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TOPIC 2

EXERCISE 1
Prepare a balance sheet and income statement for HD Bhd. From the following scramble list of
items. Calculate earnings per share and dividend per share assuming that there are 20,000
shares outstanding.
Mortgage RM20,000 Cash RM10,000
Selling and marketing expenses RM40,000 Accounts payable RM40,000
Inventories RM70,000 Gross fixed assets RM75,000
Long-term bank note RM5,000 Accumulated depreciation RM20,000
Sales RM400,000 Short-term notes RM20,000
Income taxes RM40,000 Cost of goods sold RM150,000
Common stock dividends RM15,000 Administrative expenses RM30,000
Depreciation expense RM20,000 Interest expense RM35,000
Other assets RM15,000 Accounts receivable RM50,000
Retained earnings RM15,000 Common stock RM100,000

HD.Bhd Balance Sheet
ASSETS
Cash RM 10 000
Account receivable RM 50 000
Inventory RM 70 000
Total current assets RM 130 000
Gross fixed assets RM 75 000
Accumulated depreciation (RM 20 000)
Net fixed assets RM 55 000
Other assets RM 15 000
Total assets RM 200 000
DEBT AND EQUITY
Account payable RM 40 000
Short -term note RM 20 000
Total current liabilities RM 60 000
Long- term bank note RM 5 000
Mortgage RM 20 000
Long- term debt RM 25 000
Total debt RM 85 000
Common stockholders equity
Common stock RM 100 000
Retained earning RM 15 000
Total common stockholders equity RM 115 000
Total liabilities and equity RM 200 000

HD. Bhd Income Statement
Sales RM 400 000
Cost of goods sold RM 150 000
Gross profit RM 250 000
Operating expenses:
Selling and marketing expenses RM 40 000
Administrative expenses RM 30 000
Depreciation expenses RM 20 000
(-)Total operating expenses RM 90 000
Operating income (EBIT) RM 160 000
Interest expenses RM 35 000
Earnings before taxes RM 125 000
Income taxes RM 40 000
Net income RM 85 000

Earning per share (EPS) (RM 85 000 / RM 20 000) = RM 4.25
Dividends per share (DPS) (RM 15 000 / RM 20 000) = RM 0.75

TOPIC 3
1. If Danial invests RM20,000 in a bank where it will earn 8% interest compounded
annually. How much will it be worth at the end of
a) 5 years
PV = RM 20 000 i = 8% n = 5 years

FV
n
= PV (1 + i)
n

= 20 000 (1 + 0.08)
5

= 20 000 (1.4693)
= RM 29 386

b) 15 years
PV = RM 20 000 i = 8% n = 15 years
FV
n
= PV (1 + i)
n

= 20 000 (1 + 0.08)
15

= 20 000 (3.1722)
= RM 63 444

2. If the interest rate increases to 10%, how much will the Danials savings grow?

3. How many years will the following investments take:

\$100 to grow to \$298.60 if invested at 20% compounded annually
FV
n
= PV (FVIF
i,n
)
298.60 = 100 (FVIF
20% , n
)
298.60/100 = (FVIF
20% , n
)
2.986 = (FVIF
20% , n
)
n = 6 years

\$550 to grow to \$1044.05 if invested at 6% compounded annually
FV
n
= PV (FVIF
i,n
)
1044.05 = 550 (FVIF
6% , n
)
1044.05/550 = (FVIF
6% , n
)
1.8983 = (FVIF
6% , n
)
n = 11 years

4. At what annual rate would the following investments have to be invested:
\$200 to grow to \$497.65 in 5 years
FV
n
= PV (FVIF
i,n
)
497.65 = 200 (FVIF
i , 5
)
497.65/200 = (FVIF
i , 5
)
2.4883 = (FVIF
i , 5
)
i = 20%

\$180 to grow to \$485.93 in 6 years
FV
n
= PV (FVIF
i,n
)
485.93 = 180 (FVIF
i , 6
)
485.93/180 = (FVIF
i , 6
)
2.6996 = (FVIF
i , 6
)
i = 18%

5. If you deposit \$1,000 in an account earning 8% with quarterly compounding, how much
would you have in the account after 3 years?

FV = PV (1 + i/4)
n x 4
= 1 000 (1 + 0.08/4)
3 x 4
= 1 000 (1 + 0.02)
12
= \$ 1 268.24

6. To what amount will the following investments accumulate:
\$5,000 invested for 5 years at 10% with quarterly compounding
FV = PV (1 + i/4)
n x 4
= 5 000 (1 + 0.1/4)
5 x 4

= 5 000 (1 + 0.025)
20

= \$ 8 193.08

\$4,000 invested for 6 years at 6% with semiannually compounding
FV = PV (1 + i/4)
n x 2
= 4 000 (1 + 0.06/2)
6 x 2
= 4 000 (1 + 0.03)
12
= \$ 5 703.04

7. Find the PV of \$10,000 to be received 10 years from today if our
discount rates:

a) 5%

PV = 10 000 (PVIF
5% , 10
)
= 10 000 (0.6139)
= \$ 6 139
b) 10%

PV = 10 000 (PVIF
10% , 10
)
=10 000 (0.3855)
= \$ 3 855

c) 20%

PV = 10 000 (PVIF
20% , 10
)
= 10 000 (0.1615)
= \$ 1 615

8. What is the PV of an investment that yields \$500 to be received in 3 years and \$750 to be
received in 5 years if the discount rate is 5%?

PV = 500 (PVIF
5% , 3
) + 750 (PVIF
5% , 5
)
= 500 (0.864) + 750 (0.784)
= 432 + 588
= \$ 1 020

9. What is the PV of an investment that yields \$1,000 to be received in 2 years and \$2,500
to be received in 4 years if the discount rate is 6%?

PV = 1 000 (PVIF
6% , 2
) + 2 500 (PVIF
6% , 4
)
=1 000 (0.890) + 2 500 (0.792)
= 890 + 1 980
= \$ 2 870

10. What is the accumulated sum of each of the following streams of payments
1. \$500 a year for 15 years compounded annually at 5%
PVA
15
= 500 (PVIFA
5%
,
15
)
= 500 (10. 3797)
= \$ 5 189.85

2. \$850 a year for 10 years compounded annually at 7%
PVA
10
= 850 (PVIFA
7% , 10
)
= 850 (7. 0236)
= \$ 5 970. 06

11. What is the PV of the following annuities
\$2500 a year for 15 years discounted back to the present at 8%
FVA
15
= 2 500 (FVIFA
8% , 15
)
= 2 500 (27.152)
= \$ 67 880

\$280 a year for 5 years discounted back to the present at 9%
FVA
5
= 280 (FVIFA
9% , 15
)
= 280 (5.9847)
= \$ 1 675.72

12. What is the present value of the following:
A \$100 perpetuity discounted back to the present at 12%
PV = PP / i
= 100 / 0.12
= \$ 833.33

A \$95 perpetuity discounted back to the present at 5%
PV = PP / i
= 95 / 0.05
= \$ 1 900

TOPIC 4

1. What is the expected return for each company?

Company A

r = (0.20) (4%) + (0.50) (10%) + ( 0.30) (14%)
= 0.08 + 0.05 + 0.042
= 17.2%

Company B

r = (0.20) (-10%) + (0.50) (14%) + (0.30) (30%)
= -0.02 + 0.07 + 0.09
=14%

State of the economy Probability (Pb) Return
Company A
Return
Company B
Recession 0.20 4% -10%
Normal 0.50 10% 14%
Boom 0.30 14% 30%

2 Assets- Asset H and D are currently being considered by Greeney Industries. The distributions
are shown in the following table.

Asset H Asset D
Pb r Pb r
1 0.10 40% 0.40 35%
2 0.20 10% 0.30 10%
3 0.40 0% 0.30 -20%
4 0.20 -5%
5 0.10 -10%

a. Calculate the expected rate of return, r, for each of the assets.

Asset H
r = (0.10) (40%) + (0.20) (10%) + (0.40) (0%) + (0.20) (-5%) + (0.10) (-10%)
= 0.04 + 0.02 + 0 + -0.01 + -0.01
= 4%

Asset D
r = (0.40) (35%) + (0.30) (10%) + (0.30) (-20%)
= 0.14 + 0.03 + -0.06
= 11%

b. Calculate the standard deviation, for each of the assets.

Asset H
(40% 4%)
2
(1) = 129.6
(10% 4%)
2
(2) = 7.2
(0% 4%)
2
(4) = 0
(-5% 4%)
2
(2) =16.2
(-10% 4%)
2
(1) =19.6
Variance =172.6
Stand.dev = 172.6 = 13.14%
Asset D
(35% 11%)
2
(1) = 57.6
(10% 11%)
2
(2) = 2
(-20% 11%)
2
(4) = 384.4
Variance = 444
Stand.dev = 444 = 21.07%

c. Calculate the coefficient of variation, CV, for each of the assets.

Asset H Asset D
r 13.14% 21.07%

r 4% 11%

= 3.285 = 1.915