Week Four Practice Problems 1

Time value of money

Marshall. McManus, & Viele : Ch. 6, Problem P6-26 (a, b, c, and d only)

Present value calculation. Using a present value table, your calculator, or a computer program present value function, answer the following questions:

What is the present value of nine annual cash payment of $4,000, to be paid at the end of each year using an interest rate of 6%?
What is the present value of $15,000 to be paid at the end of 20 years, using an interest rate of 18%?
How much cash must be deposited in a savings account as a single amount in order to accumulate $300,000 at the end of 12 years, assuming that the account will earn 10% interest?
How much cash must be deposited in a savings account (as a single amount) in order to accumulate $50,000 at the end of seven years, assuming that the account will earn 12% interest?

Decision Making

Lind, Ch. 7, #20

The mean starting salary for college graduates in the spring of 2004 was $36,280. Assume that the distribution of starting salary follows the normal distribution with a standard deviation of $3,300. What percent of the graduates have starting salaries?

(a) Between $35,000 and $40,000?

(b) More than $45,000?

Lind Ch. 3 #85

The manager of the local Wal-Mart Super Store is studying the number of items purchased by customers in the evening hours. Listed below is the number of items for a sample of 30 customers.

158699418101012

1247812101011913

5611145665135

(a) Find the mean and median of the number of items.

(b)Find the range and the standard deviation of the number of items.

(c)Organize the number of items into frequency distribution.

(d)What is your interpretation of frequency distribution?

1. Georgia Lazenby believes a current liability is a debt that can be expected to be paid in one year. Is Georgia correct? Explain.

2. (a) What are long-term liabilities? Give two examples.

(b) What is a bond?

3. Contrast these types of bonds:

(a) Secured and unsecured.

(b) Convertible and callable.

4. Valentin Zukovsky says that liquidity and solvency are the same thing. Is he correct? If not, how do they differ?

BE10-1 (Reporting and Analyzing Liabilities)

Kananga Company has these obligations at December 31: (a) a note payable

for $100,000 due in 2 years,

(b) a 10-year mortgage payable of $200,000 payable in ten$20,000 annual payments,

(d) accounts payable of $60,000. For each obligation, indicate whether it should be classified as a current liability.

BYP10-10 The July 1998 issue of Inc. magazine includes an article by Jeffrey L. Seglin

entitled “Would You Lie to Save Your Company?” It recounts the following truesituation:

“A Chief Executive Officer (CEO) of a $20-million company that repairs aircraft engines received notice from a number of its customers that engines that it had recently repairedhad failed, and that the company’s parts were to blame. The CEO had not yet determined whether his company’s parts were, in fact, the cause of the problem. The Federal Aviation Administration (FAA) had been notified and was investigating the matter.

What complicated the situation was that the company was in the midst of its yearend audit. As part of the audit, the CEO was required to sign a letter saying that he was not aware of any significant outstanding circumstances that could negatively impact

The company—in accounting terms, of any contingent liabilities. The auditor was not aware of the customer complaints or the FAA investigation. The company relied heavily on short-term loans from eight banks. The CEO feared that if these lenders learned of the situation, they would pull their loans. The loss of theseloans would force the company into bankruptcy, leaving hundreds of people without jobs. Prior to this problem, the company had a stellar performance record.”

Instructions

Answer the following questions:

(a) Who are the stakeholders in this situation?

(b) What are the CEO’s possible courses of action? What are the potential results of each

course of action? (Take into account the two alternative outcomes: the FAA determines

the company (1) was not at fault, and (2) was at fault.)

BYP11-10

Greenwood Corporation has paid 60 consecutive quarterly cash dividends (15 years). The last 6 months have been a real cash drain on the company, however, as profit margins have been greatly narrowed by increasing competition. With a cash balancesufficient to meet only day-to-day operating needs, the president, Gil Mailor, has decided that a stock dividend instead of a cash dividend should be declared. He tells Greenwood’sfinancial vice-president, Vicki Lemke, to issue a press release stating that the company is extending its consecutive dividend record with the issuance of a 5% stockdividend. “Write the press release convincing the stockholders that the stock dividend is just as good as a cash dividend,” he orders. “Just watch our stock rise when we announce the stock dividend; it must be a good thing if that happens.”

Instructions

(a) Who are the stakeholders in this situation?

(b) Is there anything unethical about president Mailor’s intentions or actions?

Which would you rather receive as a stockholder—a cash dividend or a stock dividend?

Why?

E10-14 McDonald’sLearning Team Assignment.

2004 financial statements contain the following selected data (in millions).

Current assets $ 2,857.8 Interest expense $ 358.4

Total assets 27,837.5 Income taxes 923.9

Current liabilities 3,520.5 Net income 2,278.5

Total liabilities 13,636

Instructions

(a) Compute the following values and provide a brief interpretation of each.

(1) Working capital. (3) Debt to total assets ratio.

(2) Current ratio. (4) Times interest earned ratio.

(b) The notes to McDonald’s financial statements show that subsequent to 2004 the company will have future minimum lease payments under operating leases of $11,442.6 million. If these assets had been purchased with debt, assets and liabilities would rise by approximately $10,500 million. Recompute the debt to total assets ratio after adjusting for this. Discuss your result.