Part B Assume that you are 23 years old and that you place $3,000 year-end deposits each year into a stock index fund that earns an average of 9.5% per year for the next 17 years.
Part C (a ½ - 1 page response is required)
What is the possible range for a correlation coefficient? For purposes of diversification, what type of correlation coefficient among asset returns is preferred by investors? Provide a brief explanation.
Describe the two (2) investment rules identified in the text. Explain the validity of the following statement and provide one (1) supporting fact to justify your reasoning. "Investors do not like risk and will always choose the investment with the least risk."
What is the possible range for a correlation coefficient? For purposes of diversification, what type of correlation coefficient among asset returns is preferred by investors? Provide a brief explanation.
Describe the two (2) investment rules identified in the text. Explain the validity of the following statement and provide one (1) supporting fact to justify your reasoning. "Investors do not like risk and will always choose the investment with the least risk."
2. a. Describe the two (2) investment rules identified in the text.
Rule 1 Diversification
It is an approach in which an investor does not put all his or her eggs in one basket, rather the investment is spread over different assets to manage risk and return of the portfolio according to the target rate of return.
Rule 2 Active VS Passive Strategy
When an investor wants to beat the index rate of return or wants to earn higher return on investment as compared to market rate of return, the active approach is used and if the investor wants to go with the index rate of return or equal to market rate of return, the approach is passive. Under the active approach the risk is on higher side but the return on investment is also on higher side and in passive approach the return on investment is on lower side due to lower risk as compared to active approach.
b. Explain the validity of the following statement and provide one (1) supporting fact to justify your reasoning. "Investors do not like risk and will always choose the investment with the least risk
It is not completely true it depends on the type of investor, if an investor is risk averse investor then he or she would not like to invest in riskier securities rather would like to invest in government securities with lower risk, but the rate of return will also be lower as the return on investment is directly related to risk associated with the particular class of asset. But the aggressive investor would like to take more risk to earn more rate of return on his or her investment.
Part A (a one page response is required)
1.Describe an incremental cash flow for a project. Describe three (3) concepts we need to examine to help understand how to estimate the incremental cash flow of a project.
2.Benson Co. purchases an asset for $6,000. This asset qualifies as a seven-year recovery asset under MACRS. Benson has a tax rate of 30%. The seven-year expense percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. If the asset is sold at the end of six years for $2,000, what is the cash flow from disposal? Show your work.
Part B (a ½ page response is required)
1.Briefly describe JIT inventory management.
2.Describe one (1) type of cost that is minimized with JIT control.
3.In order to use JIT, is it better to have high ordering costs or low? Provide one (1) supporting fact to justify your answer.
Part C (a ½ page response is required)
You are CEO of Acme, Inc. located in the United States. You use the discounted payback period method and accept all projects that payback in three years. You are considering a project that will cost $5,500,000 and will produce one cash flow that occurs in three years. However, the cash flow is in pesos since the project is an overseas project. The current indirect exchange rate is 13.5 pesos per dollar. The cash inflow in pesos is 100,000,000 in three years, and the discount rate is 11.5%. During this time, the anticipated annual inflation rate is 5% in the United States and 4% in Mexico.
Should you accept this project, using the discounted payback period method? Is this a good decision? Provide the six (6) steps you would utilize to determine whether or not this is a good decision.
1.Describe an incremental cash flow for a project. Describe three (3) concepts we need to examine to help understand how to estimate the incremental cash flow of a project.
2.Benson Co. purchases an asset for $6,000. This asset qualifies as a seven-year recovery asset under MACRS. Benson has a tax rate of 30%. The seven-year expense percentages for years 1, 2, 3, 4, 5, and 6 are 14.29%, 24.49%, 17.49%, 12.49%, 8.93%, and 8.93%, respectively. If the asset is sold at the end of six years for $2,000, what is the cash flow from disposal? Show your work.
Part B (a ½ page response is required)
1.Briefly describe JIT inventory management.
2.Describe one (1) type of cost that is minimized with JIT control.
3.In order to use JIT, is it better to have high ordering costs or low? Provide one (1) supporting fact to justify your answer.
Part C (a ½ page response is required)
You are CEO of Acme, Inc. located in the United States. You use the discounted payback period method and accept all projects that payback in three years. You are considering a project that will cost $5,500,000 and will produce one cash flow that occurs in three years. However, the cash flow is in pesos since the project is an overseas project. The current indirect exchange rate is 13.5 pesos per dollar. The cash inflow in pesos is 100,000,000 in three years, and the discount rate is 11.5%. During this time, the anticipated annual inflation rate is 5% in the United States and 4% in Mexico.
Should you accept this project, using the discounted payback period method? Is this a good decision? Provide the six (6) steps you would utilize to determine whether or not this is a good decision.
Part A (15 points each for a possible total of 30 points)
See Sheet 2 in Excel for calculations
1. After several years of business, Abel, Barney, and Cole are liquidating. The following are post-closing account balances.
Cash 18,000
Inventory 73,000
Other assets 157,000
2. The partnership of Brandon and Ryan is being liquidated. All gains and losses are shared in a 3:1 ratio, respectively. Before liquidation, their balance sheet balances are as follows:
Cash $10,000
Other Assets 8,000
Liabilities 4,000
Brandon, Capital 7,000
Ryan, Capital 7,000
a. If the Other Assets are sold for $10,000, how much will each partner receive before paying liabilities and distributing the remaining assets?
b. If the Other Assets are sold for $8,000, how much will each partner receive before paying liabilities and distributing remaining assets?
Part B (20 points each for a possible total of 40 points)
1. Simon Brothers pays $47,000 into a bond sinking fund each year to redeem the future maturity of its bonds. During the first year, the fund earned $3,825. At the time of bond redemption, the fund has a balance of $417,000. Of this, $400,000 was used to redeem the bonds. Journalize the following entries.
a. Initial deposit
b. The first year's interest
c. The redemption of the bonds
2. On January 1, Auctions Online issued $300,000, 9%, 10-year bonds to lenders at the contract rate. Interest is to be paid semiannually on July 1 and January 1. Journalize the following entries.
a. Issued the bonds
b. Paid first semiannual interest payment
c. Retired the bonds at maturity
Part C (15 points each for a possible total of 30 points)
1. Prepare a statement of retained earnings in proper form for White Corporation for the year ended December 31, 2012, from the following:
Retained Earnings, January 1, 2012 $2,000
Dividends paid during the year 800
Net income for the year 3,000
Correction of prior year error. Purchase
of land recorded as rent expense 1,000
2. Curtis Corporation's balance sheet included the following:
Common Stock, $5 par value, 5,000 shares issued
and outstanding $25,000
Retained Earnings 20,000
Total Stockholders' Equity $45,000
Prepare journal entries for the following transactions.
May 3 Issued 500 shares at $6 per share.
9 Reacquired 100 shares at $4 per share.
15 Reissued 50 of the Treasury shares at $7 per share.
17 Reissued 10 of the Treasury shares at $3 per share.
Part A (5 points each for a possible total of 15 points)
The following information is given for Tripp Company, which uses the indirect method.
Net income $20,000
Depreciation expense 3,000
Increase in accounts receivable 2,000
Payment of dividends 2,000
Proceeds from sale of equipment 6,000
Increase in accounts payable 4,000
Decrease in inventory 3,000
From the information provided, answer the following questions:
(1) The cash flow from operating activities is (2) The cash flow from investing activities is $6,000.
(3) The cash flow from financing activities is
Part B (5 points each for a possible total of 25 points)
Selected data for Stick's Design are given as of December 31, Year 1 and Year 2 (rounded to the nearest hundredth).
Year 2 Year 1
Net Credit Sales $25,000 $30,000
Cost of Goods Sold 16,000 18,000
Net Income 2,000 2,800
Cash 5,000 900
Accounts Receivable 3,000 2,000
Inventory 2,000 3,600
Current Liabilities 6,000 5,000
Compute the following:
Current ratio for Year 2.
(2) Acid-test ratio for Year 2.
(3) Accounts receivable turnover for Year 2.
(4) Average collection period for Year 2.
(5) Inventory turnover for Year 2.
Prepare an income statement showing departmental contribution margin based on the following:
Dept. X Dept. Y Rent
Expense
Space (square feet) 17,500 35,000
Net Sales $60,000 $40,000
Cost of Goods Sold 18,000 16,000
Rent Expense (allocated based on square feet) $2,700
Part D (5 points each for a possible total of 30 points)
From the following transactions, prepare the appropriate general journal entries for the month of April.
Raw materials costing $60,000 were issued from the storeroom.
Direct labor of $53,000 was charged to production.
Indirect labor costs of $17,000 were incurred.
Overhead was applied at the rate of 40% of direct labor dollars.
Completed products costing $42,000 were transferred to finished goods.
(6) Products costing $32,000 were sold.
