Question

Question 1

Thomson Corporation had the following operating results for 2019 (in 000’s): sales of $30,600; cost of goods sold of $21,800; depreciation expense of $4,200; interest expense of $1,040; dividends paid of $1,000. At the beginning of the year, net fixed assets were $23,600, current assets were $6,800, and current liabilities were $3,800. At the end of the year, net fixed assets were $25,800, current assets were $7,900, and current liabilities were $3,900. Total taxes are $1,500 ($1,424 paid, and $76 deferred).

1. What is the net income for 2019? [2 points]
2. What is the operating cash flow for 2019? [2 points]
3. What is the cash flow from assets for 2019? Is this possible? Explain [4 points]
4. If no new debt was issued during the year, what is the cash flow to creditors? What is the cash flow to shareholders? Explain and interpret the positive and negative signs of your answers in (a) through (d) [4 points]

Question 2

Easy Bank offers you a monthly interest rate of 0.30% for deposits, how long does it take to

1. double your money in years? [2 points]
2. To triple it in years? [2 points]

Question 3

Big-Bucks Financial provides a Regional Market Growth Fund that pays you 6 percent per year. If you invest $20,000 today,

1. How much will you have in the beginning of 3^rd year from now? [2 points]
2. How much would you get if the fund pays simple interest during the three years. [2 points]
3. How much interest you’ll get when compounding for the 3 years? [4 points]
4. How much more interest you’ll get when compounding for the 3 years compared with simple interest?

Question 4

Simona Ramones, who is 60 years old, has just inherited $600,000 and decides to use the money towards her retirement. She places the money in a bank, which promises a return of 4% per year until her planned retirement at age 65. If her funds earn 4% interest compounded monthly,

1. How much will she have at retirement? [2 points]

Question 5

As the winner of the Friendly Lottery, you are entitled to one of the following prizes:

            a) $80,000 per year forever (the first payment starting next year). [2 points]

            b) $144,000 per year for the next 10 years starting immediately. [2 points]

            c) $320,000 payable every 2 years over 20 years. [2 points]

            d) $20,000 starting next year growing by 5.5% forever. [2 points]

        

Which prize will provide you a higher present value if r = 7%?

Question 6

a) Given an effective quarterly rate of 2.5%, determine the equivalent effective annual rate. [2 points]

b) Given an effective annual rate of 9%, determine the equivalent effective monthly rate. [4 points]

Question 7

Vita-Chips Co. has invested in a new plant that will produce nutritious corn chips. The initial cost is $120 million. The company anticipates net cash flows of $60 million next year, $40 million, $20 million, $10 million, $5 million and then $0 over each of the following years. Vita-Chips require a 10% return per year on their investment. Calculate the net present value (NPV) of this investment. Should Vita accept the project? [4 points]

Question 8

You will be paying off a mortgage of $250,000 over the next 25 years. You have signed a loan agreement with Me-Bank to secure a fixed rate of 5.00%. The mortgage loan is compounded semi-annually.

a)         What are the monthly payments? [4 points]

b)         How much will your payments be over the first five years? [2 points]

c)         What is the amount of principal that you pay off with the first payment? [2 points]

d)         How much principal remains to be paid after the first five years? [2 points]

e)         How much will remain to be paid off after you have made your payment at the end of the 15^th year? [2 points]

Answer 1

Question 1

a. net income = sales - cost of goods sold - depreciation expense - interest expense - taxes paid = $30,600 - $21,800 - $4,200 - $1,040 - $1,424 = $2,136

b. Operating cash flow = net income + depreciation expense + interest expense = $2,136 + $4,200 + $1,040 = $7,376

c. cash flow from assets = Operating cash flow - capital spending - additions to net working capital

capital spending = ending net fixed assets - beginning net fixed assets - depreciation expense = $25,800 - $23,600 + $4,200 = $6,400

additions to net working capital = end of year (current assets - current liabilities) - beginning of year (current assets - current liabilities) = ($7,900 - $3,900) - ($6,800 - $3,800) = $4,000 - $3,000 = $1,000

cash flow from assets = $7,376 - $6,400 - $1,000 = -$24

this is possible because large sum of money is stuck in current assets than it is being used through current liabilities. this means money to be collected is higher than money to be paid.

d. cash flow to creditors = interest expense - new debt issued = $1,040 - $0 = $1,040

cash flow to shareholders = dividend paid - new common stock issued = $1,000 - $0 = $1,000

answer in part (a) with positive sign indicates net income or profit and negative sign indicates net loss.

answer in part (b) with positive sign indicates cash earned from operations and negative sign indicates cash lost from operations.

answer in part (c) with positive sign indicates cash earned from assets and negative sign indicates cash lost from assets.

answer in part (d) with positive sign indicates cash paid to creditors and shareholders and negative sign indicates cash received from creditors and shareholders.