C214 Pre-Test Q & A Complete Solutions

What is included in the Income Statement and NOT in the Statement of Cash Flows? Ans- Depreciation Expense Computation of Net Income: A co. sold products in 2014 for $120k and collected $100k cash and remainder in 20 ...

What is included in the Income Statement and NOT in the Statement of Cash Flows? Ans- Depreciation Expense Computation of Net Income: A co. sold products in 2014 for $120k and collected $100k cash and remainder in 2015. Co. incurred $70k expenses for 2014 and paid $100k which included $30k for expenses incurred in 2013. What is net income for 2014? Ans- Computation of Net Income (R-E=NI) $50,000 Net Income = $120k - $70k = $50k, or Revenues - Expenses Incurred = Net Income Retained Earning Statement: The beginning retrained earnings on 1/14/14 is $25k. The NI for 2014 is $50k and the dividend payout ratio is 25% of NI. What are retained earnings on 12/31/14? Ans- Retained Earning Statement: $62,500 Retained earnings on12/31/14 = $25k + $50k - (.25x$50k) = $62,500 Retained Earnings: Firm reported RE of $300 in 12/31/12. For 12/31/13 firm reports RE of $400 and pays dividends of $25. What is NI in 2013? Ans- Retained Earnings: Answer $125 Logic is $300 from $400 is $100 plus the $25 dividend totals out to $125. 300 + NI - 25 = 400: NI=125, so 300+125-25=400 Balance Sheet: Basic equation for the Balance Sheet is? Ans- Balance Sheet: Equity = Assets - Liabilities, or it can also be seen as Assets = Liabilities + Equity Investment: Simple Interest: An investment of $10k made today at 8% simple interest for 3 yrs and 9 mo. will yield in principle and interest of? Ans- Interest: Simple Interest $13,000 Principal + Interest = $10,000 + (10k x .08x3.75) = $13k Investment returns: A stock will be worth $36 at EOY and will pay dividend of $2.25. How much should an investor pay for the stock if investor expects a 12% rate of return? Ans- Investment returns: Highest price for stock = X+0.12= $36+$2.25/1.12 (add "1" to 12% as "X" variable) = $38.25/$1.12 = $34.15 Investment: Rate of Return You want to purchase Ord common stock at $55/share, hold 1 year, and sell after $3 dividend is paid. What would stock price be to satisfy your required ROR of 15%? Ans- Investment: Rate of Return $60.25 Price=$55 + (.15x$55) -3 = $60.25 Investment: Stocks Two types of expected returns when investing in stocks? Ans- Investment: Stocks 1. Dividends 2. Appreciation of the price of stock = Total return in the investment of stock Investment: Stock A broker purchased stock that pays $1.15 annual dividend for %16 w/a required ROR of 15%. What is the actual return if sold at EOY 1 for $19? Ans- Investment: Stock ROR=(($1.15+$19)-16) /16 = .259 or 25.9% ((Dividend+EOY stock price)-begin stock price) / by begin stock price = actual return %. Gordon Growth Model: A stock is expected to pay dividend of $5 for current year and is expected to grow at rate of 4% per year. If required ROR is 10%, what is the max amount that should be paid for the stock today? Ans- Gordon Growth Model: $83.33 GGM=5/(.10-.04)=$83.33 Tip: "grow rate of dividend" language = GGM Gordon Growth Model: A person buys shares of a co at $45. Recently paid a $2 annual dividend which is expected to grow by 10% per year. What is the expected return per year? Ans- Gordon Growth Model: 14.9% $45=(2x1.10) / (ER-.10) $45ER - $45x.10=$2.20 ER=($4.5+$2.2)/45=14.9% Gordon Growth Model: A stock is expected to pay a dividend of $5 per year in perpetuity. If the required ROR is 10%, what is the max amount that should be paid for the stock today? Ans- Gordon Growth Model: $50 It's GGM because the word "perpetuity" which means the same amount or "0" $5/.10 - 0 = $50 Investment: Probability Distribution What is expected ROR for stock where 60% chance of recession and 40% chance of expansion? The stock return 2% during recession and 8% in expansion. Ans- Investment: Probability Distribution .044 Cycle Prob Stock Reces. 60% .02 Expan 40% .08 E(r)=(.6*.02)+(.4*.08)=.044 What is portfolio ROR? Expansion prob 55%, Recess prob 45% Stock A - Expan R is 15%, Recess R 2% Stock B - Expan R is 12%, Recess R -3% We own $75k of A and $15k of B Ans- .0851 E(r) for A=((.45*.02)+(.55*.15))*75k=6852.5 E(r) for B=((.45*-.03)+(55*.12))*15k=787.5 Portfolio Return=((6852.5+787.5))/90000=.0851 Capital Budgeting refers to? Ans- ...the process used in making investment decisions involving projects that generate cash flows over a multi-year horizon (more than a year). Cash Flow consists of? Ans- Initial Outlay Differential Annual Cash Flows Terminal Cash Flow Initial Outlay consists of? Ans- Cost of the A