Assignment
1. Which organization forms give their owners limited liability?
A.Corporations and limited liability companies give owners limited liability.
B.Limited partnerships provide limited liability for the general partners, but not for the limited partners.
C.Limited partnerships provide limited liability for the limited partners, but not for the general partners.
2. Corporate managers work for the owners of the corporation. Consequently, they should make decisions that are in the interests of the owners, rather than their own. What strategies are available to shareholders to help ensure that managers are motivated to act this way?
A.Ensure that employees are paid a percentage of the company's net income.
B.Ensure that underperforming managers are fired.
C.Ensure that employees are paid with company stock and/or stock options.
D.Mount hostile takeovers.
E.Write contracts that ensure that the interests of the managers and shareholders are closely aligned
3. What four financial statements can be found in a firm's 10-K filing? What checks are there on the accuracy of these statements?
A.Balance sheet, asset and liability statement, statement of cash flows, and statement of stockholders' equity
B.Balance sheet, income statement, statement of cash flows, and Statement of income and expenses
C.Balance sheet, income statement, statement of cash flows, and statement of stockholders' equity
D.Balance sheet, cash budget, earnings statement, and statement of stockholders' equity
4. Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (file in October 2015). Answer the following questions from their balance sheet:
a. How much cash did Costco have at the end of the fiscal year?
b. What were Costco's total assets?
c. What were Costco's total liabilities? How much debt did Costco have?
d. What was the book value of Costco equity?
a. How much cash did Costco have at the end of the fiscal year?
At the end of the fiscal year, Costco had cash and cash equivalents of $ nothin million. (Round to one decimal place.)
5. Showing financial statement data and stock price data for Mydeco Corp. Suppose Mydeco repurchases 22 million shares each year from 2013 to 2016.
What would be its earnings per share in 2016?
(Assume Mydeco pays for the shares using its available cash and that Mydeco earns no interest on its cashbalances.)
(Select the best choice below.)
A. A repurchase does not impact earnings directly, so any change to EPS will come from a reduction in shares outstanding. 2016
shares outstanding
equals 55 million minus 4 times 2 million equals 47 million=55 million-4×2 million=47 million,
EPS equals $ 12.7 million divided by 47 million equals $ 0.27EPS=$12.7 million/47 million=$0.27.
B. A repurchase does not impact earnings directly, so any change to EPS will come from a reduction in shares outstanding.
2016
shares outstanding
equals 55 million minus 4 times 2 million equals 47 million=55 million-4×2 million=47 million,
EPS equals $ 21.7 million divided by 47 million equals $ 0.46EPS=$21.7 million/47 million=$0.46.
C. A repurchase does not impact earnings directly, so any change to EPS will come from an increase in shares outstanding.
2016
shares outstanding
equals 55 million plus 4 times 2 million equals 53 million=55 million+4×2 million=53 million,
EPS equals $ 12.7 million divided by 53 million equals $ 0.24EPS=$12.7 million/53 million=$0.24.
D. A repurchase does not impact earnings directly, so any change to EPS will come from an increase in shares outstanding.
2016
shares outstanding
equals 55 million plus 4 times 2 million equals 53 million=55 million+4×2 million=53 million,
EPS equals $ 21.7 million divided by 53 million equals $ 0.41EPS=$21.7 million/53 million=$0.41.
6. Suppose a firm's tax rate is 40 %40%.
a. What effect would a $ 9.15$9.15 million operating expense have on this year's earnings? What effect would it have on next year's earnings?
b. What effect would a $ 7.7$7.7 million capital expense have on this year's earnings if the capital expenditure is depreciated at a rate of
$ 1.54$1.54 million per year for fiveyears? What effect would it have on next year's earnings?
a. What effect would a $ 9.15$9.15 million operating expense have on this year's earnings? What effect would it have on next year's earnings? (Select all the choices thatapply.)
A. A $ 9.15$9.15 million operating expense would be immediately expensed, increasing operating expenses by $ 9.15$9.15 million. This would lead to a reduction in taxes of 40 % times $ 9.15 million equals $ 3.66 million40%×$9.15 million=$3.66 million.
B. A $ 9.15$9.15 million operating expense would be immediately expensed, increasing operating expenses by $ 9.15$9.15 million. This would lead to an increase in taxes of 40 % times $ 9.15 million equals $ 3.66 million40%×$9.15 million=$3.66 million.
C. Earnings would decline by $ 9.15 million minus $ 3.66 million equals $ 5.49 million$9.15 million-$3.66 million=$5.49 million. There would be no effect on next year's earnings.
D. Earnings would decline by $ 9.15 million minus $ 3.66 million equals $ 5.49 million$9.15 million-$3.66 million=$5.49 million. The same effect would be seen on next year's earning
7. Showing financial statement data and stock price data for Mydeco Corp.
a. From 2012 to 2016, what was the total cash flow that Mydeco generated from operations?
b. What fraction of the total in (a) was spent on capital expenditures?
c. What fraction of the total in (a) was spent paying dividends to shareholders?
d. What was Mydeco's total retained earnings for this period?
a. From 2012 to 2016, what was the total cash flow that Mydeco generated from operations? The total cash flows from operations was $ nothing million. (Round to one decimal place.)
8. Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015).
a. Which auditing firm certified these financial statements?
b. Which officers of Costco certified the financial statements?
a. Which auditing firm certified these financial statements? (Select the best choice below.)
A. KPMG LLP certified Costco's financial statements.
B. Deloitte &Touche LLP certified Costco's financial statements.
C. Ernst & Young LLP certified Costco's financial statements.
D. PricewaterhouseCoopers LLP certified Costco's financial statements.
9. Honda Motor Company is considering offering a $ 2 comma 000$2,000 rebate on its minivan, lowering the vehicle's price from $ 30 comma 000$30,000 to $ 28 comma 000$28,000. The marketing group estimates that this rebate will increase sales over the next year from 40 comma 00040,000 to 55 comma 00055,000 vehicles. Suppose Honda's profit margin with the rebate is $ 6 comma 000$6,000 per vehicle. If the change in sales is the only consequence of this decision, what are its benefits and costs? Is it a good idea? The benefits are $ nothing million. (Round to one decimal place.)
10. Suppose the current market price of corn is $ 3.38$3.38 per bushel. Your firm has a technology that can convert 1 bushel of corn to 3 gallons of ethanol. If the cost of conversion is $ 1.47$1.47 per bushel, at what market price of ethanol does conversion become attractive?
The price at which the conversion becomes attractive is $ nothing per gallon.t cent.) (Round to the neares
11. You run a construction firm. You have just won a contract to build a government office building. It will take one year to construct it requiring an investment of $ 10.68$10.68 million today and $ 5.00$5.00 million in one year. The government will pay you $ 23.50$23.50 million upon the building's completion. Suppose the cash flows and their times of payment are certain, and the risk-free interest rate is 11 %11%.
a. What is the NPV of this opportunity?
b. How can your firm turn this NPV into cash today?
a. What is the NPV of this opportunity?
The NPV of this opportunity is $ nothing million. (Round to two decimal places.)
12. Your firm has identified three potential investment projects. The projects and their cash flows are shown here: (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
|
Project
|
Cash Flow Today ?(millions)
|
Cash Flow in One Year ?(millions)
|
|
A
|
negative $ 10-$10
|
$ 20$20
|
|
B
|
$ 5$5
|
$ 5$5
|
|
C
|
$ 20$20
|
negative $ 10-$10
|
Suppose all cash flows are certain and the risk-free interest rate is 10%.
a. What is the NPV of each project?
b. If the firm can choose only one of these projects, which should it choose?
c. If the firm can choose any two of these projects, which should it choose?
a. What is the NPV of each project?
The NPV of project A is $ nothing million. (Round to two decimal places.)
13. Throughout the 1990s, interest rates in JapanJapan were lower than interest rates in United StatesUnited States. As a result, many Japanese investors were tempted to borrow in Japan and invest the proceeds in United States. Which of the following explains why this strategy does not represent an abritrage opportunity?
(Select the best choice below.)
A. Most Japanese investors were prohibited by law from taking advantage of this opportunity.
B.It is an arbitrage opportunity.
C.Other things besides money enter the picture. By investing overseas Japan looks weak and so this is regarded as an unpatriotic act. When the cost of appearing unpatriotic is taken into account, the profits are erased.
D.Engaging in such transactions may incur a loss if the value of the U.S. dollar falls relative to the Japanese yenJapanese yen.
Because a profit is not guaranteed, this strategy is not an arbitrage opportunity.
14. Calculate the future value of $ 6 comma 000$6,000 in
a. 55 years at an interest rate of 8 %8% per year.
b. 1010 years at an interest rate of 8 %8% per year.
c. 55 years at an interest rate of 16 %16% per year.
d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?
a. Calculate the future value of $ 6 comma 000$6,000 in 55 years at an interest rate of 8 %8% per year.
The future value of $ 6 comma 000$6,000 in 55 years at an interest rate of 8 %8% per year is $ nothing.
15.Your brother has offered to give you either $ 72 comma 000$72,000 today or $ 120 comma 000$120,000 in 1212 years. If the interest rate is 4 %4% per year, which option is preferable?
What is the present value of the future amount (amount received in 1212 years)?
The present value is $ nothing.
16. You have a loan outstanding. It requires making 66 annual payments at the end of the next 66 years of $ 1 comma 000$1,000 each. Your bank has offered to allow you to skip making the next 55 payments in lieu of making one large payment at the end of the loan's term in 66 years. If the interest rate on the loan is 5.13 %5.13%, what final payment will the bank require you to make so that it is indifferent between the two forms of payment?
The present value of the cash flows is $ nothing.
17. Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $ 28 comma 000$28,000 at the end of each of the next 33 years. The opportunity requires an initial investment of $ 7 comma 000$7,000 plus an additional investment at the end of the second year of $ 35 comma 000$35,000. What is the NPV of this opportunity if the interest rate is 6 %6% per year? Should Marian take it?
The NPV of this opportunity is $ nothing.
18. What is the present value of $ 7 comma 000$7,000 paid at the end of each of the next 5050 years if the interest rate is 7 %7% per year?The present valueis $ nothing.
19.Your grandmother has been putting $ 4 comma 000$4,000 into a savings account on every birthday since your first (that is, when you turned 1). The account pays an interest rate of 4 %4%. How much money will be in the account on your 18th birthday immediately after your grandmother makes the deposit on that birthday?
The amount in the account upon your 18th birthday is $ nothing.
20. You have an investment opportunity that requires an initial investment of $ 5 comma 000$5,000 today and will pay $ 6 comma 000$6,000 in one year. What is the IRR of this opportunity?The internal rate of return (IRR) is nothing%.
21. The Tillamook County Creamery Association manufactures Tillamook Cheddar Cheese. It sells the cheese in four varieties: aged 2 months, 9 months, 15 months, and 2 years. At the shop in the dairy, it sells 2 pounds of each variety for the following prices: $ 8.00$8.00, $ 9.50$9.50, $ 11.50$11.50, and $ 12.00$12.00, respectively. Consider the cheese maker's decision whether to continue to age a particular 2-pound block of cheese. At 2 months, he can either sell the cheese immediately or let it age further. If he sells it now, he will receive $ 8.00$8.00 immediately. If he ages the cheese, he must give up the $ 8.00$8.00 today to receive a higher amount in the future. What is the IRR (expressed in percent per month) of the investment of giving up $ 80.00$80.00 today by choosing to store 20 pounds of cheese that is currently 2 months old and instead selling 10 pounds of this cheese when it has aged 9 months, 6 pounds when it has aged 15 months, and the remaining 4 pounds when it has aged 2 years?
The IRR is nothing% per month. (Round to two decimal places.)
22.You are thinking of purchasing a house. The house costs $ 200 comma 000$200,000. You have $ 29 comma 000$29,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 3030-year mortgage that requires annual payments and has an interest rate of 7 %7% per year. What will your annual payment be if you sign up for this mortgage? The annual payment is $ nothing.
23. You have an investment opportunity in Japan. It requires an investment of $ 0.99$0.99 million today and will produce a cash flow ofyen 114¥114 million in one year with no risk. Suppose the risk-free interest rate in the United States is 4.2 %4.2%, the risk-free interest rate in Japan is 1.9 %1.9%, and the current competitive exchange rate is yen 110¥110 per dollar. What is the NPV of this investment? Is it a good opportunity?What is the NPV of this investment?
The NPV of this investment is $ nothing.
24. An Exchange Traded Fund (ETF) is a security that represents a portfolio of individual stocks. Consider an ETF for which each share represents a portfolio of 11shareshare ofHewlett-Packard (HPQ), 11 share of Sears (SHLD), and 44 shares of General Electric (GE). Suppose the current stock prices of each individual stock are as shown here:
|
Stock
|
Current Market Price
|
|
HPQ
|
$ 35$35
|
|
SHLD
|
$ 41$41
|
|
GE
|
$ 16$16
|
a. What is the price per share of the ETF in a normal market?
b. If the ETF currently trades for $ 122$122, what arbitrage opportunity is available? What trades would you make? (Ignore any transaction costs.)
c. If the EFT currently trades for $ 152$152, what arbitrage opportunity is available? What trades would you make? (Ignore any transaction costs.)
a. What is the price per share of the ETF in a normal market?
The price per share of the ETF in a normal market is $ nothing.