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 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 Asset
Shipping Costs
Investment in Working Capital
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 Asset
Shipping Costs
Investment in Working Capital
