5.         Suppose you start saving $15,000 per year (starting next year) for the 40 years you are working. How much can you withdraw each year for the 38 years you are retired? Assume that you earn an 8% return for the years you are saving and a 4% return for the years you are retired.

Balance Sheet
Brand Brew Inc.
Years 1 & 2 ($000's)
Year 1 . Year 2 .
Cash & Marketable
Securities 309,705 59,167
Accounts Receivable 108,732 705,426
Inventories 138,577 215,159
Other Current Assets 49,515 74,144
Total Current Assets 606,529 1,053,896
PP&E, Net 869,710 1,380,239
Intangibles 86,289 1,256,145
Other Assets 177,164 607,131
Total Assets 1,739,692 4,297,411
Accounts Payable 222,493 334,647
Other current liabilities 210,052 669,195
Short-term Debt 85,000 144,049
Total Current Liabilities 517,545 1,147,891
Long-term debt 20,000 1,383,392
Other long-term liabilities 250,835 784,277
Total liabilities 788,380 3,315,560
Capital Stock 8,922 28,334
Retained earnings 954,981 1,086,965
Adjustments -12,591 -133,448
Total shareholders' equity 951,312 981,851
Total Liabilities & Equity 1,739,692 4,297,411

Income Statement for Brand Brew Inc. Year 1 Year 2 Revenues 2,429,462 3,776,322 COGS 1,537,623 2,414,530 Depreciation 121,091 230,299 SG&A 619,143 833,208 EBIT 151,605 298,285 Interest Expense –14,403 49,732 Other income 32,005 8,047 Pre-Tax Income 198,013 256,600 Income Tax 75,049 94,947 Net Income 122,964 161,653

7. Refer to Brand Brew, Inc. financial statements,
Which of the following statements is correct?
(x) Both total asset turnover and ROA for the
firm decreased from Year 1 to Year 2.
(y) The amount of debt held by Brand Brew, Inc.
increased by more than 300 percent from
Year 1 to Year 2.
(z) The ROE for Brand Brew, Inc. rose from
12.9% in Year 1 to more than 17.4% in
Year 2.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

8. Refer to Brand Brew, Inc. financial statements.
What is the most important determinant of the
change in ROE?
A. ROA
B. Profit Margin
C. The change in leverage
D. Total Asset Turnover
E. Both A and B are important determinants

Entries for Installment Note Transactions

On January 1, Year 1, Bryson Company obtained a $26,000, four-year, 12% installment note from Campbell Bank. The note requires annual payments of $8,560, beginning on December 31, Year 1.

a. Prepare an amortization table for this installment note, similar to the one presented in Exhibit 4.

Note: Round the computation of the interest expense to the nearest whole dollar. Enter all amounts as positive numbers. In Year 4, round the amount in the Decrease in Notes Payable column either up or down to ensure that the Carrying Amount zeroes out.

b. Journalize the entries for the issuance of the note and the four annual note payments.

Note: For a compound transaction, if an amount box does not require an entry, leave it blank. For the Year 4 entry (due to rounding), adjust Notes Payable up or down to ensure that debits equal credits.

c. How will the annual note payment be reported in the Year 1 income statement?
  of $ would be reported on the income statement.

9. When analyzing financial statements, besides reviewing data year over year for comparisons, the analyst should also compare the data to_________________________________________

10. Give an example of “separation of duties “ in the accounting department of a small business _________________________________________________________________________________________________________________

11. Explain the meaning of “rationalization” with respect to internal control and the Fraud Triangle ________________________________________________________________________________________________________________

12. How can a business owner with very few employees implement internal controls? a. Due to small number of employees it is not feasible. b. Rotate job duties among employees. c. Hire a CPA to monitor transactions weekly.

13. The Debt to Equity ratio calculation measures a. The ability of the company to pay its’ current obligations b. The amount of Assets that are financed by debt c. The amount of capital invested by the owners relative to the debt of the company

14. The Earnings Quality ratio calculation measures how much of the net income is converted to cash. TRUE FALSE

Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets (which is equal to its total invested capital) of $385,000. The debt-to-total-capital ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt-to-total-capital ratio. Assume that sales, operating costs, total assets, total invested capital, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure? Do not round your intermediate calculations.

Last year Carson Industries issued a 10-year, 15% semiannual coupon bond at its par value of $1,000. Currently, the bond can be called in 6 years at a price of $1,075 and it sells for $1,280.

1. What are the bond's nominal yield to maturity and its nominal yield to call? Do not round intermediate calculations. Round your answers to two decimal places.

   YTM: %

   YTC: %

   Would an investor be more likely to earn the YTM or the YTC?

• What is the current yield? (Hint: Refer to Footnote 6 for the definition of the current yield and to Table 7.1) Round your answer to two decimal places.

  %

  Is this yield affected by whether the bond is likely to be called?

  1. If the bond is called, the capital gains yield will remain the same but the current yield will be different.
  2. If the bond is called, the current yield and the capital gains yield will both be different.
  3. If the bond is called, the current yield and the capital gains yield will remain the same but the coupon rate will be different.
  4. If the bond is called, the current yield will remain the same but the capital gains yield will be different.
  5. If the bond is called, the current yield and the capital gains yield will remain the same.
• What is the expected capital gains (or loss) yield for the coming year? Use amounts calculated in above requirements for calculation, if required. Negative value should be indicated by a minus sign. Round your answer to two decimal places.

  %

  Is this yield dependent on whether the bond is expected to be called?
  1. The expected capital gains (or loss) yield for the coming year does not depend on whether or not the bond is expected to be called.
  2. If the bond is expected to be called, the appropriate expected total return is the YTM.
  3. If the bond is not expected to be called, the appropriate expected total return is the YTC.
  4. If the bond is expected to be called, the appropriate expected total return will not change.
  5. The expected capital gains (or loss) yield for the coming year depends on whether or not the bond is expected to be called.

Exhibit 1
Company Shares   Beginning of year price Dividend per share End of year price

Birch    250 $ 40    $2.45    $39.00
Walnut 150    $ 8.00    $1.05 $8.50

Maple    300    $20.00    none $23.00

Cherry 400    $27.00 $1.25 $ 26.25

Use Exhibit 1. The table shows your stock
positions at the beginning of the year, the
dividends that each stock paid during the
year, and stock prices at the end of the year.
What is your portfolio percentage return? A. less than 5.65 percent
B. more than 5.65 percent but less than
6.10 percent
C. more than 6.10 percent but less than
6.55 percent
D. more than 6.55 percent but less than
7.00 percent
E. more than 7.00 percent

Compare and contrast a 5-year AAA corporate bond with a 5-year Treasury Note. Which would typically offer a higher interest rate? Why? What risk affects both types of bonds?

Current one-year interest rates in Europe is 4 percent, while one-year interest rates in the U.S. is 2 percent. You convert $200,000 to euros and invests them in France. One year later, you convert the euros back to dollars. The current spot rate of the euro is $1.20.

a. According to the IFE, what should the spot rate of the euro in one year be?

b. If the spot rate of the euro in one year is $1.12, what is your percentage return from your investment?

c. If the spot rate of the euro in one year is $1.31, what is your percentage return from your investment?

d. What must the spot rate of the euro be in one year for your strategy to be successful?