Free Essay

Finance

Submitted By jmg93
Words 720
Pages 3
Part One: Present Value Problems

1. Suppose you invest \$2,500 in an account bearing interest at the rate of 14% per year. What will the future value of your investment in six years? FV = PV x (1 + interest rate)^n FV = 2,500 x (1 + .14)^6
FV = 2,500 x (1.14)^6
FV = 2,500 x 1.14 x 1.14 x 1.14 x 1.14 x 1.14 x 1.14
FV = \$5487.43

2. Your best friend won the Wheel of Fortune in Las Vegas and has offered to give you \$10,000 in five years, after he has collected his first million dollars. If you consider that if you had the money in your hand today, you would be able to get 12% annual interest, what is the present value of the gift?

PV = FV/(1 + interest rate)^ n
PV = 10,000/(1 + .12)^5
PV = 10,000/(1.12)^5
PV = 10,000/1.12 x 1.12 x 1.12 x 1.12 x 1.12
PV = 10,000/1.76
PV = \$5,681.82

FV = PV x (1 + interest rate)^n
FV = 10,000 x (1 + .12)^5
FV = 10,000 x (1.12)^5
FV = 10,000 x (1.12 x 1.12 x 1.12 x 1.12 x 1.12)
FV = 10,000 x (1.76)
FV = \$17,600

3. In four years, you would like to purchase a villa in the Alps. You estimate that the property will cost you \$52,500 when you are ready to buy. How much money would you need to invest each year at 6% interest so that you would have the \$52,500? PV = FV/(1 + interest rate)^ n PV = 52,500/(1 + .06)^4 PV = 52,500/(1.06)^4 PV = 52,500/1.06 x 1.06 x 1.06 x 1.06 PV = 52,500/ 1.26 PV = \$41,666.66 (investing \$41,667 would give you \$52,500.42 in 4 years with the 6% interest rate. Investing the \$41,666.66 would give you \$52,499.99. It would be wiser to be 42 cents over than one penny short)

4. You have estimated that you will need \$13,000 to complete your degree in three years. How much money do you need in your account at this moment to be able to cover the expense? Your account bears interest at 10% per year. PV = FV/(1 + interest rate)^ n PV = 13,000 / (1 + 0.10)^3 PV = 13,000 / (1.1)^3 PV = 13,000 / (1.1 x 1.1 x 1.1) PV = 13,000 / 1.331 PV = \$9,767.09 (investing \$9,800 would give you \$13,043.80 in 3 years with the interest rate of 10% per year. Investing the \$9,767.09 would give you \$12,999.99. It would be wiser to have \$43.80 more than to be one penny short)

Part Two: Contribution Margin Problems

Scenario: You have decided to open a pizza parlor in your hometown. You plan to deliver your pizzas in a four mile radius from your shop. Your annual fixed expenses are \$54,000. You charge \$10 for a pizza and it costs you \$6 to make and deliver each pizza. Do not calculate income taxes for the purpose of this exercise.

Complete the following problems:
1. Using the contribution-margin approach, what is your break-even point in pizzas? QBE = [FC / (P – VC)] OBE = [54,000 / (10 – 6)]
QBE = [54,000 / 4]
QBE = 13,500 pizzas must be sold to break even

2. What is the contribution-margin ratio? The ratio is the unit contribution margin divided by the unit sales price. Ratio = (\$10 - \$6) / \$10 per pizza Ratio = 4/10 = .4

3. Compute the break-even sales ratio using the contribution-margin ratio in your calculations. Ratio = fixed costs / CM ratio Break even sales = \$54,000 / .4 = \$135,000

4. Compute the number of pizzas that must be sold to earn a net profit of \$60,000. To earn a net profit of \$60,000, the pizza parlor must sell 28,500 pizzas.
Z = number of pizzas needed to meet \$60,000 net profit
Z = FC + net profit / (P – VC)
Z = 54,000 + 60,000 / 4
Z = 28,500 pizzas

Similar Documents

Finance

...CORPORATE FINANCE COURSE CORPORATE FINANCE 2.1 Working Capital Management Sept. 2014 Ir Frank W. van den Berg mba Vrije Universiteit, Amsterdam ALYX Financial Consultancy bv, Aerdenhout FWvdB/2014 1 OUTLINE CORPORATE FINANCE FWvdB/2014 •  Basics & Guiding principles •  Time value of money + Capital Budgeting •  Valuation of CF + Bonds •  Valuation of shares (+ co.’s) •  Financial Analysis (Ratios) •  Financial Planning (EFN) •  à Working Cap. Mgt. (A/R, Inv., A/P) •  Debt Financing •  •  2 FIN 1.5 FIN 2.1 Entrepreneurial Finance / Raising Equity Mergers & Acquisitions / Corp. Restructuring FINANCIAL RATIOS - Example 1 FWvdB/2014 Sample Balance sheet (000’s €) Cash + bank 500 Accounts Receivable 5.000 Inventory 3.000 ------CA 8.500 Machinery Buildings 6.000 4.000 Total assets -------18.500 STB (bank credit line) Accounts Payable CL LTD (Bonds) Nom. Cap. (500.000 x 2) Paid-in-capital (x 3) Retained Earnings Treasury Stock Shareholders’ Capital Total liabilities + OE 3 3.000 3.000 ------6.000 6.000 1.000 1.500 4.500 - 500 6.500 -------18.500 RATIOS: SAMPLE INCOME STATEMENT REVENUES (= Sales = Turnover) CGS = Costs of Goods Sold (materials, labor costs + energy costs incl. 1.000 depreciation) GROSS PROFIT SGA= Selling Administrative & General Expenses (incl. overhead, management, insurance, marketing) EBIT = Earnings Before Interest and Tax Interest......

Words: 1063 - Pages: 5

Free Essay

Finance

...Personal FinanceIt is important to plan the finance for any regular expenditure suchas the basic needs of any person like food, clothes, accommodation,bills etc.To be able to for fill all your personal needs you must have some kindof personal income, which will cover these expenses.The sources of personal income might be:Salary or wages =============== A regular earned income from employment, for these earnings the employee and the employer both have to pay a deduction to the government such as income tax and N.I. contribution. Overtime An extra earned income for the additional hours of work Commissions ----------- An employee can get a percentage of the selling price of product from his/her employer. Bonus ----- Bonus is an earning for good performance at work place. Interest -------- Interest using your money to create more money, expressed as a rate per period of time, usually one year, in which case it is called an annual rate of interest. Winnings -------- You may win money from playing the lottery or gambling on sport events. Gifts ----- Money received from a friend or relative on a special occasion such as birthday. Sale of personal items ---------------------- Earned income from selling personal items Gross and net pay ----------------- Gross pay is the total amount of money earned by an employee before any deduction is made. Net pay is the amount of money an employee receives after deduction have been made for income tax, national insurance and any......

Words: 3067 - Pages: 13

Finance

...SUGGESTED PROGRAM PLAN FOR FINANCE MAJORS FIRST YEAR Fall Semester (14 or 15 credits) Spring Semester (15 or 16 credits) ENG106 Writing Intensive First Year Seminar* HCS100 Hum Comm Studies HIS101 World History I* HIS106 World History II* MAT108 Finite Math MAT181 Applied Calculus I ________ General Education elective ISM142 Business Computer Systems* BSN101 Foundations of Bus Admin (2 crs.)* ________ General Education elective or a General Education elective* or ECO113 Principles of Economics (4 crs.) SECOND YEAR Fall Semester (16 or 15 credits) Spring Semester (15 credits) ACC200 Fundamentals of Financial Accounting ACC201 Managerial Accounting SCM200 Statistical Applications in Business* BSL261 American Legal Environment* ECO113 Principles of Economics (4 crs) ECO280 Managerial Economics or a General Education elective ________ General Education elective ________ General Education elective ________ General Education elective ________ General Education elective THIRD YEAR Fall Semester (15 credits) Spring Semester (15 credits) FIN311 Financial Management FIN313 Advanced Financial Management (SP) MKT305 Principles of Marketing FIN333 Applied Comp. & Security Analysis (SP) MGT305 Organizational Behavior SCM330 Supply Chain & Operations Management ________ General Education elective ________ Free elective ________ General Education elective ________ General Education or Free......

Words: 620 - Pages: 3

Finance

...Ch.19 – short-term financing is concerned w/ the analysis of decisions that affect CA & CL (Networking capital=CA-CL) *Short term financial management is called working capital management * The most important difference btwn short-term and long-term is the timing of the cash flows (short term – cash inflows and outflows within a year or less) * Cash = LT – debt + Equity + CL - CA other than cash – Fixed Assets ⇒activities that increase cash: 1.  long term debt 2.  equity (selling some stock) 3.  CL 4.  CA other than cash (selling some inventory for cash) 5.  fixed assets (selling some property). * Activities that decrease cash (opposite of above) * Operating Cycle – the period between the acquisition of inventory and the collection of cash from receivables. 1. Inventory period – the time it takes to acquire and sell inventory. 2. Accounts receivable period – The time between sale of inventory and collection of receivables. (Operating cycle = Inventory Period + Accounts Receivable Period) * The operating cycle describes how a product moves through the CA accounts moving closer to cash. * Accounts Payable Period – The time btwn receipt of inventory & payment for it. *Cash Cycle – The time btwn cash disbursement and cash collection. The Cash Cycle is the number of days that pass before we collect the cash from a sale, measured from when we actually pay for the inventory. (Cash Cycle = Operating Cycle – Accounts Payable Period) * Cash Flow Timeline - A graphical......

Words: 890 - Pages: 4

Finance

...Jella Mae Macalima November 24, 2014 BSTM-2B Ms.Ana Esquierdo “9 RULES OF FREEDOM OF THE AIR” The freedoms of the air are a set of commercial aviation rights granting a country's airlines the privilege to enter and land in another country's airspace, formulated as a result of disagreements over the extent of aviation liberalisation in the Convention on International Civil Aviation of 1944, known as the Chicago Convention. The United States had called for a standardized set of separate air rights to be negotiated between states, but most other countries were concerned that the size of the U.S. airlines would dominate air travel if there were not strict rules. The freedoms of the air are the fundamental building blocks of the international commercial aviation route network. The use of the terms "freedom" and "right" confer entitlement to operate international air services only within the scope of the multilateral and bilateral treaties (air services agreements) that allow them. The first two freedoms concern the passage of commercial aircraft through foreign airspace and airports, the other freedoms are about carrying people, mail and cargo internationally. The first through fifth freedoms are officially enumerated by international treaties,......

Words: 2391 - Pages: 10

Finance

...Finance and Financial Management Finance and financial management encompass numerous business and governmental activities. In the most basic sense, the term finance can be used to describe the activities of a firm attempting to raise capital through the sale of stocks, bonds, or other promissory notes. Similarly, public finance is a term used to describe government capital-raising activities through the issuance of bonds or the imposition of taxes. Financial management can be defined as those business activities undertaken with the goal of maximizing shareholder wealth, utilizing the principles of the time value of money, leverage, diversification, and an investment's expected rate of return versus its risk. Within the discipline of finance, there are three basic components. First, there are financial instruments. These instruments—stocks and bonds—are recorded evidence of obligations on which exchanges of resources are founded. Effective investment management of these financial instruments is a vital part of any organization's financing activities. Second, there are financial markets, which are the mechanisms used to trade the financial instruments. Finally, there are banking and financial institutions, which facilitate the transfer of resources among those buying and selling the financial instruments. In today's business environment, corporate finance addresses issues relating to individual firms. Specifically, the field of corporate finance seeks to......

Words: 407 - Pages: 2

Finance

...finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance finance financ......

Words: 252 - Pages: 2

Finance

...II. Statements: Shown below are an incomplete Balance Sheet and Income Statement. Please complete the statements. 10 items, 2 points each, 20 points total Ratio Computations. Using the data in the attached (last page) Balance Sheet and Income Statement (not the ones used in Section II above), compute the following ratios. For each ratio show the formula and the result. 5 Ratios, 2 responses for each, 3 points each, 30 points total. Ratio Formula Result Current ratio ____________________________________ ______________ Total Debt ratio ____________________________________ ______________ Inventory turnover ____________________________________ ______________ Profit margin ____________________________________ ______________ Return on Assets ____________________________________ ______________ *On this page it is suppose to look like this: Ratio Formula Result III. Time value of money. Following are five potential financial scenarios. Please select four of the scenarios to compute the results. It is assumed Excel will be for the computations. The computation will involve one of the time value functions – Present Value, Future Value, Rate, Number of Periods, or Payments. For each scenario attempted, show the function name and the input values used. (Note: Not all of the input values listed will be used for each computation). 4......

Words: 666 - Pages: 3

Finance

...production and marketing activities, in such a way that it can generate the sufficient returns on invested capital, with an intention to maximise the wealth of the owners. The financial manager plays the crucial role in the modern enterprise by supporting investment decision, financing decision, and also the profit distribution decision. He/she also helps the firm in balancing cash inflows and cash outflows, and in turn to maintain the liquidity position of the firm. How does the modern financial manager differ from the traditional financial manager? Does the modern financial manager's role differ for the large diversified firm and the small to medium size firm? The traditional financial manager was generally involved in the regular finance activities, e.g., banking operations, record keeping, management of the cash flow on a regular basis, and informing the funds requirements to the top management, etc. But, the role of financial manager has been enhanced in the today's environment; he/she takes an active role in financing, investment, distribution of profits, and liquidity decisions. In addition, he/she is also involved in the custody and safeguarding of financial and physical assets, efficient allocation of funds, etc. The role of financial manager in case of diversified firm is more complicated in comparison with a small and medium size firm. A diversified firm has several products and divisions and varied financial needs. The conflicting interests of......

Words: 1368 - Pages: 6

Finance

...INTRODUCTION OVERVIEW: Today India is on a threshold of massive development, thanks to the various initiatives taken by the Govt. of India over the last 10 years or as we call it the Dawn of the era of liberalization. The economics policies have been liberalized time and again to accelerate the process of industrial growth. The government is making constant efforts to encourage the entrepreneurs by providing the climate conducive for development and growth. as a result of which various projects are coming up and due to which various applications are being received by state and national financial institutions for financial assistance. Project finance is thus becoming a field of specialization in itself. There is an ever increasing thrust on the capital formation and this capital formation is done in any economy through massive infrastructure projects like setting up a new industry , launching of the green field projects to name a few. Apart form this the Govt. of India has identified certain core factors through which it can make a quantum leap in the area of foreign exports namely the IT sector and the Pharma sector. And due to the competitive advantage that India has because of its labour force, which ids highly skilled and at the same time available very cheap, the Pharma Industry in India is set for growth. But at the same time Pharma industry is a different type of industry altogether and it has own set technical requirement and also its own......

Words: 8925 - Pages: 36

Finance

...Response to the Finance Questions Name University Response to the Finance Questions Response to Question 1 Liquidity premium theory states that the yield obtained from the bonds that are long term are greater than the return that is expected from short-term bonds that roll over so as to compensate long-term bonds investors for bearing the risks of interest rate. Bonds that have different maturity can, therefore, have different yields regardless of the possibility of future short rates being equivalent to the present short rate. This results in a yield curve that bends upwards even if the short rates are expected to fall if liquidity premiums are sufficiently high. However if the curve slopes downwards and an assumption is made that the liquidity premiums is positive, then we can presume that future short rates would be lower than the present short rate (Lim & Ogaki, 2013). Liquidity premium theory agrees with expectations theory since it gives the same significance to the expected future spot rates though it puts more weight on the impacts of the risk preferences that exist in the market. The main concept of this theory is to compensate an investor for the additional risk of having his capital tied up for a more extended period. It, therefore, aims at enticing investors to engage in long-term investments. Due to the uncertainty associated with long-term rates which have less marketability and greater price variability, investors, therefore, need to be given higher...

Words: 1288 - Pages: 6

The Finance

...able to see the visible fruits that are the yield of good stewardship and decisions. The book of Proverbs was a series of exhortations and encouragements written by King Solomon to his son.  In chapter 23 verse 23, Solomon states, “Buy truth, and do not sell it; buy wisdom, instruction, and understanding.” For thousands of years, mankind has been given stewardship of resources; natural, human, intellectual and financial. The process of managing these resources, specifically financial resources, requires intentional short-term and long-term planning. More importantly, in order for capital management to be deemed successful, it is required that all members of an organization are on board. “Capital budgeting is not only important to people in finance or accounting, it is essential to people throughout the business organization”< /span> (Block, Hirt, & Danielsen, 2011). As the duration of the investment period increases, and the size of investment increases, the residual risk also increases. For a firm to effectively manage its resources it begins with the administrative considerations, ranges to the ranking of the capital investments, the strategy of selection processes and various other financial planning details and concerns. Once again, we find in Proverbs 24:3-4, “By wisdom a house is built, and by understanding it is established; by knowledge the rooms are filled with all...

Words: 1039 - Pages: 5

Free Essay

Finance

...8. Moral hazard occurs when individuals tend to be very risky when there are protections if a loss occurs. This is more likely in indirect finance. For example, when an individual purchase a new car, they insure it and their policy dictates that if an individual accidentally hits their vehicle, they are obligated to a new vehicle. So after a few years and that individual gets tired of their vehicle and is desperately in need of a new one, they would intentionally drive a bit reckless to allow someone to hit their vehicle.  Lemons problem can be both indirect and direct finance. It occurs when one party to a transaction do not have the same degree of information. The party with less information take a risk hoping that the “lemon” is a good buy. For example, in the used car industry, the seller has all the information about the car and may limit the actual reason as to why they are selling the car, the problems the car has etc. intermediaries in the financial market can reduce lemon problems by reducing the attractiveness of direct finance by offering more incencitives to individuals when acquiring finances, offer provision for information, enforce laws on information given ensuring individuals receives sufficient information. Financial intermediaries have expertise in assessing the risk of the applicant for funds that reduces adverse selection and moral hazard. They have easy access to various databases that provide information on both individuals and businesses, and......

Words: 256 - Pages: 2

Finance

...INTRODUCTION TO CORPORATE FINANCE AGENDA • Definition • Types of corporate firm • The importance of cash flows • Agency problem WHAT IS CORPORATE FINANCE? WHAT IS CORPORATE FINANCE? How the company raise funds? (financing decision  capital structure) Sources of fund: 1. Debt 2. Equity What long-lived assets to invest? Assets: 1. Current assets 2. Non-current assets/fixed assets How the company manage shortterm operating cash flows? BALANCE SHEET MODEL OF THE FIRM Total Value of Assets: Total Firm Value to Investors: Current Liabilities Net Working Capital Current Assets Long-Term Debt Fixed Assets 1 Tangible Shareholders’ Equity 2 Intangible What is the most important job of a financial manager? To create value for the firm How? In summary, corporate finance addresses the following three questions: 1. What long-term investments should the firm choose (capital budgeting)? 2. How should the firm raise funds for the selected investments (financing)? 3. How should short-term assets be managed and financed (net working capital activities)? LEGAL FORM OF ORGANIZING FORM SOLE PROPRIETORSHIP Owned by one person PARTNERSHIP Owned by two or more individuals Types of partnership: a. General partnership b. Limited partnership Advantages 1. Easy to form 2. No corporate income taxes 3. Management control resides with the owner of general partners Disadvantages 1. 2. 3. 4. Unlimited liability Life of the business is......

Words: 517 - Pages: 3