SOLVED

1) The Board of Directors of Peterson Enterprises wishes to fire the Chief Financial Officer (CFO). As part of the settlement, the company will give the CFO a check equivalent to three years worth of salary. In calculating what the future salary will be worth today, the Directors are A) Compounding the stream of salary payments B) Amortizing the value of the salary over five years C) Determining the value of an annuity D) Discounting the stream of salary payments E) Calculating the future value of the stream of payments 2) Rekka Resin Moulding Inc.’s earnings before tax (EBT) has declined between 3% and 7% in each of the past five quarters. The company is trying to finance the purchase of a $55,000 injection moulding machine. The Kelowna-Picton Credit Union has made the best offer at 8.5%, 2.5% over Prime. At the same time, Penticton Injection Inc. a company with steady earnings growth, has received financing for a similar project with the loan provided at .75% under Prime. Due to its declining earnings Rekka will be facing A) A risk premium of 3.25% B) An opportunity cost of $4,675 C) A risk premium of $4,675 D) An opportunity cost of 3.25% E) An opportunity cost of 2.5% 3) Jeanine withdrew $10,000 from an aggressive growth mutual fund, which returned 9.8% over the last 12 months. The funds were provided in exchange for a promissory note from her son’s business to finance its expansion. The business has operated for five years and has no other debt. Inflation has been holding steady at 3.2%. The Canadian dollar, is at $1.015 to $1.00 US. Least risk, government securities are paying out 4.5%. If she believes that 1.5% will cover her risk exposure, what rate is the minimum she should realistically charge her son’s business? A) 9.8% B) 4.5% C) 8.2% D) 6.0% E) 3.2% 4) If the Company is required to make equal monthly payments into a sinking fund that will be used to pay off the amount that will be due at maturity of their bond issue and they wish to calculate what that payment will be, they will be determining A) The present value of a lump sum B) An ordinary annuity C) The future value of a lump sum D) An annuity due E) The future value of an uneven stream of payments 5) Fandango Company’s credit terms allow its customers to pay invoices in 30 days. Practice has not followed policy and the collection period is at 45 days. If Fandango’s receivables are $164,565 and the company can earn 12% on capital invested, what is the opportunity cost it is experiencing by not adhering to their collection policy? A) $19,747.80 B) $6,582.60 C) $13,165.20 D) $61,437.60 E) $8,776.80 6) If the principal of a bank loan is $20,000, the interest rate is 9% compounded annually and the maturity date is in 10 years, what would the total payment be if none of the principal was paid back before the maturity date? A) $4,734 B) $51,880 C) $53,640 D) $43,440 E) $47,348 7) In three years time, the Company estimates that they will need $10 million to build and equip a new plant. To achieve this target amount with a one-time investment today, how much cash would the company have to invest if the return is 12% compounded annually? A) $6,788,000 B) $7,118,000 C) $7,513,100 D) $8,242,000 E) $14,049,000 8) Ambidex Ltd. established five years ago, was capitalized with $4.5 million from the sale of common shares. The company retained 100% of its earnings through that period. This year Ambidex Ltd. declared a dividend which provided common shareholders with a return of 12% compounded annually. What was the amount of the dividend declared? A) $3,429,000 B) $7,929,000 C) $792,900 D) $2,553,435 E) $255,343 9) Which of the following best describes the financial loss involved in choosing a less profitable option? A) Marginal Cost B) Suboptimization C) Opportunity Cost D) Interest Loss E) Terminal Loss 10) Gerald Electric Company will only sell a piece of switching equipment on credit if the customer puts $10,000 down. The balance of $40,000 can be paid at the end of 12 months. What amount should Gerald Electric be willing to accept today if the customer is willing to make the entire payment immediately. The company’s credit terms are 14% per year compounded annually. A) $3,508 B) $34,782 C) $35,088 D) $43,859 E) $45,088 1