1. Determine the size of the M1 money supply using the following information.

A. Currency plus traveler’s checks $25 million

B. Negotiable CDs $10 million

C. Demand deposits $13 million

D. Other checkable deposits $12 million

M0-Physical cash and coin
M1 – All of M0 plus demand deposits, traveler’s checks
M2 – All of M1 plus savings deposits, money market shares

 

3. Determine the size of the demand deposits component of the M1 money supply using the following information. Demand deposit = M1 – currency-traveler`s checks- other checkable deposits- small time deposits
A. Currency $350 million

B. Traveler’s checks $10 million

C. Other checkable deposits $200 million

D. Small time deposits $100 million

E. M1 money supply $800 million

 

 

2. Assume a bank has $5 million in deposits and $1 million in vault cash. If the bank holds $1 million in excess reserves and the required reserves ratio is 8 percent, what level of deposits are being held?

a. If the required reserves ratio is 8 percent, what dollar amount of deposits can the bank have =
b. If the bank holds $65 million in deposits and currently holds bank reserves such that excess reserves are zero, what required reserves ratio is implied =

 

5. The Friendly National Bank holds $50 million in reserves at its Federal Reserve District Bank. The required reserves ratio is 12 percent.

a. If the bank has $600 million in deposits, what amount of vault cash would be needed for the bank to be in compliance with the required reserves ratio?

b. If the bank holds $10 million in vault cash, determine the required reserves ratio that would be needed for the bank to avoid a reserves deficit.

1. Assume that Banc One receives a primary deposit of $1 million. The bank must keep reserves of 20 percent against its deposits. Prepare a simple balance sheet of assets and liabilities for Banc One immediately after the deposit is received.

5. A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten-year Treasury bond has an interest rate of 2.5 percent. A maturity risk premium is estimated to be 0.2 percentage points for the longer maturity bond. Investors expect inflation to average 1.5 percentage points over the next ten years.

a.       Estimate the expected real rate of return on the ten-year U. S. Treasury bond.

b.       If the real rate of return is expected to be the same for the thirty-year bond as for the ten-year bond, estimate the average annual inflation rate expected by investors over the life of the thirty-year bond.

 

6. You are considering an investment in a one-year government debt security with a yield of 5 percent or a highly liquid corporate debt security with a yield of 6.5 percent. The expected inflation rate for the next year is expected to be 2.5 percent.

a.       What would be your real rate earned on either of the two investment?

b.       What would be the default risk premium on the corporate debt security?

 

4. You are planning to invest $2,500 today for three years at a nominal interest rate of 9 percent with annual compounding.

a.What would be the future value of your investment?

b.Now assume that inflation is expected to be 3 percent per year over the same three-year period. What would be the investment’s future value in terms of purchasing power?

c.What would be the investment’s future value in terms of purchasing power if inflation occurs at a 9 percent annual rate?

1. Compute the annual interest payments ad principal amount for a Treasury Inflation-Protected Security with a par value of $1,000 and a 3 percent interest rate if inflation is at 4 percent in year one, 5 percent in year two, and 6 percent in year three.

23. The Joseph Company has a stock issue that pays a fixed dividend of $3.00 per share annually. Investors believe the nominal risk-free rate is 4 percent and that this stock should have a risk premium of 6 percent. What should be the value of this stock?

1.       In late 2010, you purchased the common stock of a company that has reported significant earnings increases in nearly every quarter since your purchase. The price of the stock increased from $12 a share at the time of the purchase to a current level of $45. Notwithstanding the success of the company, competitors are gaining much strength. Further, your analysis indicates that the stock may be overpriced based on your projection of future earnings growth. Your analysis, however, was the same one year ago and the earnings have continued to increase. Actions that you might take range from an outright sale of the stock (and the payment of capital gains tax) to doing nothing a continuing to hold the shares. You reflect on these choices as well another action that could be taken. Describe the various actions tat you might take and their implications.

 

 

Problem 3: Use your knowledge of balance sheets to fill in the missing amounts:

ASSETS

 

CASH ACCOUNTS RECEIVABLE

$50,000

ACCOUNTS RECEIVABLE

80,000

INVENTORY

100,000

TOTAL CURRENT ASSETS

 

GROSS PLANT AND EQUIPMENT

 

LESS: ACCUMULATED DEPRECIATION

130,000

NET PLANT AND EQUIPMENT

600,000

TOTAL ASSETS

 

 

LIABILITIES

 

ACCOUNTS PAYABLE

$12,000

NOPTES PAYABLE

50,000

TOTAL CURRENT LIABILITIES

 

LONG-TERM DEBT

 

TOTAL LIABILITIES

 

COMMON STOCK($ 1 PAR, 100,000 SHARES)

 

PAID-IN CAPITAL

250,000

RETAINED EARNINGS

200,000

TOTAL STOCKHOLDERS’ EQUITY

 

TOTAL LIABILITIES AND EQUITY

$830,000

 

Problem 6: Use the following information to construct an income statement:

INTEREST

25,000

SALES

950,000

INCOME TAX RATE

25%

SELLING AND MARKETING EXPENSES

160,000

GENERAL AND ADMINISTRATIVE EXPENSE

200,000

GROSS PROFIT

550,000

DEPRECIATION

30,000

COST OF GOODS SOLD

400,000

 

Problem 3: The Dayco’s Manufacturing Company had the following financial statement results for last year. Net sales were $1.2 million with net income of $90,000. Total assets at year end amounted to $900,000.

A.      Calculate Dayco’s asset turnover ratio and its profit margin.

B.      Show how the two ratios in Part (a) can be used to determine Dayco’s rate of return on assets.

C.      Dayco’s operates industry average ratios are these: Return on assets: 11 percent; Asset turnover: 2.5 times; Net profit margin: 3.6 percent. Compare Dayco’s performance against the industry averages.

Problem 6: Following are financial statements for the Genatron Manufacturing Corporation for 2012 and 2011.

GENATRON MANUFACTURING CORPORATION

BALANCE SHEET

2012

2011

ASSETS

 

 

CASH

$40,000

$50,000

ACCTS. RECIEVABLE

260,000

200,000

INVENTORY

500,000

450,000

TOTAL CURRENT ASSETS

800,000

700,000

FIXED ASSETS, NET

400,000

300,000

TOTAL ASSETS

$1,200,000

$1,000,000

LIABILITIES AND EQUITY

 

 

ACCTS. PAYABLE

$170,000

$130,000

BANK LOAN

90,000

90,000

ACCRUALS

70,000

50,000

TOTAL CURRENT LIABILITIES

330,000

270,000

LONG-TERM DEBT, 12%

400,000

300,000

COMMON STOCK, $10 PAR

300,000

300,000

CAPITAL SURPLUS

50,000

50,000

RETAINED EARNINGS

120,000

80,00

TOTAL LIABILITIES & EQUITY

$1,200,000

$1,000,000

 

INCOME STATEMENT

2012

2011

NET SALES

$1,500,000

$1,300,000

COST OF GOODS SOLD

900,000

780,000

GROSS PROFIT

600,000

520,000

EXPENSES; GENERAL & ADMIN

150,000

150,000

MARKETING

150,000

130,000

DEPRECIATION

53,000

40,000

INTEREST

57,000

45,000

EARNING BEFORE TAXES

190,000

155,000

INCOME TAXES

76,000

62,000

NET INCOME

$114,000

$93,000

a.       Apply Du Pont analysis to both the 2012 and 2011 financial statements’ data.

b.      Explain how financial performance differed between 2012 and 2011.

 

Problem 1: Find the NVP and PI of a project that cost $1,500 and returns $800 in year one and $850 in year two. Assume the project’s cost of capital is 8 percent.

 

 

Problem 1: AQ&Q has EBIT of $2 million, total assets of $10 million, stockholders’s equity of $4 million, and pretax interest expense of 10 percent.

a.       What is AQ&Q’s indifference level of EBIT?

b.       Given its current situation, might it benefit from increasing or decreasing its use of debt? Explain.

c.        Suppose we are told AQ&Q’s average tax rate is 40 percent. How does this affect your answers to (a) and (b)?

 

Problem 4: Faulkner’s Fine Fries, Inc. (FFF), is thinking about reducing its debt burden. Given the following capital structure information and an expected EBIT of $50 million (plus or minus 10 percent) next year, should FFF change their capital structure?

 

 

CURRENT

PROPOSED

TOTAL ASSETS

$750 MILLION

$750 MILLION

DEBT

450 MILLION

300 MILLION

EQUITY

300 MILLION

450 MILLION

COMMON STOCK PRICE

$30

$30

NUMBER OF SHARES

10,000,000

15,000,000

INTEREST RATE

12%

12%

 

 

 

 

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