FIN 370 Week 2 Finance Lab

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1. (Related to Checkpoint 5.2) (Future value) Leslie Mosallam, who recently sold her Porsche, placed S 10,000 in a savings account paying annual compound interest of 6 percent.

a. Calculate the amount of money that will accumulate if Leslie leaves the money in the bank for 1, 5 and 15 year(s).

b. Suppose Leslie moves her money into an account that pays 8 percent or one that pays 10 percent. Rework part (a) using 8 percent and 10 percent.

c. What conclusions can you draw about the relationship between interest rates, time, and future sums from the calculations you just did?

 

2. (Related to Checkpoint 5.4) (Present value) Sarah Wiggum would like to make a single investment and have $2.0 million at the time of her retirement in 35 years. She found a mutual fund that will earn 4 percent annually. How much will Sarah have to invest today? If Sarah earned an annual return of 14 percent, how soon could she then retire?

 

3. (Related to Checkpoint 5.5) (Solving for n) How many years will it take for $ 480 to grow to $ 1,015.86 if its invested at 8 percent compounded annually?

 

4. (Related to Checkpoint 5.6) (Solving for i) Lance Murdock purchased a wooden statue of a Conquistador for $7,600 to put in his home office 7 years ago. Lance has recently married, and his home office is being converted into a sewing room. His new wife, who has far better taste than Lance, thinks the Conquistador is hideous and must go immediately. Lance decided to sell it on e-Bay and only received $5,200 for it, and so he took a loss on the investment. What was his rate of return, that is, the value of i?

 

5. (Future value of an ordinary annuity) What is the future value of $500 per year for 10 years compounded annually at 5 percent?

 

6. (Related to Checkpoint 6.2) (Present value of an ordinary annuity) What is the present value of $2,500 per year for 8 years discounted back to the present at 10 percentage?

 

7. (Present value of a growing perpetuity) What is the present value of a perpetual stream of cash flows that pays $20000 at the end of year one and then grows at a rate of 7% per year indefinitely? The rate of interest used to discount the cash flows is 11%.

 

8. (Present value of complex cash flows) How much do you have to deposit today so that beginning 11 years from now you can withdraw $10,000 a year for the next 5 years(periods 11 through 15) plus an additional amount of $20,000 in the last year(period 15)? Assume an interest rate of 6 percent.

 

9. (Related to Checkpoint 13.4) (Break-even analysis) The Marvel Mfg. Company is considering whether or not to construct a new robotic production facility. The cost of it is $600,000 and it’s expected to have a six year life with annual depreciation expense of $100,000 and no salvage value. Annual Sales from the new facility is expected 2,000 units with a price of $1,000 per unit. Variable production costs are $600 per unit while fixed cash expenses are $80,000 per year

a. Find the accounting and the cash break-even units of production.

b. Will the plant make a profit based on its current expected level of operations?

c. Will the plant contribute cash flow to the firm at the expected level of operations?

 

10 (Related to Checkpoint 13.4) (Break-even analysis) Farrington Enterprises owns a number of sporting goods businesses and is currently analyzing a new T-shirt printing business. Specifically, the company is evaluating the feasibility of this business based on its estimates of unit sales, the price per unit, variable cost per unit and fixed costs. The company’s initial estimates of annual sales and other critical variables are shown here:

a. Calculate the accounting and cash break even annual sales volume in units.

b. Bill Farrington is the grandson of the founder of the company and is currently enrolled in his junior year at the local state university. After reviewing the accounting break-even calculation done in part a, Bill wondered if the depreciation expense should be included in the calculation. Bill had just completed his first finance class and was well aware that depreciation is not an actual out-of-pocket expense but an allocation of the cost of the printing equipment used in the business over its useful life. What do you think? What do the cash and accounting break-even points tell you?

 

11. (Financial Forecasting) Which of the following accounts would most likely vary directly with the level of firm sales?

Yes                  No

Cash                            ——–              ———–

Notes payable             ——–              ———–

Marketable securities  ——–              ———–

Plant and equipment   ——–              ———–

Accounts payable        ——–              ———–

Inventories                  ——–              ———–

Long-term debt           ——–              ———–

 

12. (Corporate income tax) Meyer Inc. has taxable income (earnings before taxes) of $300,000. Calculate Meyer’s federal income tax liability using the tax table shown in th popup window. What are the firm’s average and marginal tax rates?

 

3. (Related to Checkpoint) (Working with the balance sheet) The Caraway Seed Company grows heirloom tomatoes and sells their seeds. The heirloom tomato plants are preferred by many growers for their superior flavor. At the end of the most recent year the firm had current assets of $ 50,000, net fixed assets of $ 250,000, current liabilities of $30,000, and long term debt of $ 100, 000.

a. Calculate Caraway’s stockholders equity.

b. What is the firm’s net working capital?

c. If Caraway’s current liabilities consist of $ 20,000 in accounts payable and $ 10,000 in short-term debt (notes payable), what is the firm’s net working capital ?

 

14. (Related to Checkpoint 3.2) (Review of financial statements) A scrambled list of accounts from the income statement and balance sheet of Belmond, Inc. is found here:

a. How much is the firm’s net working capital?

b. Complete an income statement and a balance sheet for Belmond.

c. If you were asked to respond to part (a) and (b) as part of a training exercise, what could you tell your boss about the company’s financial condition based on your answers?

 

15. (Analyzing the quality of firm earnings) Kabutell, Inc. had net income of $750,000, cash flow from financing activities of $50,000, depreciation expenses of $50,000, and cash flow from operating activities of $575,000.

a. Calculate the quality of earnings ratio. What does this ratio tell you?

b. Kabutell, Inc. reported the following in its annual reports for 2011-2013:

($ Million)                                           2011                2012                2013

Cash Flow from Operation                 $478                $403                $470

Capital Expenditures (CAPES)          $459                $447                $456

Calculate the average capital acquisitions ratio over the three-year period. How would you interpret these results?