantially declined in the economy. The issuer calls the existing bonds and issues new bonds at the lower interest rate. This reduces the interest payments the issuer must pay each year.<br /><br />2. List the differences between the new TIPS and traditional Treasury bonds.<br /><br /> Traditional Treasury bonds have a fixed principal and constant payments. Because the principal and coupon rate are fixed, interest rate changes in the economy cause the market price of the bonds to have large fluctuations. On the other hand, the principal of a TIPS increases with the rate of inflation. Similar to a T-bond, the TIPS has a constant coupon rate. However, since the principal of the TIPS increases over time, the interest payment increases over time. This inflation rate adjustment of a TIPS’ principal every six months reduces the amount of downward price change in the price of the bond when interest rates increase.<br /><br />3. Explain how mortgage-backed securities work.<br /><br /> A large amount of home mortgages are purchased and pooled together. The home owners pay interest and principal monthly on their mortgages. Bonds are issued from the pool of mortgages, using the mortgages as collateral. The interest payments and bond principal payments for these mortgage-backed securities (MBS) originate from the mortgage borrowers and flow through the pool of mortgages. As the home owners pay off their mortgages over time, the MBS are also paid.<br /><br />4. Provide the definitions of a discount bond and a premium bond. Give examples.<br /><br /> A discount bond is simply a bond that is selling below its par value. It would be quoted at a price that is less than 100 percent of par, like 99.05. A premium bond is a bond selling above its par value. Its price will be quoted as over 100 percent of par value, like 101.15. A bond becomes a discount bond when market interest rates rise above the bond’s coupon rate. A bond becomes a premium bond when market interest rates fall below the bond’s coupon rate.<br /><br />5. Describe the differences in interest payments and bond price between a 5 percent coupon bond and a zero coupon bond.<br /><br /> The 5 percent coupon bond pays annual interest of 5 percent of the bond’s par value. For $1,000 par value bond, this would be $50 per year. This interest might be paid in two payments of $25. The price of the coupon bond tends to stay near its par value. The zero coupon bond pays no interest payments. The bondholder earns a return from the increase of the bond’s market price over time. The bond’s price is initially much lower than its par value. When the zero coupon bond finally matures, the par value is paid.<br /><br />6. All else equal, which bond’s price is more affected by a change in interest rates, a short-term bond or a longer-term bond? Why?<br /><br /> All else equal, a long-term bond experiences larger price changes when interest rates change than a short-term bond. A bond’s price is the present value of all its cash flows. Changes in the discount rate (the interest rate) impact present values more for cash flows that are further out in time.<br /><br />7. All else equal, which bond’s price is more effected by a change in interest rates, a bond with a large coupon or a small coupon? Why?<br /><br /> The price of the bond with the small coupon will be impacted more by a change in interest rates than the price of the large coupon bond. For a small coupon bond, the cash flows are weighted much more toward the maturity date because of the small interest payments. The large coupon bond has high interest payments, many occur soon. These higher cash flows made earlier dampen the impact of interest rate changes because those changes in the discount rate impact the earlier cash flows to a lesser degree than the later cash flows.<br /><br />Problems<br />6-1 Interest Payments Determine the interest payment for the following three bonds: 3 ½ percent coupon corporate bond (paid semi-annually), 4.25 percent coupon Treasury note, and a corporate zero coupon bond maturing in 10 years. (Assume a $1,000 par value.)<br /><br />3 ½ percent coupon corporate bond (paid semi-annually): ½ × 3.5% × $1,000 = $17.50<br />4.25 percent coupon Treasury note: ½ × 4.25% × $1,000 = $21.25<br />corporate zero coupon bond maturing in 10 years: 0% × $1,000 = $0<br /><br />6-2 Interest Payments Determine the interest payment for the following three bonds: 4 ½ percent coupon corporate bond (paid semi-annually), 5.15 percent coupon Treasury note, and a corporate zero coupon bond maturing in 15 years. (Assume a $1,000 par value.)<br /><br />4 ½ percent coupon corporate bond (paid semi-annually): ½ × 4.5% × $1,000 = $22.50<br />5.15 percent coupon Treasury note: ½ × 5.15% × $1,000 = $25.75<br />corporate zero coupon bond maturing in 10 years: 0% × $1,000 = $0<br /><br />6-3 Time to Maturity A bond issued by Ford on May 15, 1997 is scheduled to mature on May 15, 2097. If today is November 16, 2008, what is this bond’s time to maturity?<br /><br />May 15, 2097 minus November 16, 2008 = 88 years and 6 months<br /><br />6-4 Time to Maturity A bond issued by IBM on December 1, 1996 is scheduled to mature on December 1, 2096. If today is December 2, 2007, what is this bond’s time to maturity?<br /><br />December 1, 2096 minus December 2, 2007 = 89 years<br /><br />6-5 Call Premium A 7 percent corporate coupon bond is callable in five years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?<br /><br />principal + call premium = $1,000 + 7%×$1,000 = $1,070<br /><br />6-6 Call Premium A 6.5 percent corporate coupon bond is callable in ten years for a call premium of one year of coupon payments. Assuming a par value of $1,000, what is the price paid to the bondholder if the issuer calls the bond?<br /><br />principal + call premium = $1,000 + 6.5%×$1,000 = $1,065<br /><br />6-7 TIPS Interest and Par Value A 2 ¾ percent TIPS has an original reference CPI of 185.4. If the current CPI is 210.7, what is the current interest payment and par value of the TIPS?<br /><br />par value = 210.7/185.4 × $1,000 = $1,136.46<br />interest payment = ½ × 2.75% × $1,136.46 = $15.63<br /><br />6-8 TIPS Interest and Par Value A 3 1/8 percent TIPS has an original reference CPI of 180.5. If the current CPI is 206.8, what is the current interest payment and par value of the TIPS?<br /><br />par value = 206.8/180.5 × $1,000 = $1,145.71<br />interest payment = ½ × 3.125% × $1,145.71 = $17.90Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com10tag:blogger.com,1999:blog-3568395903540506507.post-88537557981095433992010-03-02T20:32:00.000-08:002010-03-02T22:07:54.287-08:00CHAPTER 5 – Time Value of Money 2<span style="font-weight: bold; color: rgb(204, 0, 0);" lang="EN-US">Questions</span> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-1 How can you add a cash flow in year two and a cash flow in year four<span style=""> </span>in year seven?
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">To add cash flows, they need to be moved to the same time period.<span style=""> </span>The cash flows in years two and four should be moved forward with interest to year seven, then they can be added together.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-2 People can become millionaires in their retirement years quite easily if they start saving early in employer 401(k) or 403(b) programs (or even if their employers don’t offer such programs).<span style=""> </span>Demonstrate the growth of a $250 monthly contribution for 40 years earning 9 percent APR.
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Using equation 5-2, we have:</span></p><p class="MsoNormal" style="text-align: justify;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0U4wWDCj8CmWYP_-YwKt95Q5dn1bmyGjyPFU4xE6rDV_aPOUDTISAKpA-GxWdlcS2OiogLSFdKrw4eeM1_O_wNhOZ7_3l54BKUxoUsFc8cbSJYmlNxxm5f5Wn6RHJUjB6UBGqMKxyyZo/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 248px; height: 29px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj0U4wWDCj8CmWYP_-YwKt95Q5dn1bmyGjyPFU4xE6rDV_aPOUDTISAKpA-GxWdlcS2OiogLSFdKrw4eeM1_O_wNhOZ7_3l54BKUxoUsFc8cbSJYmlNxxm5f5Wn6RHJUjB6UBGqMKxyyZo/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444262227232035874" border="0" /></a></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><span style="position: relative; top: 12pt;"><!--[if gte vml 1]><v:shapetype id="_x0000_t75" coordsize="21600,21600" spt="75" preferrelative="t" path="m@4@5l@4@11@9@11@9@5xe" filled="f" stroked="f"> <v:stroke joinstyle="miter"> <v:formulas> <v:f eqn="if lineDrawn pixelLineWidth 0"> <v:f eqn="sum @0 1 0"> <v:f eqn="sum 0 0 @1"> <v:f eqn="prod @2 1 2"> <v:f eqn="prod @3 21600 pixelWidth"> <v:f eqn="prod @3 21600 pixelHeight"> <v:f eqn="sum @0 0 1"> <v:f eqn="prod @6 1 2"> <v:f eqn="prod @7 21600 pixelWidth"> <v:f eqn="sum @8 21600 0"> <v:f eqn="prod @7 21600 pixelHeight"> <v:f eqn="sum @10 21600 0"> </v:formulas> <v:path extrusionok="f" gradientshapeok="t" connecttype="rect"> <o:lock ext="edit" aspectratio="t"> </v:shapetype><v:shape id="_x0000_i1025" type="#_x0000_t75" style="'width:200.25pt;" ole=""> <v:imagedata src="file:///C:\Users\almansor\AppData\Local\Temp\msohtml1\01\clip_image001.wmz" title=""> </v:shape><![endif]--><!--[if !vml]-->
<br /><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1025" drawaspect="Content" objectid="_1329124730"> </o:OLEObject> </xml><![endif]--></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-3 When you discount multiple cash flows, how does the future period that a cash flow is paid affect its present value and its contribution to the value of all the cash flows?
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Discounting reduces a future cash flow to a smaller present value.<span style=""> </span>Cash flows far into the future become very small when discounted to the present.<span style=""> </span>Thus, cash flows in distant future periods have small impacts on present values.
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-4 How can you use the present value of an annuity concept to determine the price of a house you can afford?
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Mortgages are typically for a large enough amount of money that borrowing is required to purchase a home.<span style=""> </span>The amount that one can afford for a home is a function of their current state of wealth.<span style=""> </span>Mortgages allow consumers to spread the expense of a home over a longer period, typically 15 or 30 years.<span style=""> </span>This allows consumers to put a smaller portion of wealth into the home (for example, a 20% down payment) and borrow the balance over the life of the loan.<span style=""> </span>Due to the effect of annuity compounding, the payments for such a long lived debt make the monthly payments of a manageable nature so that they can be paid from current income.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-5 Since perpetuity payments continue for ever, how can a present value be computed? Why isn’t the present value infinite?</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Equation 5-5 is used to calculate the present value of a perpetuity.<span style=""> </span>It is a limiting version of equation 5-<st1:metricconverter productid="4 in" st="on">4 in</st1:metricconverter> which the period N grows infinitely large.<span style=""> </span>As this occurs the expression following the “<st1:metricconverter productid="1”" st="on">1”</st1:metricconverter> in equation 5-4 drives to the value 0 and the numerator simply become “<st1:metricconverter productid="1.”" st="on">1.”</st1:metricconverter><span style=""> </span>The present value is not infinite since the terms following the PMT in equation 5-4 converge to a finite limit of 1/i. This also demonstrates how payments far into the future have infinitesimal value today.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-6 Explain why you use the same adjustment factor, (1 + <i style="">i</i>), when you adjust annuity due payments for both future value and present value.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Adjusting an annuity due calculation involves shifting the entire series of payments forward one period.<span style=""> </span>This is accomplished by multiplying by (1 + i) irrespective of whether it is a future value or present value calculation.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-7 Use the idea of compound interest to explain why EAR is larger than APR.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">The annual percentage rate does not take into account the frequency of interest compounding. Equation 5-8 illustrates the conversion from <st1:stockticker st="on">APR</st1:stockticker> to <st1:stockticker st="on">EAR</st1:stockticker>.<span style=""> </span>The effective annual rate converts the annual percentage rate to a rate that can be compared to other annual rates.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /><span style=""> </span></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-8 Would you rather pay $10,000 for a five year $2,500 annuity or a ten-year $1,250 annuity?<span style=""> </span>Why?
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">The effective annual rates for these two payment streams are 7.93% and 4.28% respectively.<span style=""> </span>I would rather pay $10,000 for a five year $2,500 annuity as it earns a higher effective annual rate of interest.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-9 The interest on your home mortgage is tax deductible. Why are the early years of the mortgage more helpful in reducing taxes than in the later years?
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Mortgage payments at the beginning of the amortization schedule are predominantly interest with little principal.<span style=""> </span>In later years, interest payments decline and principal payments make up an ever increasing part of the payments.<span style=""> </span>Thus, the tax deductible part (the interest payment) is larger in the beginning years.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5-10 How can you use the concepts illustrated in computing the number of payments in an annuity to figure how to pay off a credit card balance?<span style=""> </span>How does the magnitude of the payment impact the number of months?
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Utilizing equation 5-2, you can declare the present balance for the credit card and set that equal to the <st1:stockticker st="on">PVA</st1:stockticker>.<span style=""> </span>The interest can be obtained as an <st1:stockticker st="on">APR</st1:stockticker> and converted to and <st1:stockticker st="on">EAR</st1:stockticker> using equation 5-8.<span style=""> </span>This is the value to put into “i” in equation 5-2.<span style=""> </span>You then decide when you want to have the credit card paid off and convert this to a monthly value of N in equation 5-2.<span style=""> </span>Solving for PMT will yield the amount needed to pay the credit card off in the time frame you desire, assuming that no additional charges are made to the credit card and that the interest rate remains level.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><b style=""><span lang="EN-US"><span style="color: rgb(255, 0, 0);font-size:180%;" >Problems</span><o:p></o:p></span></b></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-1 <b style="">Future Value</b> Compute the future value in year 8 of a $1,000 deposit in year</span><span lang="EN-US"> 1 and another $1,500 deposit at the end of year 3 using a 10% interest rate.</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-1:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -55.8pt; text-indent: 36pt; line-height: 200%; color: rgb(153, 51, 0);"><a name="OLE_LINK7"></a><a name="OLE_LINK8"><span style=""><span lang="EN-US">FV = $1,000 × (1 + 0.10)<sup>7</sup> + $1,500× (1 + 0.10)<sup>5</sup><span style=""> </span>= $1,948.72 + $2,415.77 = $4,364.48<o:p></o:p></span></span></a></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">
<br /></span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-2 <b style="">Future Value</b> Compute the future value in year 7 of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using a 8% interest rate.</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-1:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">FV = $2,000 × (1 + 0.08)<sup>6</sup> + $2,500 × (1 + 0.08)<sup>3</sup><span style=""> </span>= $3,173.75 + $3,149.28 = $6,323.03<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">
<br /></span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-3 <b style="">Future Value of an Annuity</b> What is the future value of a $500 annuity payment over 5 years if interest rates are 9 percent?</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-2:</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOqfDkUaZwewVfczUqMXrlBX3ZjvtPhJaPhwRtjA8sVf-vk_Vy4yn3Ka09WHLsSUNlCHIZ-003n8RKwZL47h5dtrN5JkJpfI64mGWHmfZWxxPohibU6UwIf1lNfVWWCDD_E6_bopdWoH8/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 248px; height: 29px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiOqfDkUaZwewVfczUqMXrlBX3ZjvtPhJaPhwRtjA8sVf-vk_Vy4yn3Ka09WHLsSUNlCHIZ-003n8RKwZL47h5dtrN5JkJpfI64mGWHmfZWxxPohibU6UwIf1lNfVWWCDD_E6_bopdWoH8/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444262550460321970" border="0" /></a></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-4 <b style="">Future Value of an Annuity</b> What is the future value of a $700 annuity payment over 4 years if interest rates are 10 percent?</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-2:</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh16sWamr5VSUC5dXkUoO9XKyjEtZO_oy7SPakV0YI6UEeiKhUnXUpHFZ9oRgj-8998OcZckzUDeb7w42kV-chExwJW8qUQOvvCiX2aPuxkpu1JceZqHcpFF7np40VbUZaXd3y39OWn5kE/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 248px; height: 29px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh16sWamr5VSUC5dXkUoO9XKyjEtZO_oy7SPakV0YI6UEeiKhUnXUpHFZ9oRgj-8998OcZckzUDeb7w42kV-chExwJW8qUQOvvCiX2aPuxkpu1JceZqHcpFF7np40VbUZaXd3y39OWn5kE/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444262828062145250" border="0" /></a>
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: 36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><span style="position: relative; top: 12pt;"><!--[if gte vml 1]><v:shape id="_x0000_i1027" type="#_x0000_t75" style="'width:224.25pt;height:27.75pt'" ole=""> <v:imagedata src="file:///C:\Users\almansor\AppData\Local\Temp\msohtml1\01\clip_image005.wmz" title=""> </v:shape><![endif]--><!--[if !vml]-->
<br /><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1027" drawaspect="Content" objectid="_1329124732"> </o:OLEObject> </xml><![endif]--><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-5 <b style="">Present Value</b> Compute the present value of a $1,000 deposit in year 1 and another $1,500 deposit at the end of year 3 if interest rates are 10 percent.</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-3:</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -55.8pt; text-indent: 36pt; line-height: 200%; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p>PV = $1,000 ÷ (1 + 0.10)<sup>1</sup> + $1,500 ÷ (1 + 0.10)<sup>3</sup><span style=""> </span>= $909.09 + $1,126.97 <span style=""> </span>= $2,036.06 <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">
<br /></span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-6 <b style="">Present Value</b> Compute the present value of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using an 8% interest rate.</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-3:<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -55.8pt; text-indent: 36pt; line-height: 200%; color: rgb(153, 51, 0);"><span lang="EN-US">PV = $2,000 ÷ (1 + 0.08)<sup>1</sup> + $2,500 ÷ (1 + 0.08)<sup>4</sup><span style=""> </span>= $1,851.85 + $1,837.57 <span style=""> </span>= $3,689.43 <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">
<br /></span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-7 <b style="">Present Value of an Annuity</b> What’s the present value of a $500 annuity payment over 5 years if interest rates are 9 percent?</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-4:</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFlp_E2x6OZFOxYTswGwvEzEpTXBXlbzpHqsrf4kAjp6lmQRWFmv2NcJZDafMw-ycBQiC4GcjhmgpO_AxfdNUXpIj0Z3_joQ0Xd5RKcSlGBeBJZC5eq6iw7KXvuhxzOYmYfj_Mo_BK4Gw/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 248px; height: 50px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFlp_E2x6OZFOxYTswGwvEzEpTXBXlbzpHqsrf4kAjp6lmQRWFmv2NcJZDafMw-ycBQiC4GcjhmgpO_AxfdNUXpIj0Z3_joQ0Xd5RKcSlGBeBJZC5eq6iw7KXvuhxzOYmYfj_Mo_BK4Gw/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444263008800211922" border="0" /></a></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><link rel="Edit-Time-Data" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_editdata.mso"><link rel="OLE-Object-Data" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_oledata.mso"><!--[if !mso]> <style> v\:* {behavior:url(#default#VML);} o\:* {behavior:url(#default#VML);} w\:* {behavior:url(#default#VML);} .shape {behavior:url(#default#VML);} </style> <![endif]--><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> </p><p class="MsoNormal" style="text-align: justify; text-indent: 36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><span style="position: relative; top: 31pt;"><!--[if gte vml 1]><v:shapetype id="_x0000_t75" coordsize="21600,21600" spt="75" preferrelative="t" path="m@4@5l@4@11@9@11@9@5xe" filled="f" stroked="f"> <v:stroke joinstyle="miter"> <v:formulas> <v:f eqn="if lineDrawn pixelLineWidth 0"> <v:f eqn="sum @0 1 0"> <v:f eqn="sum 0 0 @1"> <v:f eqn="prod @2 1 2"> <v:f eqn="prod @3 21600 pixelWidth"> <v:f eqn="prod @3 21600 pixelHeight"> <v:f eqn="sum @0 0 1"> <v:f eqn="prod @6 1 2"> <v:f eqn="prod @7 21600 pixelWidth"> <v:f eqn="sum @8 21600 0"> <v:f eqn="prod @7 21600 pixelHeight"> <v:f eqn="sum @10 21600 0"> </v:formulas> <v:path extrusionok="f" gradientshapeok="t" connecttype="rect"> <o:lock ext="edit" aspectratio="t"> </v:shapetype><v:shape id="_x0000_i1025" type="#_x0000_t75" style="'width:229.5pt;" ole=""> <v:imagedata src="file:///C:\Users\almansor\AppData\Local\Temp\msohtml1\01\clip_image001.wmz" title=""> </v:shape><![endif]--><!--[if !vml]-->
<br /><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1025" drawaspect="Content" objectid="_1329124976"> </o:OLEObject> </xml><![endif]--><o:p></o:p></span></p><span style="color: rgb(153, 51, 0);" lang="EN-US"><span style="position: relative; top: 31pt;">
<br /><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1028" drawaspect="Content" objectid="_1329124733"> </o:OLEObject> </xml><![endif]--><o:p></o:p></span> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-8 <b style="">Present Value of an Annuity</b> What’s the present value of a $700 annuity payment over 4 years if interest rates are 10 percent?</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-4:</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYXH00oQV_NarXxpyi_LLdcblHeuAbca_aaP42mXbNHaFk1tOaS1cc-MxUJpJN7hJHGudJZKp-ad6oQ806iA_wZdZaTbyzQJdWeDr6bdCnb7B4mDub2Si7svvnB-oqkal-dpmqxYqlQxw/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 248px; height: 50px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjYXH00oQV_NarXxpyi_LLdcblHeuAbca_aaP42mXbNHaFk1tOaS1cc-MxUJpJN7hJHGudJZKp-ad6oQ806iA_wZdZaTbyzQJdWeDr6bdCnb7B4mDub2Si7svvnB-oqkal-dpmqxYqlQxw/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444263252679591442" border="0" /></a>
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: 36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><span style="position: relative; top: 31pt;"><!--[if gte vml 1]><v:shape id="_x0000_i1029" type="#_x0000_t75" style="'width:236.25pt;height:51pt'" ole=""> <v:imagedata src="file:///C:\Users\almansor\AppData\Local\Temp\msohtml1\01\clip_image009.wmz" title=""> </v:shape><![endif]--><!--[if !vml]-->
<br /><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1029" drawaspect="Content" objectid="_1329124734"> </o:OLEObject> </xml><![endif]--><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-9 <b style="">Present Value of a Perpetuity</b> What’s the present value, when interest rates are 7.5 percent, of a $50 payment made every year forever?
<br /></span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-5:</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHvge0tKJGx6n1Tev2LAEp4_5Prnl703uZrJ2KLpsBz3nAQRFq4qXQnBmj5EL4fLE4fd75HPLVv5SpwYzcmg8aZBEiG5UNxpy48BQ9QXcQfIlhZeD-USyP7VyLVIAH7z_rEZcx2OqxSmw/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 248px; height: 29px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjHvge0tKJGx6n1Tev2LAEp4_5Prnl703uZrJ2KLpsBz3nAQRFq4qXQnBmj5EL4fLE4fd75HPLVv5SpwYzcmg8aZBEiG5UNxpy48BQ9QXcQfIlhZeD-USyP7VyLVIAH7z_rEZcx2OqxSmw/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444263503031020722" border="0" /></a>
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 36pt; text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US"><span style="position: relative; top: 12pt;"><!--[if gte vml 1]><v:shape id="_x0000_i1030" type="#_x0000_t75" style="'width:146.25pt;height:24pt'" ole=""> <v:imagedata src="file:///C:\Users\almansor\AppData\Local\Temp\msohtml1\01\clip_image011.wmz" title=""> </v:shape><![endif]--><!--[if !vml]-->
<br /><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1030" drawaspect="Content" objectid="_1329124735"> </o:OLEObject> </xml><![endif]--></span></p> <p class="MsoNormal" style="margin-left: 36pt; text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">5-10 <b style="">Present Value of a Perpetuity</b> What’s the present value, when interest rates are 8.5 percent, of a $75 payment made every year forever?
<br /></span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt; color: rgb(153, 51, 0);"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><span lang="EN-US">Use equation 5-5:</span></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);">
<br /></p><p class="MsoNormal" style="text-align: justify; color: rgb(153, 51, 0);"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFu2JeWChKrm7XpHnkE6lpmh7wIX05NW0058UG5BqqN2vK-T1SRqPuXkv2cILuPQTxp-ItGTZt5DLi49bX9YAwJ48AssyyF73BwW8EQKTH2x9HCnsIzTMViBzOLe79mqf9ciRGVrlZHwE/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 248px; height: 29px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgFu2JeWChKrm7XpHnkE6lpmh7wIX05NW0058UG5BqqN2vK-T1SRqPuXkv2cILuPQTxp-ItGTZt5DLi49bX9YAwJ48AssyyF73BwW8EQKTH2x9HCnsIzTMViBzOLe79mqf9ciRGVrlZHwE/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444264190864032642" border="0" /></a>
<br /><span lang="EN-US"><o:p></o:p></span></p> <p class="MsoNormal"><span lang="EN-US"><span style="position: relative; top: 12pt;"><!--[if gte vml 1]><v:shape id="_x0000_i1031" type="#_x0000_t75" style="'width:145.5pt;height:24pt'" ole=""> <v:imagedata src="file:///C:\Users\almansor\AppData\Local\Temp\msohtml1\01\clip_image013.wmz" title=""> </v:shape><![endif]--><!--[if !vml]-->
<br /><!--[endif]--></span><!--[if gte mso 9]><xml> <o:oleobject type="Embed" progid="Equation.3" shapeid="_x0000_i1031" drawaspect="Content" objectid="_1329124736"> </o:OLEObject> </xml><![endif]--></span></p> Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com1tag:blogger.com,1999:blog-3568395903540506507.post-69314401251350923392010-03-02T19:56:00.000-08:002010-03-02T20:31:03.713-08:00CHAPTER 4<b style=""><span lang="EN-US">CHAPTER 4 – TIME VALUE OF MONEY 1: ANALYZING SINGLE CASH FLOWS<o:p></o:p></span></b> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><b style=""><span lang="EN-US">Questions<o:p></o:p></span></b></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">1. List and describe the purpose of each part of a time line with an initial cash inflow and a future cash outflow. Which cash flows should be negative and which positive?<span style=""> </span>Why?</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">The cash flow timeline is a visual depiction of inflows and outflows relative to the period under consideration.<span style=""> </span>Cash flows are illustrated above the cash flow line with the corresponding periods that apply appearing under the cash flow diagram.<span style=""> </span>Inflows are represented by positive numbers and outflows by negative numbers.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /><span style=""> </span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">2.<span style=""> </span>How are the present value and future value related?</span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">The measure that relates present values to future values is the interest rate i.<span style=""> </span>A present value can be moved forward in time with interest to arrive at the future value
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiX8QiM81TgV_c5dzGFw6RXH20kDIgCzSfqeZT8Onnl9RXqBaGlE2pDOhPvfEMinrqB3MAutdvbNc9YcjZpTu1jqPZWeuaL6aIjfODYQMYN8Nkz9VPQD1nbdW3-nAohYy-F-orazVTY9WM/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 248px; height: 29px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiX8QiM81TgV_c5dzGFw6RXH20kDIgCzSfqeZT8Onnl9RXqBaGlE2pDOhPvfEMinrqB3MAutdvbNc9YcjZpTu1jqPZWeuaL6aIjfODYQMYN8Nkz9VPQD1nbdW3-nAohYy-F-orazVTY9WM/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444257080526872082" border="0" /></a><span lang="EN-US"><span style=""> </span>A future value can be discounted back to the present by rearranging the equation so that the FV is divided by the interest factor.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">3. Would you prefer to have an investment earning 5 percent for 40 years or an investment earning 10 percent for 20 years? Explain. </span></p> <p class="MsoNormal" style="margin-left: 18pt; text-align: justify; text-indent: -54pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Investments of $1 will grow to $7.04 in 40 years (= $1.05<sup>40</sup>) and $1 will grow to $6.73 in 20 years (= $1.10<sup>20</sup>). The 5 percent investment for 40 years is worth more.<span style=""> </span>This example illustrates the importance of time in building wealth.
<br /></span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">4. How are present values affected by changes in interest rates?</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Interest rates have an inverse relationship to present values.<span style=""> </span>Increases in expected interest rates result in lower present values because future values are discounted at a high rate to become smaller present values. Decreases in expected interest rates result in higher present values because future values are discounted at a lower rate.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">5. What do you think about the following statement.<span style=""> </span>“I am going to receive $100 two years from now and $200 three years from now, so I am getting a $300 future value.”<span style=""> </span>How could the two cash flows be compared or combined?</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">Cash flows may only be combined when they are moved to the same point in time.<span style=""> </span>The statement above is incorrect in that it compares the $100 cash flow after year 2 with the $200 cash flow after year 3.<span style=""> </span>To make comparisons meaningful, the cash flows need to be considered at the same point in time. Either the $100, 2<sup>nd</sup> year cash flow could be moved to year 3, or the $200, 3<sup>rd</sup> year cash flow could be moved to year 2 for combining.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">6. <span style="color:black;">Show how the Rule of 72 can be used to approximate the number of years to quadruple an investment.<o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;">The Rule of 72 is a rule of thumb that approximates the amount of time necessary for an investment to double given a certain level of interest expressed in percentage form.<span style=""> </span>Therefore, an investment of 8% interest will take approximately 9 years (= 72/8) to double according to the Rule of 72.<span style=""> </span>It would then take another 9 years for this amount to double.<span style=""> </span>Therefore, it would take 18 years for the original investment to quadruple at an 8 percent rate.</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;">
<br /></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">7. Without making any computations, indicate which of each pair has a higher interest rate?</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: 18pt;"><span lang="EN-US">a. $100 doubles to $200 in 5 years <i style="">or</i> 7 years.</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: 18pt;"><span lang="EN-US">b. $500 increases in 4 years to $750 <i style="">or</i> to $800.</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: 18pt;"><span lang="EN-US">c. $300 increases to $450 in 2 years <i style="">or</i> increases to $500 in 3 years.</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">a. $100 doubling to $200 in 5 years has the higher interest rate.</span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">b. $500 increasing to $800 in 4 years has a higher interest rate.</span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">c. $300 increasing to $450 in 2 years has the higher interest rate.</span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><st1:metricconverter productid="8. A" st="on"><span lang="EN-US">8. A</span></st1:metricconverter><span lang="EN-US"> $1,000 investment has doubled to $2,000 in 8 years because of a 9 percent rate of return.<span style=""> </span>How much longer will it take for the investment to reach $4,000 if it continues to earn a 9 percent rate?</span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">The Rule of 72 predicted that $1000 will double to $2000 in 8 years at 9 percent interest.<span style=""> </span>Another doubling from $2000 to $4000 will occur in eight more years at 9 percent, again predicted by the Rule of 72. </span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span style="font-weight: bold;font-size:130%;" lang="EN-US" ><span style="color: rgb(204, 0, 0);">Problems</span></span><b style=""><span lang="EN-US"><o:p></o:p></span></b></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;">4-1 <b style="">Time Line</b> Show the time line for a $300 cash inflow today, a $363 cash outflow in year two, and a 10 percent interest rate.</span><span style="display: block;" id="formatbar_Buttons"><span class=" on" style="display: block;" id="formatbar_Add_Image" title="Add Image" onmouseover="ButtonHoverOn(this);" onmouseout="ButtonHoverOff(this);" onmouseup="addImage();" onmousedown="CheckFormatting(event);;ButtonMouseDown(this);"><img src="http://www.blogger.com/img/blank.gif" alt="Add Image" class="gl_photo" border="0" /></span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -64.8pt; line-height: 200%;"><span lang="EN-US">The time line for this problem is:</span></p><p class="MsoNormal" style="margin-right: -64.8pt; line-height: 200%;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLCvPU1tsOx73tCZgTTNikIcNBciRqIPFhJI-hralkQ_fZ_vMaUNFA-qpfTpgg-k2rNg5zqzoa12ZfdXnotP7w2oUbZsamRSCHVwWw0jAR75Q6HPH8BKw9zIuZq-utSIqP8uAL9Da83NA/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 320px; height: 42px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLCvPU1tsOx73tCZgTTNikIcNBciRqIPFhJI-hralkQ_fZ_vMaUNFA-qpfTpgg-k2rNg5zqzoa12ZfdXnotP7w2oUbZsamRSCHVwWw0jAR75Q6HPH8BKw9zIuZq-utSIqP8uAL9Da83NA/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444257438156849122" border="0" /></a></p><span lang="EN-US" style="color:black;"><span style=""> </span><o:p></o:p></span> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;">4-2 <b style="">Time Line</b> Show the time line for a $400 cash outflow today, a $518 cash inflow in year three, and a 9% interest rate.<span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">The time line for this problem is:</span></p> <p class="MsoNormal" style="margin-left: 36pt; text-align: justify;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -1.8pt; text-align: justify;"><span lang="EN-US"><span style=""> </span>Cash Flow<span style=""> </span>-400<span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span>518</span></p><p class="MsoNormal" style="margin-right: -1.8pt; text-align: justify;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhgZkDWITrvrkm0OtfTinym1FgCzzGbaVrja24zbozqdrFyfa6BrJaLBnEclXvWfR_2pieoGeImrjy02rvzqagqcEv5S16UMc8p7s_rfZrQD11UHykNAbEbSjeKWAGx94IzNHuZiasrYQs/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 320px; height: 42px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhgZkDWITrvrkm0OtfTinym1FgCzzGbaVrja24zbozqdrFyfa6BrJaLBnEclXvWfR_2pieoGeImrjy02rvzqagqcEv5S16UMc8p7s_rfZrQD11UHykNAbEbSjeKWAGx94IzNHuZiasrYQs/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444257617247994642" border="0" /></a></p><p class="MsoNormal" style="text-align: justify; text-indent: -36pt;">
<br /><!--[endif]--><span lang="EN-US"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -1.8pt; text-align: justify;"><span lang="EN-US" style="color:black;"><span style=""> </span><span style=""> </span>Period<span style=""> </span>0<span style=""> </span>9%<span style=""> </span>1<span style=""> </span>9%<span style=""> </span>2 <span style=""> </span>9%<span style=""> </span>3 years<span style=""> </span><o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;">4-3 <b style="">One Year Future Value</b> What is the future value of $500 deposited for one year earning a 9% interest rate annually. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -14.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV<sub>N</sub></span></i><span lang="EN-US"><span style=""> </span>= <i style="">PV</i> × (1 + <i style="">i</i>)<i style=""><sup>N</sup></i> <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -5.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV<sub>1</sub></span></i><span lang="EN-US"><span style=""> </span>= 500 × (1 + 0.09)<sup>1</sup> <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -41.4pt; text-indent: 126pt;"><span lang="EN-US"><span style=""> </span>= 500 × 1.09 </span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><span style=""> </span><span style=""> </span><span style=""> </span><span style=""> </span>=<span style=""> </span>545</span></p><p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">
<br /></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;">4-4 <b style="">One Year Future Value</b> What is the future value of $400 deposited for one year earning an interest rate of 11 percent per year?<o:p></o:p></span></p> <p class="MsoNormal" style="margin-right: -14.4pt;"><i style=""><span lang="EN-US"><o:p> </o:p></span></i></p> <p class="MsoNormal" style="margin-right: -14.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV<sub>N</sub></span></i><span lang="EN-US"><span style=""> </span>= <i style="">PV</i> × (1 + <i style="">i</i>)<i style=""><sup>N</sup></i> <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -5.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV<sub>1</sub></span></i><span lang="EN-US"><span style=""> </span>= 400 × (1 + 0.11)<sup>1</sup> <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -41.4pt; text-indent: 126pt;"><span lang="EN-US"><span style=""> </span>= 400 × 1.11</span></p> <p class="MsoNormal" style="margin-left: 72pt; text-align: justify; text-indent: 36pt;"><span lang="EN-US"><span style=""> </span>= 444<span style=""> </span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;">4-5 <b style="">Multi-Year Future Value</b> How much would be in your savings account in 8 years after depositing $150 today if the bank pays 7 percent per year?<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <p class="MsoNormal" style="margin-right: -14.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV<sub>N</sub></span></i><span lang="EN-US"><span style=""> </span>= <i style="">PV</i> × (1 + <i style="">i</i>)<i style=""><sup>N</sup></i> <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -5.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV<sub>8</sub></span></i><span lang="EN-US"><span style=""> </span>= 150 × (1 + 0.07)<sup>8</sup> <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -41.4pt; text-indent: 126pt;"><span lang="EN-US"><span style=""> </span>= 150 × 1.71819</span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><span style=""> </span><span style=""> </span><span style=""> </span>=<span style=""> </span>257.73</span></p><p class="MsoNormal" style="text-align: justify;">
<br /><span lang="EN-US"><span style=""> </span><span style="color:black;"><o:p></o:p></span></span></p> <span lang="EN-US"><span style=""></span><span style="color:black;"><o:p></o:p></span></span> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;">4-6 <b style="">Multi-Year Future Value</b> Compute the value in 25 years of a $1,000 deposit earning 10 percent per year.<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -14.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV<sub>N</sub></span></i><span lang="EN-US"><span style=""> </span>= <i style="">PV</i> × (1 + <i style="">i</i>)<i style=""><sup>N</sup></i> <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -5.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV<sub>25</sub></span></i><span lang="EN-US"><span style=""> </span>= 1000 × (1 + 0.10)<sup>25</sup> <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -41.4pt; text-indent: 126pt;"><span lang="EN-US"><span style=""> </span>= 1000 × 10.83471</span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><span style=""> </span><span style=""> </span><span style=""> </span>=<span style=""> </span>10,834.71</span></p><p class="MsoNormal" style="text-align: justify;">
<br /><span lang="EN-US"><span style=""> </span><span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;"><span style=";font-family:Symbol;color:black;" lang="EN-US">4-7 <b style="">Compounding with Different Interest Rates </b>A deposit of $350 earns the following interest rates:</span></p><p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;"><span style=";font-family:Symbol;color:black;" lang="EN-US"><span style="">·<span style=";font-family:";font-size:7pt;" > </span></span></span><!--[endif]--><span lang="EN-US" style="color:black;">8 percent in the first year, <o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span style=";font-family:Symbol;color:black;" lang="EN-US"><span style="">·<span style=";font-family:";font-size:7pt;" > </span></span></span><!--[endif]--><span lang="EN-US" style="color:black;">7 percent in the second year, and <o:p></o:p></span></p> <p class="MsoNormal" style="margin-left: 54pt; text-align: justify; text-indent: -18pt;"><!--[if !supportLists]--><span style=";font-family:Symbol;color:black;" lang="EN-US"><span style="">·<span style=";font-family:";font-size:7pt;" > </span></span></span><!--[endif]--><span lang="EN-US" style="color:black;">5 percent in the third year. <o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;"><span style=""> </span>What would be the third year future value?<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">The time line for this problem is:</span></p><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxVssCJQwzc46tM0rVRp8z63K41KprkrWQjtSPM0DytDS_ba68Pok6RH4nG-hnm1MHorvRPXdknqsspbsYs6cZXd2IwqZY16uBL-AE-qvdAsE2IIYnE2wziaHUPE8juqAEiJXoPbUdyj0/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 320px; height: 42px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxVssCJQwzc46tM0rVRp8z63K41KprkrWQjtSPM0DytDS_ba68Pok6RH4nG-hnm1MHorvRPXdknqsspbsYs6cZXd2IwqZY16uBL-AE-qvdAsE2IIYnE2wziaHUPE8juqAEiJXoPbUdyj0/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444258030457873922" border="0" /></a><p class="MsoNormal" style="margin-left: 36pt; text-align: justify;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p><span lang="EN-US" style="color:black;"><o:p></o:p></span> <p class="MsoNormal" style="margin-right: -14.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US"><o:p> </o:p></span></i></p> <p class="MsoNormal" style="margin-right: -14.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">
<br /></span></i></p><p class="MsoNormal" style="margin-right: -14.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV</span></i><span lang="EN-US"><span style=""> </span>= <i style="">PV</i> × (1 + <i style="">i</i>) (1 + <i style="">j</i>) (1 + <i style="">k</i>) <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -5.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV</span></i><span lang="EN-US"><span style=""> </span>= 350 × (1 + 0.08) (1 + 0.07) (1 + 0.05) <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -41.4pt; text-indent: 126pt;"><span lang="EN-US"><span style=""> </span>= 350 × 1.08 × 1.07 × 1.05</span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><span style=""> </span><span style=""> </span><span style=""> </span>=<span style=""> </span>424.68</span></p><p class="MsoNormal" style="text-align: justify;">
<br /><span lang="EN-US"><span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;">4-8 <b style="">Compounding with Different Interest Rates</b> A deposit of $750 earns interest rates of 10 percent in the first year and 12 percent in the second year.<span style=""> </span>What would be the second year future value?<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: justify; text-indent: -36pt;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US">The time line for this problem is:</span></p><p class="MsoNormal" style="text-align: justify;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8rzM6_-DcruEtxhj5UVZlP-WzuZflyJcX9xjj7Bf8ueCx-rNk3tBjDQqbofrUG5wYvaVKJ8_9P9xHqfDMpX-LJgRbK2UqKmzL0f4VhK5U1_b392dPl9AXW9_R1IgFIIDuWuUjvmwfUBQ/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 320px; height: 42px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8rzM6_-DcruEtxhj5UVZlP-WzuZflyJcX9xjj7Bf8ueCx-rNk3tBjDQqbofrUG5wYvaVKJ8_9P9xHqfDMpX-LJgRbK2UqKmzL0f4VhK5U1_b392dPl9AXW9_R1IgFIIDuWuUjvmwfUBQ/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5444258412352993458" border="0" /></a></p> <p class="MsoNormal" style="margin-left: 36pt; text-align: justify;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p><span lang="EN-US" style="color:black;"><span style=""> </span><o:p></o:p></span> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US" style="color:black;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -14.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">
<br /></span></i></p><p class="MsoNormal" style="margin-right: -14.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV</span></i><span lang="EN-US"><span style=""> </span>= <i style="">PV</i> × (1 + <i style="">i</i>) (1 + <i style="">j</i>)<span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -5.4pt; text-indent: 126pt;"><i style=""><span lang="EN-US">FV</span></i><span lang="EN-US"><span style=""> </span>= 750 × (1 + 0.10) (1 + 0.12) <span style=""> </span></span></p> <p class="MsoNormal" style="margin-right: -41.4pt; text-indent: 126pt;"><span lang="EN-US"><span style=""> </span>= 750 × 1.10 × 1.12</span></p> <p class="MsoNormal" style="text-align: justify;"><span lang="EN-US"><span style=""> </span><span style=""> </span><span style=""> </span>=<span style=""> </span>924.00<span style="color:black;"><o:p></o:p></span></span></p> <p class="MsoNormal"><span lang="EN-US"><o:p> </o:p></span></p>Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com0tag:blogger.com,1999:blog-3568395903540506507.post-5215087519515333292010-02-03T23:24:00.000-08:002010-02-07T18:22:57.486-08:00ANALYZING FINANCIAL STATEMENTS<meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; mso-layout-grid-align:none; text-autospace:none; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;"><b><span style="color: rgb(51, 51, 255);" lang="EN-US">1. Classify each of the following ratios according to a ratio category (liquidity ratio, asset management ratio, debt management ratio, profitability ratio, or market value ratio).</span></b></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>a. Current ratio – liquidity ratio<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">b. Inventory turnover ratio – asset management ratio<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">c. Return on assets – profitability ratio<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">d. Accounts payable period – asset management ratio<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">e. Times interest earned – debt management ratio</span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">f. Capital intensity ratio – asset management ratio<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">g. Equity multiplier – debt management ratio<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">h. Basic earnings power ratio – profitability ratio</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;"><b><span style="color: rgb(51, 51, 255);" lang="EN-US"><u1:p></u1:p>2. For each of the actions listed below, determine what would hap</span></b></span><span style="font-size:85%;"><b><span style="color: rgb(51, 51, 255);" lang="EN-US">pen to the current ratio. Assume nothing else on the balance sheet changes and that net working capital is positive.</span></b></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>a. Accounts receivable are paid in cash – Current ratio does not change<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">b. Notes payable are paid off with cash – Current ratio increases<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">c. Inventory is sold on account – Current ratio does not change</span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">d. Inventory is purchased on account– Current ratio decreases<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">e. Accrued wages and taxes increase – Current ratio decreases<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">f. Long-term debt is paid with cash – Current ratio decreases<o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">g. Cash from a short-term bank loan is received – Current ratio decreases</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;"><b><span style="color: rgb(51, 51, 255);" lang="EN-US">3. Explain the meaning and significance of the following ratios</span></b></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;">a. Quick ratio - Inventories are generally the least liquid of a firm’s current assets. Further, inventory is the current asset for which book values are the least reliable measures of market val</span><span lang="EN-US" style="font-size:85%;">ue. In practical terms, what this means is that if the firm must sell inventory to pay upcoming bills, the firm is most likely to have to discount inventory items in order to liquidate them, and so therefore they are the assets on which losses are most likely to occur. Therefore, the quick (or acid-test) ratio measures a firm’s ability to pay off short-term obligations without relying on inventory sales. The quick ratio measures the dollars of more liquid assets (cash and marketable securities and accounts receivable) a</span><span lang="EN-US" style="font-size:85%;">vailable to pay each dollar of current liabilities.</span></p><p class="MsoNormal"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">b. Average collection period - The average collection period (ACP) measures the number of days accounts receivable are held before the firm collects cash from the sale. In general, a firm wants to produce a high level of sales per dollar of accounts receivable, i.e., it wants to collect its accounts receivable as quickly as possible to reduce any cost of financing inventories and accounts receivable, includ</span><span lang="EN-US" style="font-size:85%;">ing interest expense on liabilities used to finance inventories and accounts receivable, and defaults associated with accounts receivable.</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">c. Return on equity - Return on equity (ROE) measures the return on the common stockholders’ investment in the assets of the firm. ROE is the net income earned per dollar of common stockholders’ equity. The value of a firm’s ROE is affected not only by net income, but also by the amo</span><span lang="EN-US" style="font-size:85%;">unt of financial leverage or debt that firm uses.</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>d. Days’ sales in inventory - . The <b>days’ sales in inventory</b> ratio measures the number of days that inventory is held before the final product is sold. In general, a firm wants to produce a high level of sales per dollar of inventory, that is, it wants to turn inventory over (from raw materials to finished goods to sold goods) as quickly as possible. A high level of sales per dollar of inventory implies reduced warehousing, monitoring, insurance, and any other costs of servicing the inventory. So, a high inventory turnover ratio</span><span lang="EN-US" style="font-size:85%;"> or a low days’ sales in inventory is a sign of good management.</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>e. Debt ratio - The debt ratio measures the percentage of total assets financed with debt. The debt-to-equity ratio measures the dollars of debt financing used for every dollar of equity financing. The equity multiplier ratio measures the dollars of assets on the balance sheet for every dollar of equity financing. As you might suspect, all three measures are related. So, the lower the debt, debt</span><span lang="EN-US" style="font-size:85%;">-to-equity, or equity multiplier ratios, the less debt and more equity the firm uses to finance its assets (i.e., the bigger the firm’s equity cushion).
<br /></span></p><p class="MsoNormal"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>f. Profit margin - The profit margin is the percent of sales left after all firm expenses are paid.</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>g. Accounts payable turnover - The accounts payable turnover ratio measures the dollar cost of goods sold per dollar of accounts payable. In general, a firm wants to pay for its purchases as slowly as possible. The more slowly it can pay for its supply purchases, the less the firm will need other costly sources of financing such as notes payable or long-term debt. Thus, a high APP or a low accou</span><span lang="EN-US" style="font-size:85%;">nts payable turnover ratio is generally a sign of good m</span><span lang="EN-US" style="font-size:85%;">anagement.</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>h. Market-to-book ratio - The market-to-book ratio<b> </b>compares the market (current) value of the firm’s equity to their historical costs. In general, the higher the market-to-book ratio, the better the firm.</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><span style="font-weight: bold; color: rgb(51, 51, 255);">4. A</span><b style="font-weight: bold; color: rgb(51, 51, 255);"><span style="color: rgb(51, 51, 255);"> firm has an average collection period of 10 da</span></b></span><span lang="EN-US" style="font-size:85%;"><b style="font-weight: bold; color: rgb(51, 51, 255);"><span style="color: rgb(51, 51, 255);">ys. The industry average ACP is 25 days. Is this a good or poor sign about the management of the firm’s accounts receivable?</span></b><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>If the ACP is extremely low, the firm’s accounts receivable policy may be so strict that customers prefer to do business with competing firms. Firms offer accounts receivable terms as an incentive to get customers to buy products from their firm rather than a competing firm. By offering firm customers the accounts receivable privilege, management allows customers to buy (more) now and pay later. Without this incentive, that is, if managers require customers to pay for their purchases very quickly, customers may </span><span lang="EN-US" style="font-size:85%;">choose to buy the goods from the firm’s competitors w</span><span lang="EN-US" style="font-size:85%;">ho offer better credit terms. So extremely low ACP levels may be a sign of bad firm management.</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p><span style="font-weight: bold; color: rgb(51, 51, 255);">5. A</span><b style="font-weight: bold; color: rgb(51, 51, 255);"><span style="color: rgb(51, 51, 255);"> firm has a debt ratio of 20%. The industry average debt ratio is 65%. Is this a good or poor sign about the management of the firm’s financial leverage?</span></b><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>When a firm issues debt to finance its assets, it gives t</span><span lang="EN-US" style="font-size:85%;">he debtholders first claim to a fixed amount of its cash flows. Stockholders are entitled to any residual cash flows―those left after debtholders are paid. When a firm does well, financial leverage increases the reward to shareholders since the amount of cash flows promised to debtholders is constant and capped. So when firms do well, financial leverage creates more cash flows to share with stockholders—it magnifies the return to the stockholders of the firm. This magnification is one re</span><span lang="EN-US" style="font-size:85%;">ason that firm stockholders encourage the use of debt financing. However, financial leverage also increases the firm’s potential for financial distress and even failure. If the firm has a bad year and can not make promised debt payments, debtholders can force the firm into ban</span><span lang="EN-US" style="font-size:85%;">kruptcy. Thus, a firm’s current and potential debtholders (and even stockholders) look at equity financing as a safety cushion that can absorb fluctuations in the firm’s earnings and asset values and guarantee debt service payments. Clearly, the larger the fluctuations or variability of a firm’s cash flows, the greater the need for an equity cushion. Managers’ choice of capital structure―the amount of debt versus equity to issue―affects the firm’s viability as a long-term entity. In deciding the level of debt versus equity financing to hold on the balance sheet, managers must consider the trade-off between maximizing cash flows to the firm’s stockholders versus the risk of being unable to make promised debt payments. In summary, the low debt ratio could be either a good sign or a poor sign, depending upon the overall circumstances.</span></p><p class="MsoNormal"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p><span style="font-weight: bold; color: rgb(51, 51, 255);">6. A</span><b style="font-weight: bold; color: rgb(51, 51, 255);"><span style="color: rgb(51, 51, 255);"> firm has an ROE of 20%. The industry average ROE is 12%. Is this a good or poor sign about the management of the firm?</span></b><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>Generally, a high ROE is considered to be a positive sign of firm performance. However, if performance comes from a high degree of financial leverage, a high ROE can indicate a firm with an unacceptably high level of bankruptcy risk as well.
<br /></span></p><p class="MsoNormal"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;"><b><span style="color: rgb(51, 51, 255);" lang="EN-US"><u1:p></u1:p>7. Why is the DuPont system of analysis an important tool when evaluating firm performance?</span></b></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>Many of the ratios discussed in the chapter are interrelated. So a change in one ratio may well affect the value of several ratios. Often these interrelations can help evaluate firm performance. Managers and investors often perform a detailed analysis of ROA (Return on Assets) and ROE (Return on Equity) using the DuPont analysis system. Popularized by the DuPont Corporation, the DuPont analysis system uses the balance sheet and income statement to break the ROA and ROE ratios into component pieces.</span></p><p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">
<br /></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><o:p> </o:p></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>8. A<b><span style="color: rgb(51, 51, 255);"> firm has an ROE of 10%. The industry average ROE is 15%. How can the DuPont system of analysis help the firm’s managers identify the reasons for this difference?</span></b><o:p></o:p></span></p> <span style="font-size:85%;"><u1:p></u1:p></span> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;"><u1:p></u1:p>The basic DuPont equation looks at the firm’s overall profitability as a function of the profit the firm earns per dollar of sales (operating efficiency) and the dollar of sales produced per dollar of assets on the balance sheet (efficiency in asset use). With this tool, managers can see the reason for any changes in ROA in more detail. For example, if ROA increases, the DuPont equation may show that the net profit margin was constant, but the total asset turnover (efficiency in using assets) increased, or that total asset turnover remained constant, but profit margins (operating efficiency) increased. Managers can then break down operating efficiency and efficiency in asset use further using the ratios described above to more specifically identify the reasons for an ROA change.</span></p><p style="color: rgb(204, 0, 0);" class="MsoNormal"><span style="font-size:85%;">
<br /></span></p><p style="color: rgb(204, 0, 0);" class="MsoNormal"><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; mso-layout-grid-align:none; text-autospace:none; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:595.3pt 841.9pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:35.4pt; mso-footer-margin:35.4pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> </p><p class="MsoNormal" style="margin-right: -21.6pt; color: rgb(204, 0, 0);"><span style="font-size:85%;"><span style="font-weight: bold; color: rgb(51, 51, 255);" lang="EN-US">Problems</span></span></p><p class="MsoNormal" style="margin-right: -21.6pt; color: rgb(204, 0, 0);"><span style="font-size:85%;"><span style="font-weight: bold; color: rgb(51, 51, 255);" lang="EN-US">
<br /></span></span></p><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; mso-layout-grid-align:none; text-autospace:none; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <p class="MsoNormal" style="margin-right: 1.3pt; text-align: justify;"><span lang="EN-US" style="font-size:85%;"><span style="font-weight: bold; color: rgb(51, 51, 255);">3-1 </span><b style="font-weight: bold; color: rgb(51, 51, 255);">Liquidity Ratios </b><span style="font-weight: bold; color: rgb(51, 51, 255);">You are evaluating the balance sheet for Goodman’s Bees Corporation. From the balance sheet you find the following balances: Cash and marketable securities = $400,000, Accounts receivable = $1,200,000, Inventory = $2,100,000, Accrued wages and taxes = $500,000, Accounts payable = $800,000, and Notes payable = $600,000. Calculate Goodman Bee’s Current ratio, Quick ratio, and Cash ratio.</span></span></p><p class="MsoNormal" style="margin-right: 1.3pt; text-align: justify;"><span style="font-size:85%;"><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvW1A4JipTuJ6NRkGQZzf9v6bfpSsN9IbKuct9Y9_ccI-GrtbGxcCljD1WVC2m1ICifOKaFL1-RXzH4n-hjQieBly33IU4sPlxRzYmc4uo-K9MWBrZYoy7kgbeGUMzQW2kN4ibWOucxHk/s1600-h/Untitled.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 320px; height: 196px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhvW1A4JipTuJ6NRkGQZzf9v6bfpSsN9IbKuct9Y9_ccI-GrtbGxcCljD1WVC2m1ICifOKaFL1-RXzH4n-hjQieBly33IU4sPlxRzYmc4uo-K9MWBrZYoy7kgbeGUMzQW2kN4ibWOucxHk/s320/Untitled.jpg" alt="" id="BLOGGER_PHOTO_ID_5434295077611067362" border="0" /></a></span></p><p class="MsoNormal" style="margin-right: 1.3pt; text-align: justify;"><span style="font-size:85%;">
<br /></span></p><p class="MsoNormal" style="margin-right: 1.3pt; text-align: justify;"> </p><table str="" style="border-collapse: collapse; width: 612pt;" width="816" border="0" cellpadding="0" cellspacing="0"><col style="width: 207pt;" width="276"> <col style="width: 48pt;" width="64" span="3"> <col style="width: 165pt;" width="220"> <col style="width: 48pt;" width="64" span="2"></table><p class="MsoNormal" style="margin-right: 1.3pt; text-align: justify;"> </p><table str="" style="border-collapse: collapse; width: 612pt;" width="816" border="0" cellpadding="0" cellspacing="0"><col style="width: 207pt;" width="276"> <col style="width: 48pt;" width="64" span="3"> <col style="width: 165pt;" width="220"> <col style="width: 48pt;" width="64" span="2"></table><p class="MsoNormal" style="margin-right: 1.3pt; text-align: justify;"><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; mso-layout-grid-align:none; text-autospace:none; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> </p><p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">3-2 <b style="">Liquidity Ratios </b>The top part of Ramakrishnan Inc,’s 2008 and 2009 balance sheets is listed below (in millions of dollars).</span><span style="font-size:85%;">
<br /></span></p><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <table class="MsoNormalTable" style="border: medium none ; width: 374.85pt; margin-left: 4.65pt; border-collapse: collapse;" width="500" border="1" cellpadding="0" cellspacing="0"> <tbody><tr style="height: 20.25pt;"> <td style="border: 1pt solid windowtext; padding: 0cm 5.4pt; width: 108.75pt; height: 20.25pt;" width="145" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;"><b><span lang="EN-US">Current assets:</span></b><b><o:p></o:p></b></span></p> </td> <td style="border-style: solid solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" num="" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b>2008<o:p></o:p></b></span></p> </td> <td style="border-style: solid solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" num="" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b>2009<o:p></o:p></b></span></p> </td> <td style="border-style: solid solid solid none; padding: 0cm 5.4pt; width: 85.4pt; height: 20.25pt;" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;"><b><span style=""> </span>Current liabilities:<o:p></o:p></b></span></p> </td> <td style="border-style: solid solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" num="" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b>2008<o:p></o:p></b></span></p> </td> <td style="border-style: solid solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" num="" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b>2009<o:p></o:p></b></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="border-style: none solid solid; padding: 0cm 5.4pt; width: 108.75pt; height: 20.25pt;" width="145" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 85.4pt; height: 20.25pt;" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;">Accrued wages and taxes</span><span style="font-size:85%;"><o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><span style=""> </span>$<span style=""> </span>18<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><span style=""> </span>$<span style=""> </span>19<o:p></o:p></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="border-style: none solid solid; padding: 0cm 5.4pt; width: 108.75pt; height: 20.25pt;" str="Cash and marketable securities " width="145" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;">Cash and marketable securities <o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">$<span style=""> </span>15<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">$<span style=""> </span>20<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 85.4pt; height: 20.25pt;" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;">Accounts payable<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" num="" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">45<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" num="" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">51<o:p></o:p></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="border-style: none solid solid; padding: 0cm 5.4pt; width: 108.75pt; height: 20.25pt;" width="145" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;">Accounts receivable<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" num="" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span lang="EN-US" style="font-size:85%;">75<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" num="" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span lang="EN-US" style="font-size:85%;">84<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 85.4pt; height: 20.25pt;" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> </tr> <tr style="height: 20.25pt;"> <td style="border-style: none solid solid; padding: 0cm 5.4pt; width: 108.75pt; height: 20.25pt;" width="145" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;">Inventory</span><span style="font-size:85%;"><o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" num="" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">110<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 20.25pt;" num="" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">121<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 85.4pt; height: 20.25pt;" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;">Notes payable<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" num="" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">40<o:p></o:p></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 20.25pt;" num="" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">45<o:p></o:p></span></p> </td> </tr> <tr style="height: 21pt;"> <td style="border-style: none solid solid; padding: 0cm 5.4pt; width: 108.75pt; height: 21pt;" width="145" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;"><b style=""><span lang="EN-US">Total</span></b><b style=""><o:p></o:p></b></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 21pt;" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style="">$200<o:p></o:p></b></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 38.3pt; height: 21pt;" width="51" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style="">$225<o:p></o:p></b></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 85.4pt; height: 21pt;" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;"><b style="">Total<o:p></o:p></b></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 21pt;" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style="">$103<o:p></o:p></b></span></p> </td> <td style="border-style: none solid solid none; padding: 0cm 5.4pt; width: 52.05pt; height: 21pt;" width="69" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style="">$115<o:p></o:p></b></span></p> </td> </tr> </tbody></table> <span style="font-size:85%;">
<br /></span><span style="font-size:85%;">
<br /></span><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; mso-layout-grid-align:none; text-autospace:none; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <p class="MsoNormal" style="margin-right: -21.6pt;"><span lang="EN-US" style="font-size:85%;">Calculate Ramakrishnan Inc.’s Current ratio, Quick ratio, and Cash ratio for 2008 and 2009.</span></p><span style="font-size:85%;">
<br /></span><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <table class="MsoNormalTable" style="width: 426.2pt; margin-left: 4.65pt; border-collapse: collapse;" width="568" border="0" cellpadding="0" cellspacing="0"> <tbody><tr style="height: 20.25pt;"> <td style="padding: 0cm 5.4pt; width: 85.3pt; height: 20.25pt;" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;"><b><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td colspan="2" style="padding: 0cm 5.4pt; width: 165.35pt; height: 20.25pt;" num="" width="220" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;"><b style="">2008<span style=""><o:p></o:p></span></b></span></p> </td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 20.25pt;" width="16" valign="top"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td colspan="2" style="padding: 0cm 5.4pt; width: 163.75pt; height: 20.25pt;" num="" width="218" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;"><b style="">2009<span style=""><o:p></o:p></span></b></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 85.3pt; height: 20.25pt;" width="114" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">Current ratio =</span><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p></o:p></span></p> </td> <td style="border-style: none none solid; padding: 0cm 5.4pt; width: 82.2pt; height: 20.25pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$200m</span><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p></o:p></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 83.15pt; height: 20.25pt;" width="111" nowrap="nowrap"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:85%;" lang="EN-US" >= </span><span style="font-size:85%;">1.9417 times</span><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p></o:p></span></p> </td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 20.25pt;" width="16" valign="top"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border-style: none none solid; padding: 0cm 5.4pt; width: 82.75pt; height: 20.25pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$225m<o:p></o:p></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 81pt; height: 20.25pt;" width="108" nowrap="nowrap"> <p class="MsoNormal"><span style="font-size:85%;">= 1.9565 times<o:p></o:p></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 82.2pt; height: 20.25pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$103m<o:p></o:p></span></p> </td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 20.25pt;" width="16" valign="top"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border: medium none ; padding: 0cm 5.4pt; width: 82.75pt; height: 20.25pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$115m<o:p></o:p></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="padding: 0cm 5.4pt; width: 85.3pt; height: 20.25pt;" num="" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 82.2pt; height: 20.25pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 83.15pt; height: 20.25pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 20.25pt;" width="16" valign="top"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 82.75pt; height: 20.25pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 81pt; height: 20.25pt;" width="108" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> </tr> <tr style="height: 20.25pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 85.3pt; height: 20.25pt;" width="114" nowrap="nowrap"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">Quick ratio<o:p></o:p></span></p> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">(acid-test ratio) =</span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> </td> <td style="border-style: none none solid; padding: 0cm 5.4pt; width: 82.2pt; height: 20.25pt;" num="" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">$200m. - $110m</span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 83.15pt; height: 20.25pt;" num="" width="111" nowrap="nowrap"> <p class="MsoNormal"><span lang="EN-US" style="font-size:85%;">= </span><span style="font-size:85%;">0.8738 times<span style=""> </span></span><span lang="EN-US" style="font-size:85%;"><o:p></o:p></span></p> </td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 20.25pt;" width="16" valign="top"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border-style: none none solid; padding: 0cm 5.4pt; width: 82.75pt; height: 20.25pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$225m. - $121m</span><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p></o:p></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 81pt; height: 20.25pt;" width="108" nowrap="nowrap"> <p class="MsoNormal"><span style=";font-family:Arial;font-size:85%;" lang="EN-US" >= </span><span style="font-size:85%;">0.90435 times</span><span style=";font-family:Arial;font-size:85%;" lang="EN-US" ><o:p></o:p></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 82.2pt; height: 20.25pt;" num="" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$103m<o:p></o:p></span></p> </td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 20.25pt;" width="16" valign="top"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border: medium none ; padding: 0cm 5.4pt; width: 82.75pt; height: 20.25pt;" num="" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$115m<o:p></o:p></span></p> </td> </tr> <tr style="height: 21pt;"> <td style="padding: 0cm 5.4pt; width: 85.3pt; height: 21pt;" num="" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 82.2pt; height: 21pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 83.15pt; height: 21pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 21pt;" width="16" valign="top"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 82.75pt; height: 21pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 81pt; height: 21pt;" width="108" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> </tr> <tr style="height: 21pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 85.3pt; height: 21pt;" width="114" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">Cash ratio =<b style=""><o:p></o:p></b></span></p> </td> <td style="border-style: none none solid; padding: 0cm 5.4pt; width: 82.2pt; height: 21pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$15m<b style=""><o:p></o:p></b></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 83.15pt; height: 21pt;" width="111" nowrap="nowrap"> <p class="MsoNormal"><span style="font-size:85%;">= 0.14563 times<span style=""> </span><b style=""><o:p></o:p></b></span></p> </td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 21pt;" width="16" valign="top"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border-style: none none solid; padding: 0cm 5.4pt; width: 82.75pt; height: 21pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$20m<b style=""><o:p></o:p></b></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 81pt; height: 21pt;" width="108" nowrap="nowrap"> <p class="MsoNormal"><span style="font-size:85%;"><b style="">= </b></span><span style="font-size:85%;">0.17391 times<b style=""><o:p></o:p></b></span></p> </td> </tr> <tr style="height: 21pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 82.2pt; height: 21pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$103m<b style=""><o:p></o:p></b></span></p> </td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 21pt;" width="16" valign="top"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="border: medium none ; padding: 0cm 5.4pt; width: 82.75pt; height: 21pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$115m<b style=""><o:p></o:p></b></span></p> </td> </tr> <tr style="height: 21pt;"> <td style="padding: 0cm 5.4pt; width: 85.3pt; height: 21pt;" width="114" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 82.2pt; height: 21pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 83.15pt; height: 21pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 11.8pt; height: 21pt;" width="16" valign="top"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 82.75pt; height: 21pt;" width="110" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 81pt; height: 21pt;" width="108" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p> <span style="font-size:85%;">
<br />
<br />
<br /></span></td> </tr> </tbody></table><span style="font-size:85%;">
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<br /></span><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; mso-layout-grid-align:none; text-autospace:none; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--><span style="font-size:85%;"><span style=";font-family:";" lang="EN-US">3-3 Asset Management Ratios Tater and Pepper Corp. reported sales for 2008 of $23 million. Tater and Pepper listed $5.6 million of inventory on its balance sheet. Using a 365 day year, how many days did Tater and Pepper’s inventory stay on the premises? How many times per year did Tater and Pepper’s inventory turn over?</span>
<br />
<br /></span><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <table class="MsoNormalTable" style="width: 369.75pt; margin-left: 4.65pt; border-collapse: collapse;" width="493" border="0" cellpadding="0" cellspacing="0"> <tbody><tr style="height: 20.25pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 153.75pt; height: 20.25pt;" width="205" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">Days’ sales in inventory<span style=""> </span>=<span style=";font-family:Arial;" lang="EN-US"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; padding: 0cm 5.4pt; width: 81pt; height: 20.25pt;" width="108" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$5.6m. x 365<span style=";font-family:Arial;" lang="EN-US"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 135pt; height: 20.25pt;" width="180" nowrap="nowrap"> <p class="MsoNormal"><span style="font-size:85%;">= 88.8696 days<span style=";font-family:Arial;" lang="EN-US"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 81pt; height: 20.25pt;" width="108" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$23m<o:p></o:p></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="padding: 0cm 5.4pt; width: 153.75pt; height: 20.25pt;" width="205" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p><span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 81pt; height: 20.25pt;" width="108" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;"><o:p> </o:p></span></p><span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 135pt; height: 20.25pt;" width="180" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p><span style="font-size:85%;">
<br /></span></td> </tr> <tr style="height: 20.25pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 153.75pt; height: 20.25pt;" width="205" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">Inventory turnover ratio =<span lang="EN-US"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; padding: 0cm 5.4pt; width: 81pt; height: 20.25pt;" width="108" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$23m<span lang="EN-US"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 135pt; height: 20.25pt;" width="180" nowrap="nowrap"> <p class="MsoNormal"><span style="font-size:85%;">= 4.1071 days<span lang="EN-US"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 81pt; height: 20.25pt;" width="108" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$5.6m<o:p></o:p></span></p> </td> </tr> <tr style="height: 21pt;"> <td style="padding: 0cm 5.4pt; width: 153.75pt; height: 21pt;" width="205" nowrap="nowrap" valign="bottom"> <p class="MsoNormal"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p><span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 81pt; height: 21pt;" width="108" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p><span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 135pt; height: 21pt;" width="180" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><b style=""><o:p> </o:p></b></span></p><span style="font-size:85%;">
<br /></span></td> </tr> </tbody></table><span style="font-size:85%;">
<br />
<br /></span><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman";} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;">3-4 <b style="">Asset Management Ratios</b> Mr. Husker’s Tuxedos, Corp. ended the year 2008 with an average collection period of 32 days. The firm’s credit sales for 2008 were $33 million. What is the year-end 2008 balance in accounts receivable for Mr. Husker’s Tuxedos?</span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:85%;"><o:p> </o:p></span></p> <table class="MsoNormalTable" style="width: 414.75pt; margin-left: 4.65pt; border-collapse: collapse;" width="553" border="0" cellpadding="0" cellspacing="0"> <tbody><tr style="height: 20.25pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 189.75pt; height: 20.25pt;" width="253" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;">Average collection period (ACP) =<span style=";font-family:Arial;" lang="EN-US"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; padding: 0cm 5.4pt; width: 153pt; height: 20.25pt;" width="204" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">Accounts receivable x 365<span style=";font-family:Arial;" lang="EN-US"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 72pt; height: 20.25pt;" width="96" nowrap="nowrap"> <p class="MsoNormal"><span style="font-size:85%;">= 32 days<span style=";font-family:Arial;" lang="EN-US"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 153pt; height: 20.25pt;" width="204" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;">$33m<o:p></o:p></span></p> </td> </tr> <tr style="height: 20.25pt;"> <td style="padding: 0cm 5.4pt; width: 189.75pt; height: 20.25pt;" width="253" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 153pt; height: 20.25pt;" width="204" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> <td style="padding: 0cm 5.4pt; width: 72pt; height: 20.25pt;" width="96" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:85%;"><o:p> </o:p></span></p> <span style="font-size:85%;">
<br /></span></td> </tr> </tbody></table><span style="font-size:78%;">
<br /></span><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; mso-layout-grid-align:none; text-autospace:none; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <p class="MsoNormal"><span lang="EN-US" style="font-size:78%;">=> Accounts receivable = 32 days x $33 m./365 = $2,893.15m.</span></p><p class="MsoNormal"><span style="font-size:78%;">
<br /></span></p><p class="MsoNormal"><span style="font-size:78%;">
<br /></span></p><p class="MsoNormal"><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; mso-layout-grid-align:none; text-autospace:none; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> </p><meta equiv="Content-Type" content="text/html; charset=utf-8"><meta name="ProgId" content="Word.Document"><meta name="Generator" content="Microsoft Word 11"><meta name="Originator" content="Microsoft Word 11"><link rel="File-List" href="file:///C:%5CUsers%5Calmansor%5CAppData%5CLocal%5CTemp%5Cmsohtml1%5C01%5Cclip_filelist.xml"><!--[if gte mso 9]><xml> <w:worddocument> <w:view>Normal</w:View> <w:zoom>0</w:Zoom> <w:punctuationkerning/> <w:validateagainstschemas/> <w:saveifxmlinvalid>false</w:SaveIfXMLInvalid> <w:ignoremixedcontent>false</w:IgnoreMixedContent> <w:alwaysshowplaceholdertext>false</w:AlwaysShowPlaceholderText> <w:compatibility> <w:breakwrappedtables/> <w:snaptogridincell/> <w:wraptextwithpunct/> <w:useasianbreakrules/> <w:dontgrowautofit/> </w:Compatibility> <w:browserlevel>MicrosoftInternetExplorer4</w:BrowserLevel> </w:WordDocument> </xml><![endif]--><!--[if gte mso 9]><xml> <w:latentstyles deflockedstate="false" latentstylecount="156"> </w:LatentStyles> </xml><![endif]--><style> <!-- /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-parent:""; margin:0cm; margin-bottom:.0001pt; mso-pagination:widow-orphan; mso-layout-grid-align:none; text-autospace:none; font-size:10.0pt; font-family:"Times New Roman"; mso-fareast-font-family:"Times New Roman"; mso-ansi-language:EN-US; mso-fareast-language:EN-US;} @page Section1 {size:612.0pt 792.0pt; margin:72.0pt 90.0pt 72.0pt 90.0pt; mso-header-margin:36.0pt; mso-footer-margin:36.0pt; mso-paper-source:0;} div.Section1 {page:Section1;} --> </style><!--[if gte mso 10]> <style> /* Style Definitions */ table.MsoNormalTable {mso-style-name:"Table Normal"; mso-tstyle-rowband-size:0; mso-tstyle-colband-size:0; mso-style-noshow:yes; mso-style-parent:""; mso-padding-alt:0cm 5.4pt 0cm 5.4pt; mso-para-margin:0cm; mso-para-margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:10.0pt; font-family:"Times New Roman"; mso-ansi-language:#0400; mso-fareast-language:#0400; mso-bidi-language:#0400;} </style> <![endif]--> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">3-5 <b style="">Debt Management Ratios </b>Tiggie’s Dog Toys, Inc. reported a debt-to-equity ratio of 1.75 times at the end of 2008. If the firm’s total debt at year-end was $25 million, how much equity does Tiggie’s have?<o:p></o:p></span></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US"><o:p> </o:p></span></span></p> <table class="MsoNormalTable" style="width: 429.6pt; margin-left: 4.65pt; border-collapse: collapse;" width="573" border="0" cellpadding="0" cellspacing="0"> <tbody><tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 186.2pt; height: 12.75pt;" width="248" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 98.3pt; height: 12.75pt;" width="131" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 186.2pt; height: 12.75pt;" width="248" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">Debt-to-equity ratio =</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color windowtext; border-width: medium medium 1pt; padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">Total debt</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 98.3pt; height: 12.75pt;" width="131" nowrap="nowrap"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">= 1.75</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">Total equity</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 186.2pt; height: 12.75pt;" width="248" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 98.3pt; height: 12.75pt;" width="131" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 186.2pt; height: 12.75pt;" width="248" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 98.3pt; height: 12.75pt;" width="131" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 186.2pt; height: 12.75pt;" width="248" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color windowtext; border-width: medium medium 1pt; padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$25 m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 98.3pt; height: 12.75pt;" width="131" nowrap="nowrap"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">Total equity</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 186.2pt; height: 12.75pt;" width="248" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 98.3pt; height: 12.75pt;" width="131" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 186.2pt; height: 12.75pt;" width="248" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">=> Total equity =</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color windowtext; border-width: medium medium 1pt; padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$25m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 98.3pt; height: 12.75pt;" width="131" nowrap="nowrap"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">= 14.29m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">1.75</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 186.2pt; height: 12.75pt;" width="248" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 145.1pt; height: 12.75pt;" width="193" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 98.3pt; height: 12.75pt;" width="131" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> </tbody></table> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US"><o:p> </o:p></span></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US"><o:p> </o:p></span></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US"><o:p> </o:p></span></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US"><o:p> </o:p></span></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">3-6 <b style="">Debt Management Ratios </b>You are considering a stock investment in one of two firms (LotsofDebt, Inc. and LotsofEquity, Inc.), both of which operate in the same industry. LotsofDebt, Inc. finances its $25 million in assets with $24 million in debt and $1 million in equity. LotsofEquity, Inc. finances its $25 million in assets with $1 million in debt and $24 million in equity. Calculate the debt ratio, equity multiplier, and debt-to-equity ratio for the two firms.<o:p></o:p></span></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US"><o:p> </o:p></span></span></p> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US"><o:p> </o:p></span></span></p> <table class="MsoNormalTable" style="width: 375.55pt; margin-left: 4.65pt; border-collapse: collapse;" width="501" border="0" cellpadding="0" cellspacing="0"> <tbody><tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><b style=""><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></b></span></p> </td> <td style="padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><b style=""><span style="font-size: 12pt;" lang="EN-US">Lotsof<o:p></o:p></span></b></span></p> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><b style=""><span style="font-size: 12pt;" lang="EN-US">Debt</span></b><b style=""><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></b></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><b style=""><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></b></span></p> </td> <td style="padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><b style=""><span style="font-size: 12pt;" lang="EN-US">Lotsof<o:p></o:p></span></b></span></p> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><b style=""><span style="font-size: 12pt;" lang="EN-US">Equity</span></b><b style=""><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></b></span></p> </td> <td style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><b style=""><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></b></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">Debt ratio =</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color windowtext; border-width: medium medium 1pt; padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$24m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">= 96.00%</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color windowtext; border-width: medium medium 1pt; padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$1m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">= 4.00%</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$25m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border: medium none ; padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$25m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">Equity multiplier ratio =</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color windowtext; border-width: medium medium 1pt; padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$25m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">= 25 times</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color windowtext; border-width: medium medium 1pt; padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$25m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">= 1.042 times</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$1m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border: medium none ; padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$24m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td rowspan="2" style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">Debt-to-equity ratio =<span style=""> </span></span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color windowtext; border-width: medium medium 1pt; padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$24m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">= 24 times</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border-style: none none solid; border-color: -moz-use-text-color -moz-use-text-color windowtext; border-width: medium medium 1pt; padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$1m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td rowspan="2" style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">= .042 times</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="border: medium none ; padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$1m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> <td style="border: medium none ; padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: center;" align="center"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US">$24m</span><span style="font-size: 12pt; font-family: Arial;"><o:p></o:p></span></span></p> </td> </tr> <tr style="height: 12.75pt;"> <td style="padding: 0cm 5.4pt; width: 133.1pt; height: 12.75pt;" width="177" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style="text-align: right;" align="right"><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 47.65pt; height: 12.75pt;" width="64" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="border-style: none solid none none; border-color: -moz-use-text-color windowtext -moz-use-text-color -moz-use-text-color; border-width: medium 1pt medium medium; padding: 0cm 5.4pt; width: 63pt; height: 12.75pt;" width="84" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 48.55pt; height: 12.75pt;" width="65" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> <td style="padding: 0cm 5.4pt; width: 83.25pt; height: 12.75pt;" width="111" nowrap="nowrap" valign="bottom"> <p class="MsoNormal" style=""><span style="font-size:78%;"><span style="font-size: 12pt; font-family: Arial;"><o:p> </o:p></span></span></p> </td> </tr> </tbody></table> <p class="MsoNormal" style="margin-right: -21.6pt;"><span style="font-size:78%;"><span style="font-size: 12pt;" lang="EN-US"><o:p> </o:p></span></span></p> <span style="font-size:78%;">
<br /></span><span lang="EN-US" style="font-size:78%;"><o:p></o:p></span><p></p> <meta equiv="Content-Type" content="text/html; charset=utf-8"> <!--[if gte mso 9]><xml> <u4:worddocument> <u4:view>Normal<u4:zoom>0<u4:punctuationkerning/> <u4:validateagainstschemas/> <u4:saveifxmlinvalid>false<u4:ignoremixedcontent>false<u4:alwaysshowplaceholdertext>false<u4:compatibility> <u4:breakwrappedtables/> <u4:snaptogridincell/> <u4:wraptextwithpunct/> <u4:useasianbreakrules/> <u4:dontgrowautofit/> <u4:browserlevel>MicrosoftInternetExplorer4</u4:browserlevel> </u4:compatibility> </u4:alwaysshowplaceholdertext> </u4:ignoremixedcontent> </u4:saveifxmlinvalid> </u4:zoom> </u4:view> </u4:worddocument> </xml><![endif]--><!--[if gte mso 9]><xml> <u5:latentstyles deflockedstate="false" latentstylecount="156"> </u5:latentstyles> </xml><![endif]-->Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com1tag:blogger.com,1999:blog-3568395903540506507.post-58831795289016836612010-02-02T20:39:00.000-08:002010-02-02T22:55:14.933-08:00CHAPTER 2 – REVIEWING FINANCIAL STATEMENTS<span style="font-weight: bold;">1. List and describe the four major financial statements.</span><br /><br />The four basic financial statements are:<br />1. The balance sheet reports a firm’s assets, liabilities, and equity at a particular point in time.<br />2. The income statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time—generally one year.<br />3. The statement of cash flows shows the firm’s cash flows over a given period of time. This statement reports the amounts of cash that the firm generated and distributed during a particular time period. The bottom line on the statement of cash flows―the difference between cash sources and uses―equals the change in cash on the firm’s balance sheet from the previous year’s cash account balance.<br />4. The statement of retained earnings provides additional details about changes in retained earnings during a reporting period. This financial statement reconciles net income earned during a given period and any cash dividends paid within that period on one side with the change in retained earnings between the beginning and ending of the period on the other side.<br /><br /><span style="font-weight: bold;">2. On which of the four major financial statements (balance sheet, income statement, statement of cash flows, or statement of retained earnings) would you find the following items?</span><br /><br />a. earnings before taxes - income statement<br />b. net plant and equipment - balance sheet<br />c. increase in fixed assets - statement of cash flows<br />d. gross profits - income statement<br />e. balance of retained earnings, December 31, 20xx - statement of retained earnings<br />f. common stock and paid-in surplus - balance sheet<br />g. net cash flow from investing activities - statement of cash flows<br />h. accrued wages and taxes - income statement<br />i. increase in inventory - statement of cash flows<br /><br /><span style="font-weight: bold;">3. What is the difference between current liabilities and long-term debt?</span><br /><br />Current liabilities constitute the firm’s obligations due within one year, including accrued wages and taxes, accounts payable, and notes payable. Long-term debt includes long-term loans and bonds with maturities of more than one year.<br /><br /><span style="font-weight: bold;">4. How does the choice of accounting method used to record fixed asset depreciation affect management of the balance sheet?</span><br /><br />Firm managers can choose the accounting method they use to record depreciation against their fixed assets. Two choices include the straight-line method and the modified accelerated cost recovery system (MACRS). Companies often calculate depreciation using MACRS when they figure the firm’s taxes and the straight-line method when reporting income to the firm’s stockholders. The MACRS method accelerates deprecation, which results in higher deprecation expenses, lower taxable income, and lower taxes in the early years of a project’s life. The straight-line method results in lower depreciation expenses, but also results in higher taxes in the early years of a project’s life. Firms seeking to lower their cash outflows from tax payments will favor the MACRS depreciation method.<br /><br /><span style="font-weight: bold;">5. What are the costs and benefits of holding liquid securities on a firm’s balance sheet?</span><br /><br />The more liquid assets a firm holds, the less likely the firm will be to experience financial distress. However, liquid assets generate no profits for a firm. For example, cash is the most liquid of all assets, but it earns no return for the firm. In contrast, fixed assets are illiquid, but provide the means to generate revenue. Thus, managers must consider the trade-off between the advantages of liquidity on the balance sheet and the disadvantages of having money sit idle rather than generating profits.<br /><br /><span style="font-weight: bold;">6. Why can the book value and market value of a firm differ?</span><br /><br />A firm’s balance sheet shows its book (or historical cost) value based on Generally Accepted Accounting Principles (GAAP). Under GAAP, assets appear on the balance sheet at what the firm paid for them, regardless of what assets might be worth today if the firm were to sell them. Inflation and market forces make many assets worth more now than they were when the firm bought them. So in most cases, book values differ widely from the market values for the same assets—the amount that the assets would fetch if the firm actually sold them. For the firm’s current assets—those that mature within a year―the book value and market value of any particular asset will remain very close. For example, the balance sheet lists cash and marketable securities at their market value. Similarly, firms acquire accounts receivable and inventory and then convert these short-term assets into cash fairly quickly, so these assets’ book value is generally close to their market value.<br /><br /><span style="font-weight: bold;">7. From a firm manager’s or investor’s point of view, which is more important―the book value of a firm or the market value of the firm?</span><br /><br />Balance sheet assets are listed at historical cost. Managers would thus see little relation between the total asset value listed on the balance sheet and the current market value of the firm’s assets. Similarly, the stockowners’ equity listed on the balance sheet generally differs from the true market value of the equity—in this case, the market value may be higher or lower than the value listed on the firm’s accounting books. So financial managers and investors often find that balance sheet values are not always the most relevant numbers.<br /><br /><span style="font-weight: bold;">8. What do we mean by a “progressive” tax structure?</span><br /><br />The U.S. tax structure is progressive, meaning that the larger the income, the higher the taxes assessed. However, corporate tax rates do not increase in any kind of linear way based on this progressive nature: They rise from a low of 15 percent to a high of 39 percent, then drop to 34 percent, rise to 38 percent, and finally drop to 35 percent.<br /><br /><span style="font-weight: bold;">9 What’s the difference between an average tax rate and a marginal tax rate?</span><br /><br />You can figure the average tax rate as the percentage of each dollar of taxable income that the firm pays in taxes. From your economics classes, you can probably guess that the firm’s marginal tax rate is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns.<br /><br /><span style="font-weight: bold;">10 How does the payment of interest on debt affect the amount of taxes the firm must pay?</span><br /><br />Corporate interest payments appear on the balance sheet as an expense item, so we deduct interest payments from operating income when the firm calculates taxable income. But, any dividends paid by corporations to their shareholders are not tax deductible. This is one factor that encourages managers to finance projects with debt financing rather than to sell more stock. Suppose one firm uses mainly debt financing and another firm, with identical operations, uses mainly equity financing. The equity-financed firm will have very little interest expense to deduct for tax purposes. Thus, it will have higher taxable income and pay more taxes than the debt-financed firm. The debt-financed firm will pay fewer taxes and be able to pay more of its operating income to asset funders, i.e., its bondholders and stockholders. So even stockholders prefer that firms finance assets primarily with debt rather than with stock.<br /><br /><span style="font-weight: bold;">11 The income statement is prepared using GAAP. How does this affect the reported revenue and expense measures listed on the balance sheet?</span><br /><br />Company accountants must prepare firm income statements following GAAP principles. GAAP procedures require that the firm recognize revenue at the time of sale, but sometimes the company receives the cash before or after the time of sale. Likewise, GAAP counsels the firm to show production and other expenses on the balance sheet as the sales of those goods take place. So production and other expenses associated with a particular product’s sale only appear on the income statement (for example, cost of goods sold and depreciation) when that product sells. Of course, just as with the revenue recognition, actual cash outflows incurred with production may occur at a very different point in time—usually much earlier than GAAP principles allow the firm to formally recognize the expenses. Further, income statements contain several non-cash entries; the largest of these non-cash entries is depreciation. Depreciation attempts to capture the non-cash expense incurred as fixed assets deteriorate from the time of purchase to the point when those assets must be replaced. Let’s illustrate the effect of depreciation: Suppose a firm purchases a machine for $100,000. The machine has an expected life of five years and at the end of those five years, the machine will have no expected salvage value. The firm lays out a $100,000 cash outflow at the time of purchase. But the entire $100,000 does not appear on the income statement in the year that the firm purchases the machine—in accounting terms, the machine is not expensed in the year of purchase. Rather, if the firm’s accounting department uses the straight-line depreciation method, it deducts only $100,000/5 = $20,000 each year as an expense. This $20,000 equipment expense is not a cash outflow for the firm. The person in charge of buying the machine knows that the cash flow occurred at the time of purchase—and it totaled $100,000 rather than $20,000. So, figures shown on an income statement may not represent the actual cash inflows and outflows for a firm during a particular period.<br /><br /><span style="font-weight: bold;">12 Why do financial managers and investors find cash flow to be more important than accounting profit?</span><br /><br />Financial managers and investors are far more interested in actual cash flows than they are in the somewhat artificial, backward-looking accounting profit listed on the income statement. This is a very important distinction between the accounting point of view and the finance point of view. Finance professionals know that the firm needs cash, not accounting profit, to pay the firm’s obligations as they come due, to fund the firm’s operations and growth, and to compensate the firm’s ultimate owners: its shareholders. Thus, the statement of cash flows is a financial statement that shows the firm’s cash flows over a given period of time. This statement reports the amounts of cash that the firm generated and distributed during a particular time period.<br /><br /><span style="font-weight: bold;">13 Which of the following activities result in an increase (decrease) in a firm’s cash?</span><br /><br />a. decrease fixed assets – increase in cash<br />b. decrease accounts payable - decrease in cash<br />c. pay dividends - decrease in cash<br />d. sell common stock – increase in cash<br />e. decrease accounts receivable - increase in cash<br />f. increase notes payable – increase in cash<br /><br /><span style="font-weight: bold;">14 What is the difference between net cash flow from operating activities, net cash flow from investing activities, and net cash flow from financing activities?</span><br /><br />Cash flows from operations are those cash inflows and outflows that result directly from producing and selling the firm’s products. These cash flows include: net income, depreciation, and working capital accounts other than cash and operations-related short-term debt. Cash flows from investing activities are cash flows associated with buying or selling of fixed or other long-term assets. This section of the statement of cash flows shows cash inflows and outflows from long-term investing activities—most significantly the firm’s investment in fixed assets. Cash flows from financing activities are cash flows that result from debt and equity financing transactions. These include raising cash by: Issuing short-term debt, issuing long-tern debt, issuing stock, using cash to pay dividends, using cash to pay off debt, and using cash to buy back stock.<br /><br /><span style="font-weight: bold;">15 What are free cash flows for a firm? What does it mean when a firm’s free cash flow is negative?</span><br /><br />Free cash flows are the cash flows available to pay the firm’s stockholders and debtholders after the firm has made the necessary working capital investments, fixed asset investments, and developed the necessary new products to sustain the firm’s ongoing operations. If free cash flow is negative, the firm's operations produce no cash flows available for investors.<br /><br /><span style="font-weight: bold;">16 What is earnings management?</span><br /><br />Managers and financial analysts have recognized for years that firms use considerable latitude in using accounting rules to manage their reported earnings in a wide variety of contexts. Indeed, within the GAAP framework, firms can “smooth” earnings. That is, firms often take steps to over or understate earnings at various times. Managers may choose to smooth earnings to show investors that firm assets are growing steadily. Similarly, one firm may be using straight line depreciation for its fixed assets, while another is using a modified accelerated cost recovery method (MACRS), which causes depreciation to accrue quickly. If the firm uses MACRS accounting methods, they write fixed asset values down quickly; assets will thus have lower book value than if the firm used straight line depreciation methods. This process of controlling a firm’s earnings is called earnings management.<br /><br /><span style="font-weight: bold;">17 What does the Sarbanes-Oxley Act require of firm managers?</span><br /><br />Sarbanes-Oxley Act, passed in June 2002, requires public companies to ensure that their corporate boards’ audit committees have considerable experience applying generally accepted accounting principles (GAAP) for financial statements. The Act also requires that any firm’s senior management must sign off on the financial statements of the firm, certifying the statements as accurate and representative of the firm’s financial condition during the period covered. If a firm’s board of directors or senior managers fails to comply with Sarbanes-Oxley (SOX), the firm may be delisted from stock exchanges.<br /><br /><span style="font-weight: bold;">Problems</span><br /><br />Basic 2-1 Balance Sheet You are evaluating the balance sheet for Goodman’s Bees Corporation.<br />Problems From the balance sheet you find the following balances: Cash and marketable securities =<br />LG1 $400,000, Accounts receivable = $1,200,000, Inventory = $2,100,000, Accrued wages and taxes = $500,000, Accounts payable = $800,000, and Notes payable = $600,000. Calculate Goodman Bee’s net working capital.<br /><br /><span style="font-weight: bold;">net working capital = current assets - current liabilities. </span><br /><br />Goodman’s Bees <span style="font-weight: bold;">current assets</span> =<br /><br />Cash and marketable securities-- = $400,000<br />Accounts receivable------------- = $1,200,000<br />Inventory----------------------- = $2,100,000<br />Total current assets <span>---------------</span><span style="font-weight: bold;">$3,700,000</span><br /><br />and <span style="font-weight: bold;">current liabilities</span> =<br /><br />Accrued wages and taxes-------- = $500,000<br />Accounts payable---------------- = $800,000<br />Notes payable--------------------= $600,000<br />Total current liabilities <span>-------------</span><span style="font-weight: bold;">$1,900,000</span><br /><br /><span style="font-weight: bold; color: rgb(204, 0, 0);">So the firm’s net working capital was $1,800,000 ($3,700,000 - $1,900,000).</span><br /><br /><span style="font-weight: bold;">2. Balance Sheet Zoeckler Mowing & Landscaping’s year-end 2009 balance sheet lists current assets of $256,000, fixed assets of $324,000, current liabilities of $245,000, and long-term debt of $185,000. Calculate Zoeckler’s total stockholders’ equity.</span><br /><br />Recall the balance sheet identity in Equation 2-1: Assets = Liabilities + Equity. Rearranging this equation: Equity = Assets – Liabilities. Thus, the balance sheets would appear as follows:<br /><br /> Book value ------------------------------------Book value <br /><span style="font-weight: bold;">Assets</span><span> --------------------------------</span><span style="font-weight: bold;">Liabilities and Equity</span><br /><br />Current assets --$ 256,000 -----------Current liabilities--------- $ 245,000<br />Fixed assets ------324,000 -----------Long-term debt ------------185,000<br />---------------------------------------<span style="font-weight: bold; color: rgb(255, 0, 0);">Stockholders’ equity ---- 150,000</span> <br /><span style="font-weight: bold;">Total $ 580,000 -------------------- Total --------------------$ 580,000</span><br /><br />3. Income Statement Reed’s Birdie Shot, Inc.’s 2008 income statement lists the following income and expenses: EBIT = $538,000, Interest expense = $63,000, and Net income = $435,000. Calculate the 2008 Taxes reported on the income statement.<br /><br />Using the setup of an Income Statement in Table 2.2:<br /><br />EBIT ----------------$538,000<br />Interest expense -------63,000<br />EBT ------------------475,000<br /><span style="color: rgb(255, 0, 0); font-weight: bold;">Taxes----------------(40,000)</span><br />Net income ----------$435,000<br /><br />4. Income Statement Reed’s Birdie Shot, Inc.’s 2009 income statement lists the following income and expenses: EBIT = $455,000, Interest expense = $58,000, and Taxes = $138,000. Reed’s has no preferred stock outstanding and 100,000 shares of common stock outstanding. Calculate the 2008 earnings per share.<br /><br />Using the setup of an Income Statement in Table 2.2:<br /><br /><br />EBIT ------------------ $455,000<br />Interest expense............ (58,000)<br />EBT.................................. 397,000<br />Taxes ...............................(138,000)<br />Net income...................... $259,000<br /><br />Thus,<br /> <span style="font-weight: bold; color: rgb(255, 0, 0);">Earnings per share (EPS) =$259,000/100,000= $2.59 per share</span><br /> <br />5. Corporate Taxes Oakdale Fashions Inc. had $245,000 in 2008 taxable income. Using the tax schedule in Table 2-3, calculate the company’s 2008 income taxes. What is the average tax rate? What is the marginal tax rate?<br /><br />From Table 2.3, the $245,000 of taxable income puts Oakdale Fashion in the 39 percent marginal tax bracket. Thus,<br /><br /><span style="font-weight: bold;">Tax liability = Tax on base amount + Tax rate (amount over base):</span><br /> = $22,250 + .39 ($245,000 - $100,000) = $78,800<br /><br />Note that the base amount is the maximum dollar value listed in the previous tax bracket. The average tax rate for Oakdale Fashions Inc. comes to:<br /> <br /><span style="font-weight: bold; color: rgb(255, 0, 0);">Average tax rate = $78,800/ $245,000= $78,800/$245,000 = 32.16%</span><br /><br />If Oakdale Fashions earned $1 more of taxable income, it would pay 39 cents (its tax rate of 39 percent) more in taxes. Thus, the firm’s marginal tax rate is 39 percent.<br /><br /><span style="font-weight: bold;">6. Corporate Taxes Hunt Taxidermy, Inc. is concerned about the taxes paid by the company in 2008. In addition to $26.5 million of taxable income, the firm received $1,750,000 of interest on state-issued bonds and $600,000 of dividends on common stock it owns in Hunt Taxidermy, Inc. Calculate Hunt Taxidermy’s tax liability, average tax rate, and marginal tax rate.</span><br /><br />In this case, interest on the state-issued bonds is not taxable and should not be included in taxable income. Further, the first 70 percent of the dividends received from Hunt Taxidermy is not taxable. Thus, only 30 percent of the dividends received are taxed, so:<br /><br />Taxable income = $26,500,000 + (.3)$600,000 = $26,680,000<br /><br />Now Hunt Taxidermy’s tax liability will be:<br /><br />Tax liability = $6,416,667 + .35 ($26,680,000 - $18,333,333) = $9,338,000<br /><br />The $600,000 of dividend income increased Hunt Taxidermy’s tax liability by $63,000 (= (.3) x $600,000 x (.35)). Hunt Taxidermy’s resulting average tax rate is now:<br /><br /><span style="color: rgb(255, 0, 0); font-weight: bold;">Average tax rage = $9,338,000/$26,680,000 = 35.00%</span><br /><br />Finally, if Hunt Taxidermy earned $1 more of taxable income, it would still pay 35 cents (based upon its marginal tax rate of 35 percent) more in taxes.<br /><br />7. Statement of Cash Flows Ramakrishnan Inc. reported 2008 net income of $15 million and depreciation of $2,650,000. The top part of Ramakrishnan, Inc.’s 2007 and 2008 balance sheets is listed below (in millions of dollars).<br /><br /><a onblur="try {parent.deselectBloggerImageGracefully();} catch(e) {}" href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_7a4lY_w8PIGeeUPj-Fn0D8EMDrLvQQES0xpA3uVk4GJaKOi7rTYYm89bURncNySAs2CT_4zrw_o27dj8uJhPjeSjnLqFIkhki4Z3fA6mpxJnuwOBukf0uJoXBwPvkpMB0MaVO7lTCFI/s1600-h/current+asset.jpg"><img style="margin: 0px auto 10px; display: block; text-align: center; cursor: pointer; width: 320px; height: 193px;" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_7a4lY_w8PIGeeUPj-Fn0D8EMDrLvQQES0xpA3uVk4GJaKOi7rTYYm89bURncNySAs2CT_4zrw_o27dj8uJhPjeSjnLqFIkhki4Z3fA6mpxJnuwOBukf0uJoXBwPvkpMB0MaVO7lTCFI/s320/current+asset.jpg" alt="" id="BLOGGER_PHOTO_ID_5433907022173070546" border="0" /></a><span style="font-weight: bold; color: rgb(255, 0, 0);">Net cash flow from operating activities: $4,650,000</span><br /><br /><span style="font-weight: bold;">8. Statement of Cash Flows In 2008, Usher Sports Shop had cash flows from investing activities of -$2,567,000 and cash flows from financing activities of -$3,459,000. The balance in the firm’s cash account was $950,000 at the beginning of 2008 and $1,025,000 at the end of the year. </span><br /><br /><span style="font-weight: bold; color: rgb(255, 0, 0);">Calculate Usher Sports Shop’s cash flow from operations for 2008.</span><br /><br />Net change in cash and marketable securities = $1,025,000 - $950,000 = $75,000<br /><br />Cash Flows from Operating Activities = $6,101,000<br /><br />Cash Flows from Investing Activities .................... = - 2,567,000<br />Cash Flows from Financing Activities..................... = - 3,459,000<br /><span style="font-weight: bold; color: rgb(255, 0, 0);">Net Change in Cash and Marketable Securities.... = $75,000</span>Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com4tag:blogger.com,1999:blog-3568395903540506507.post-42468751538048945412010-02-02T20:34:00.000-08:002010-02-02T20:35:35.065-08:00CHAPTER 1 − INTRODUCTION TO FINANCIAL MANAGEMENT1. Describe the type of people who use the financial markets.<br /><br />The financial markets are used by people who have extra money now and want it to grow for their future. They offer this capital through the financial markets to others who have good ideas and opportunities, but need the capital to implement them. These types of people are denoted as Type 2 and 3 people in Figure 1.1.<br /><br />2. What is the purpose of financial management? Describe the kinds of activities that financial management involves.<br /><br />Financial management is the process of making decisions for the acquisition, use, and repayment of capital. Decisions for the acquisition of capital can include how the business is organized, what type of capital should be obtained, and how much capital should be obtained. Decisions for the uses of capital include what new business projects to invest in, what capital to retain to fund ongoing projects, and to reduce taxation. Decisions for the repayment of capital involve paying capital back to its providers.<br /><br />3. What is the difference in perspective between finance and accounting?<br /><br />Accounting focuses on recording and presenting the past business activities. This information is good for evaluating past performance. The finance function uses this past data along with current information to make decisions on what business activities to do now and in the future. Decisions about the future involve much uncertainty, so risk evaluation is part of the finance job.<br /><br />4. What personal decisions can you think of that will benefit from learning finance?<br /><br />Learning finance will help the student build wealth and reduce costs in their personal life. After taking this class, the student should be able to make good decisions about funding their future retirement and investment allocations. People with finance knowledge can also reduce costs by making good decisions in borrowing while buying cars, homes, and using credit cards.<br /><br />5. What are the three basic forms of business ownership? What are the advantages and disadvantages to each?<br /><br />The three basic business forms are the sole proprietorship (SP), the partnership (Part), and the corporation (Corp). Advantages and disadvantages can be determined along several dimensions: control, risks, access to capital, and taxation. The SP owner has total control of business decisions. Control decreases for owners of Part and then Corp. The owner has high risk to their personal wealth in a SP and Part, but low risk in a Corp. Access to capital is addressed in the next question. Lastly, SP and Part owners are taxed as if the business was personal income. The Corp owner is taxed twice, once at the corporation level and then again at the personal level.<br /><br />6. Between the three basic forms of business ownership, describe the ability of each form to access capital.<br /><br />The corporation has the highest access to capital. It can acquire new equity capital from the public market. Also, banks are more willing to lend to corporations. Debt investors are also more likely to buy the bonds of a corporation. Partnerships have the next best access to capital. With larger numbers of partners involved with the business, the more likely banks will lend and debt investors will buy its bonds. Partnerships do not have access to the public equity market. Lastly, sole proprietorships have poor access to capital. Generally speaking, the sole proprietor cannot borrow as much money from banks or debt investors.<br /><br />7. Explain how the founder of a business can eventually lose control of the firm. How can the founder ensure this will not happen?<br /><br />When the founder wants the business to grow quickly, more capital is required. In the early stages of a small fast growing company, it is equity capital that is available. In other words, the founder must give up a portion of his/her ownership to other investors. As this process continues over time, the founder may find that he/she no longer owns a majority of the firm. There may come a time when enough of these other owners that own a combined 50+% of the firm come together and change the leadership of the firm.<br /><br />8. Explain the shareholder wealth maximization goal of the firm and how it can be measured. Make an argument for why it is a better goal than maximizing profit.<br /><br />The shareholder wealth maximization goal of the firm states that managers should run the company in such a way that maximizes the wealth of the stockholders. Progress for this goal can be measured using the stock price. The stock price contains what investors know about the current profitability of the firm and expectations about future profits and opportunities. Maximizing profit is a similar goal, but quite as good. A manager could maximize this year’s profit at the detriment of future profits. This would not be good for long-term investors.<br /><br />9. Name and describe as many corporate stakeholders as you can.<br /><br />Stockholders, managers, and employees are all stakeholders with a very close relationship to the firm. Customers, suppliers, banks, and bondholders have a close relationship to the firm. Local government, local community people, and people who enjoy the environment are also stakeholders.<br /><br />10. What conflicts of interest can arise between managers and stockholders?<br /><br />Stockholders own the firm and hire managers to run the firm. Managers, therefore, control the day to day operations of the firm. Since the stockholders can’t see these decisions, it is possible that the managers will manage the firm in such a way that it benefits themselves more than the shareholders. This conflict of interest can manifest as higher costs to the firm for things that benefit the managers. It can also show up in decisions to make poor acquisitions of other firms in order to make the company bigger and then argue for higher managerial pay.Academic Activitieshttp://www.blogger.com/profile/13709485814679493186noreply@blogger.com8