Accounting Midterm

Question 1

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Joice has saved $5,000 that will be a down payment on a new car that can be purchased for $38,000.  

a

The loan to finance this will have a rate of 7.125% APR compounded monthly.  What will the monthly payments on the car be if the loan is for 4 years??

b

How long would it take to pay off the loan if she would pay $1,000 monthly?

c

Joice has been offered a lease for this car with payments of $600 a month for 5 years. There would not be any down payment.  As happens with leases, she would essentially receive the full value of the car today and she would return the car to the dealer at the end of the lease (essentially paying out the value of the car at that time).  The value of this car in 5 years, with no damage or excessive mileage, is expected to be $12,000. What APR with monthly compounding would she be paying?

Question 2

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Tony has decided to make a $500 monthly investment in a retirement fund.  The three funds in which he is interested all pay 2.00% APR but with different compounding frequencies..  How much will Tony accumulate in 30 years for each of the three investment alternatives?

a

Interest of 2.00% APR compounded weekly (52 times per year)

b

Interest of 2.00% APR compounded monthly (12 times per year)

c

Interest of 2.00% APR  compounded annually (1 time per year)

Question 3

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Peter has won $250,000 in a lottery that he is going to invest.  He has narrowed down his search to three funds that each have different stated rates.  How much will Peter accumulate in 30 years for each of the three investment alternatives?

a

6.15% APR with monthly compounding

b

0.50% monthly PIR

c

6.25% EAR

Question 4

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Jackson is considering whether to invest monthly, quarterly or annually in a fund that earns 7% APR with monthly compounding.  How much will Jackson accumulate in 30 years for each of the three investment alternatives shown below? Assume that months are equal in length and that there is no initial deposit in year 0.

Years

30

APR

7.00%

Monthly Compounding

Alternative

Payments

a

Monthly

$500

b

Quarterly

$1,500

c

Annually

$6,000

Question 5

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Cheapskate used car dealer offers the following automobile finance opportunity.  Monthly payments on the loan are 3% of the loan amount for 36 months.  The loan amount is after any down payment.  In addition the loan will require a $1,500 up front loan processing fee that is not included in the loan.

a

For a loan of $20,000, what is the APR with monthly compounding without the up front fee?

b

For a loan of $20,000, what is the APR with monthly compounding with the inclusion of the up front fee?

Question 6

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Michael has developed a financial retirement strategy.  His plan is to invest in somewhat risky stocks for 15 years and then move everything to low risk bonds for the retirement years as described below.   

Michael presently has $250,000 in a retirement account that will be invested in a stock fund that has historically earned 12% annually (EAR) with no dividends.  The plan is to add an additional $25,000 to the fund at the beginning of each of the upcoming 15 years. 

When he retires, he will reinvest the stock fund in a tax-free municipal bonds and live on the coupons only that have a coupon rate of 2.5% paid semi-annually.    (the bonds will be donated to charity upon his death).

How much will Michael receive semi-annually during retirement?

Question 7

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Max is starting a new company with an investment of $500,000.  He expects sales to grow arithmetically by $100,000 a year for five years, with sales in year 1 being $100,000, year 2 $200,000, etc.. Then for years 6-10 sales are forecast to grow geometrically at a rate of 30% per year (year 6 sales grow 30% over year 5, year 7 30% over year 6, etc.) 

At the end of each year, for years 1-10, Max expects profits to be al least  10% of the sales each year and he will invest 10% of profits in a fund that earns 6% APR compounded monthly.

a

What will be the value of the invested funds in year 10?

b

Did the 10 years of profits cover her initial investment?

Question 8

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The Marketing, Inc. has collected the following data for the past year.  Prepare a formal income statement that contains the relevant subtotals.  Show values in whole dollars (no cents).  Assume that no taxes are due on asset purchases or sales.  

Data Block

Beginning of year

During Year

End of year

Cash On Hand

$330,500

Quantity Sold

45,200

Quantity Produced

38,000

Sales Price

$54.00

Cost per unit to produce

$24.50

Staff Expenses

$424,600

Facility Expenses

$387,200

Asset Sale

$1,575,300

Asset Purchase

$2,204,000

Tax rate

20%

Inventory

$57,000

$24,000

Accounts Receivable

$74,000

$38,000

Accounts Payable

$68,000

$62,000

Depreciation

$48,000

Interest Paid on Loan

$46,000

Loan Principle payment

$125,000

Dividends

$128,000

Question 9

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Prepare a cash flow statement using the following data.    Assume that no taxes are due on asset purchases or sales.  Prepare a formal cash flow statement that contains the relevant subtotals.   Show values in whole dollars (no cents).

Data Block

Beginning of year

During Year

End of year

Cash

$630,600

Net Income

$1,200,000

Staff Expenses

$724,600

Facility Expenses

$887,200

Asset Sale

$156,530

Asset Purchase

$1,240,400

Tax rate

22.5%

Inventory

$87,000

$84,000

Accounts Receivable

$73,000

$78,000

Accounts Payable

$78,000

$75,000

Depreciation

$89,500

Interest Paid on Loan

$76,000

Loan Principle payment

$50,000

Dividends Paid

$200,000

Question 10

Nina and Noah have started a small business that seems to be thriving.   Friends have suggested that they should consider legally organizing as something other than the present proprietorship.  They are asking for your advice via email (you do not know them).  Compose up to five questions and state the purpose of each question that could be used to collect information about Nina and Noah and their business that is relevant to making a recommendation on how they should legally organize their business.