Assignment 2

1)You sold a car and accepted a note with the following cash flow stream as
your payment: $1,000 after 1 year, 2,000 after 2 years, 2,500 after 3 years and
3,000 after 4 years. What was the effective price you received for the car
assuming an interest rate of 6.0%?

Answer: PV = FV / (1+i)n

=1000/(1+0.06) +2000/(1+0,06)n +2500/(1+0.06)3 +3000/(1+0.06)4 = $7198.4

2)You want to quit your job and go back to school for a law degree 4 years from
now, and you plan to save $3,500 per year, beginning immediately. You will
make 4 deposits in an account that pays 5.7% interest. Under these
assumptions, how much will you have 4 years from today?

Answer: FV=PMT[(1+i)n/i)-1/i]

= 3500[(1+0.057)4/0.057-1/0.057]

=16111

If a bank compounds savings accounts quarterly, the nominal rate will exceed
the effective annual rate.(T/F)

False,The effective rate will always be higher than the nominal rate if you
compound more than once a year.

When a loan is amortized, a relatively high percentage of the payment goes to

reduce the outstanding principal in the early years, and the interest paid on the
loan decreases. (T/F)

False , the highest percentage goes to reduce the interest paid on the loan

Firms A and B have the same current ratio, 0.75, the same amount of sales, and
the same amount of current liabilities. However, Firm A has a higher inventory
turnover ratio than B. Therefore, we can conclude that A's quick ratio must be
smaller than B's quick ratio. (True or false).

False , the lower inventories the firm has the higher its quick ratio will be.

7) On January 1, you deposit $100 in an account that pays a nominal (or

quoted) interest rate of 11.33463%, with interest added (compounded) daily.
 How much will you have in your account on October 1, or 9 months later?
(273 days)
Answer: FV= PV (1+i/365) 273
= 100(1+11.33463%/365) 273
=100(1.00031054)273 = 108.845

8) Your grandmother just died and left you $100,000 in a trust fund that
pays 6.5% interest. You must spend the money on your college education,
and you must withdraw the money in 4 equal installments, beginning
immediately. How much could you withdraw today and at the end of each of
the next 3 years and end up with zero in the account? ANNUITY DUE :

Answer: PMT = PV [i/1-(1+i) -n ](1/1+i)

=100000[.065/1-(1+.065) -4](1/1+.065)

=2740.87

9) Procter & Gamble Co. reported the following Balance sheet and Income
statement for the year 2009:

Balance Sheet for Procter & Gamble

For the year 2009
Asssets Liabilities & Owners Equity
Current Assets Current Liabilities
Cash Accounts Payable
300,000 500,400
Accounts Receivable Notes Payable
100,000 290,200
InventoryTotal Current liabilities
566,400 790,600
Total Current Assets
966,400 Long term Debt
500,000
Fixed Assets Shareholder Equity
Net Equipment Common stock
1,473,600 90,000
Retained Earnings
TOTAL ASSETS 2,440,000 1,059,400
Total Equity
1,149,400

Total Liab.& Equity

2,440,000

Procter & Gamble

2009 Income Statement
Sales 5,444,000
Cost of Goods Sold 3,884,000
Gross Profit 1,560,000
Other Expenses & Depreciation 504,000
EBIT 1,056,000
Interest 600,800
EBT 455,200
Taxes (40%) 182,080
Net Income 273,120

Analyze the position of the Company in the market given the following industry average
ratios:
Current Ratio 1.2 times
Total Debt Ratio 40%
Times Interest Earned2.01 times
Ratio(TIE)
Profit Margin 4.5%
Inventory Turnover Ratio 5.3 times
Day Sales Outstanding (DSO) 10 days
Return on Assets (ROA) 13%

10) The present value of a future sum increases as either the interest rate or the
number of periods per year increases, other things held constant. (T/F) TRUE

I think False; The Present Value should actually Decrease in that case

11) Bad managerial judgments or problems in firm profitability that happen to a

firm are defined as "company-specific," or "unsystematic," events, and their
effects on investment risk can in theory be diversified away.(True/False)
True
12) Given the following information concerning the expected returns and
probabilities of 2 stocks- ECB & WCB, calculate expected return and risk
for each stock and determine which stock is best for investment.
Probabilities ECB WCB
0.4 40% 40%
0.1 -10% 15%
0.2 35% -5%
0.1 -5% -10%
0.2 15% 35%

Expected Return ECB

= 0.4 * 40% + 0.1 * (-10%) + 0.2 * 35% + 0.1 * (-5%) + 0.2 * 15%

= 0.16 – 0.01 + 0.07 – 0.005 + 0.03

= 0.245 = 24.5%
Stock ECB
Expected
Return 24.50%

Probability Related Stock Deviation from DER squared P *

(P) Return (RSR) Expected Return (DER) (DERS) DERS
0.4 40% 15.5% 2.4% 1.0%
0.1 -10% -34.5% 11.9% 1.2%
0.2 35% 10.5% 1.1% 0.2%
0.1 -5% -29.5% 8.7% 0.9%
 0.2 15% -9.5% 0.9% 0.2%
Expected Return = Sum (P * RSR) 24.5%
Variance = Sum (P*DERS) 3.4%
Standard Deviation = Square Root of Variance 18.5%

Stock WCB
Expected
Return 22.50%

Probability Related Stock Deviation from DER squared P *

(P) Return (RSR) Expected Return (DER) (DERS) DERS
0.4 40% 15.5% 2.4% 1.0%
0.1 15% -9.5% 0.9% 0.1%
0.2 -5% -29.5% 8.7% 1.7%
0.1 -10% -34.5% 11.9% 1.2%
0.2 35% 10.5% 1.1% 0.2%
Expected Return = Sum (P * RSR) 22.5%
Variance = Sum (P*DERS) 4.2%
Standard Deviation = Square Root of Variance 20.5%

Stock ECB is Better as it has higher expected rate and lower risk