Georgia State University J. Mack Robinson College of Business. Spring 2010: FI3300 Solutions for Quiz #2

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1 Georgia State University J. Mack Robinson College of Business Spring 2010: FI3300 Solutions for Quiz #2 Instructions 1. Please put your student ID number (last 4 digits) and name at the bottom of this sheet. 2. There are 6 pages to this quiz (including this cover page). The quiz includes 9 questions. All questions have the same weight. Question 10 is a challenge / bonus question. 3. In order to receive full credit, you must show all relevant work. Please use the space provided for your work and solutions. You may also use the backs of pages for scratch work (please label all work with the question number). 4. You may use only this quiz and your calculator. 5. You have 45 minutes, until 8:00 PM to complete the quiz. There will be a lecture after the quiz. 6. Follow the instructions and read each question carefully. Make sure you are providing the solution that the question is seeking. 7. If you need the result of a part that you were not able to solve, pick a reasonable number, write down your assumption and use it to solve the next part. Good Luck! Last 4 digits of your Student ID Number: Name:

2 1. You are given the following information on MoneyMaker Inc.: MoneyMaker Inc. Balance sheet for the year ending December 31, 2009 Cash $1,500 Notes Payable $3,500 Accounts Receivable $5,000 Accounts Payable $17,400 x1.3 Inventory $14,500 Accruals $1,000 x1.3 Gross Fixed Assets $55,950 Long Term Bank Debt $3,000 (Acc. Depreciation) $7,200 Common Stock $15,000 Net Fixed Assets $48,750 Capital Surplus $2,500 Acc. Retained Earnings $27,350 +7,904 Total assets $69,750 x1.3=90,675 Total Liabilities and Equity $69,750 83,174 Additional Information Sales in 2009: $95,000 Projected Sales Growth Rate in 2010: 30% sales (2010) = 95,000 x 1.3 = $123,000 Projected Net Profit Margin in 2010: 8% NetProf / 123,500 = 0.08; NetProf = $9,880 Projected Dividends (dividend payout ratio) in 2010: 20% of the Net Income (1-0.2) x 9,880 = $7, Find the projected Addition to Retained Earnings in 2010 a. $ 8,205 b. $ 9,880 c. $ 7,904 d. $ 1,976 e. None of the above 2. Find the projected Outside Funds Needed (OFN) in 2010 = 90,675 83,174 = $7,501 a. $ 1,824 b. $ 7,501 c. $ 13,429 d. $ 13,581 e. $ 14,949

3 3. Which of the following would INCREASE the Outside Funds Needed (OFN) if all other things are fixed? a. An increase in the Dividend Payout Ratio b. An increase in the Net Profit Margin c. An increase in the projected Sales Growth Rate d. Both (a) and (c) are correct e. None of the above 4. You plan to withdraw $7,300 from your account in one year and $2,500 in three years. If the bank pays 5% interest a year, how much should you deposit in your account today? a. $ 9,800 b. $ 9,220 c. $ 9,002 d. $ 7,125 e. None of the above is within $1 of the correct answer PV = 7,300 / ,500 / (1.05)^3 = $9, You have an opportunity to buy a consol (perpetuity) that pays $20,000 a year forever. Your required rate of return is 8% per annum. What is the price of the consol today? a. $ 250,000 b. $ 20,000 c. $ 18,519 d. $ 160,000 e. $ 2,500 PV = 20,000 / 0.08 = $250,000

4 6. The annual interest rate is 12%. How many years will it take a deposit of $100 to triple in value? (Triple in value: $100 become $300) a. 3.0 years b. 2.4 years c. 9.7 years d. There is not enough information to answer the question e. None of the above PV x (1+r)^T = FV 100 x (1.12)^T = 300 T = You deposit $16,000 in your bank account today and plan to spend $20,000 on a family vacation two years from now. What is the annual interest rate? a. 25.0% b. 11.1% c. 11.8% d. 20.0% e. None of the above is within 1% of the correct answer FV = PV x (1+r)^T 20,000 = 16,000 x (1+r)^2 r = 11.8%

5 8. You have just won the lottery and you get to choose one of two options: A. Receive annual payments of $200,000 for 10 years (the first payment today t=0 and the last payment on date t=9); or B. Receive one payment today. The annual interest rate is 8%. How much should the lottery company offer in (B) to make you indifferent between the two options? a. $2,000,000 b. $1,342,016 c. $1,449,378 d. $2,500,000 e. None of the above is within $1 of the correct answer PV = (200,000 / 0.08) x [ 1- (1/1.08)^10 ] x (1.08) = $1,449, You have decided to buy a car. You can either (a) pay cash or (b) get a loan from the dealer: monthly payments of $532 per month for 4 years. The monthly interest rate is 1%. What price (cash payment offer a) will make you indifferent between the two offers, (a) and (b)? a. $ 53,200 b. $ 255,360 c. $ 21,400 d. $ 52,752 e. None of the above is within $1 of the correct answer PV = (532 / 0.01) x [ 1- (1/1.01)^48 ] = $20,202.15

6 10. You plan to retire in 30 years. Then you will need $200,000 a year for 10 years (first withdrawal at t=31). Ten years later you expect to go to a retirement home where you will stay for the rest of your life. To enter the retirement home, you will have to make a single payment of $1,000,000. You can start saving for your retirement in an account that pays 9% interest a year. Therefore, starting one year from now (end of the first year: t =1), you will make equal yearly deposits into this account for 30 years. In 30 years (on date t=30), you expect a deposit of $500,000 to your retirement account from your cash value insurance policy. What should be your yearly deposit into the retirement account? FV ( outflows on date t=30) = (200,000 / 0.09) x [ 1- (1/1.09)^10 ] + [ 1,000,000 / (1.09)^10 ] = 1,283, , = 1,705,942.3 FV ( outflows on date t=30 ) = FV ( inflows on date t=30) FV ( inflows on date t=30) = (CF / 0.09) x [ 1- (1/1.09)^30 ] x (1.09)^ ,000 = 1,705,942.3 CF = $8,847.22