Homework Set I The solutions to the questions below should be typed (Word or Excel file) and show all

steps of calculations. (No points will be given without the steps or work to the final answers) Please submit your file in Moodle.

1. Discuss the difference between book values and market values and explain which one is more important to the financial manager and why. 2. Bonner Collision has shareholders' equity of $141,800. The firm owes a total of $126,000 of which 60 percent is payable within the next year. The firm net fixed assets of $161,900. What is the amount of the net working capital? 3. Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes? 4. The Widget Co. purchased new machinery three years ago for $4 million. The machinery can be sold to the Roman Co. today for $2 million. The Widget Co.'s current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the current assets were liquidated today, the company would receive $1.9 million in cash. The book value of the Widget Co.'s assets today is _____ and the market value of those assets is _____.

5. What is the amount of dividends paid in 2011?

6. Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit? 7. The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000, and a profit margin of 4.80 percent. What is the return on assets? 8. The Home Supply Co. has a current accounts receivable balance of $280,000. Credit sales for the year just ended were $1,830,000. How many days on average did it take for credit customers to pay off their accounts during this past year?

9. You invested $1,400 in an account that pays 5 percent simple interest. How much more could you have earned over a 20-year period if the interest had compounded annually? 10. You would like to give your daughter $75,000 towards her college education 17 years from now. How much money must you set aside today for this purpose if you can earn 8 percent on your investments? 11. Your older sister deposited $5,000 today at 8.5 percent interest for 5 years. You would like to have just as much money at the end of the next 5 years as your sister will have. However, you can only earn 7 percent interest. How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years? 12. On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today? 13. You just won the grand prize in a national writing contest! As your prize, you will receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is this prize worth to you today? 14. You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5 years at 8.6 percent interest. What is the amount of each payment? 15. Kingston Development Corp. purchased a piece of property for $2.79 million. The firm paid a down payment of 15 percent in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75 percent, compounded monthly. What is the amount of each mortgage payment? 16. Your parents have made you two offers. The first offer includes annual gifts of $10,000, $11,000, and $12,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is

8 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer? 17. You would like to establish a trust fund that will provide $120,000 a year forever for your heirs. The trust fund is going to be invested very conservatively so the expected rate of return is only 5.75 percent. How much money must you deposit today to fund this gift for your heirs? 18. You grandfather won a lottery years ago. The value of his winnings at the time was $50,000. He invested this money such that it will provide annual payments of $2,400 a year to his heirs forever. What is the rate of return? 19. You are paying an effective annual rate of 18.974 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account? 20. Explain the difference between the effective annual rate (EAR) and the annual percentage rate (APR). Of the two, which one has the greater importance and why?