Financial Accounting Solved Assignment Solution Sample

QUESTION

 

  1. You work in the mortgage division of a bank and are asked to draw the amortization schedule of $250,000, 15-year loan priced at 7.5%. There is no penalty on the prepayment of principal. Provide appropriate headings for the amortization schedule.
    1. Assuming that there is no prepayment and the payments are annual:
      1. Calculate the annual payment.
      2. Calculate the total interest paid over 15 years (do not adjust for time value of money).
      3. What is the outstanding principal at the end of 5, 10 and 15 years?
    2. Assuming no principal prepayments and monthly payments,
      1. Calculate the monthly payment.
      2. Calculate the total interest paid over 15 years (do not adjust for time value of money).
      3. What is the outstanding principal at the end of 5, 10 and 15 years?
    3. Assume monthly payments. Also assume that after two years, the borrower will prepay $250 per month. Adjust your amortization schedule
      1. How many months will it take for the borrower take care of all the interest and principal payments?
      2. Calculate the total interest paid (do not adjust for time value of money).
      3. What is the outstanding principal at the end of 5 and 10 years?
    4. Are the answers in a(ii), b(ii) and c(ii) different?
    5. Explain your answer in d.
  1. Your retirement is 20 years away and you are interested in saving for your retirement. You expect another fifteen years to live after retirement. You think you will need 60,000 dollars every year to live post retirement. You have to estimate how much you should save annually if
    1. You expect a rate of return of 8% for the next 35 years, and
    2. You expect to earn 9% for the next 20 years. At retirement you put your money in an investment that gives you a 4.5% return.
    3. Discuss the two options and recommend which one is a better option.
  1. Consider the data in the provided in the data General Electrics. Estimate the following:
    1. Compounded annual growth rate in dividends
    2. Average annual growth rate in dividends
    3. Which of these two rates will you use for the Gordon Growth model, and why?
    4. Expected dividend in 2008
    5. The expected price in the beginning of 2008, if your expected rate of return in the past 20 years average return.
    6. The beta of stock.
    7. Is GE a defensive or aggressive stock? Explain your answer.
    8. If the next year’s expected return on the market is expected to be 5%, and the risk free rate is expected to be 3%, what rate of return would you expect on GE?
Month Day Year Ticker Ret Adjdiv Market

12

 31 1986 GE

21.83%

0.0988

15.65%

12

 31 1987 GE

5.29%

0.1104

1.74%

12

 30 1988 GE

4.86%

0.1217

17.61%

12

 29 1989 GE

48.71%

0.1417

28.48%

12

 31 1990 GE

-8.13%

0.1600

-6.08%

12

 31 1991 GE

37.37%

0.1733

33.78%

12

 31 1992 GE

15.10%

0.1933

9.06%

12

 31 1993 GE

26.04%

0.2175

11.59%

12

 30 1994 GE

0.21%

0.2483

-0.64%

12

 29 1995 GE

45.13%

0.2817

35.73%

12

 31 1996 GE

40.28%

0.3167

21.23%

12

 31 1997 GE

50.95%

0.3600

30.43%

12

 31 1998 GE

40.99%

0.4167

22.34%

12

 31 1999 GE

53.56%

0.4867

25.68%

12

 29 2000 GE

-6.00%

0.5700

-11.25%

12

 31 2001 GE

-15.07%

0.6600

-11.07%

12

 31 2002 GE

-37.71%

0.7300

-20.88%

12

 31 2003 GE

30.75%

0.7700

33.15%

12

 31 2004 GE

20.68%

0.8200

13.02%

12

 30 2005 GE

-1.43%

0.9100

7.31%

12

 29 2006 GE

9.35%

1.0300

16.24%
  1. You are provided with the last two years financial statements of a chain of fast food restaurant which is being evaluated as a takeover target by your client. You are asked to determine an appropriate price for the chain.

XYZ Inc.

Balance Sheet for Year 1 and Year 2
Year

Y1

Y2
Current Assets
Cash and cash equivalence 164,964 467,649
Accounts receivables 335,677 648,010
Inventory 126,477 508,220
Total current Assets 627,118 1,623,879
Property and equipment
At cost 3,570,000 8,756,733
Less accumulated depreciation 357,000 973,337
Net property and equipment 3,213,000 7,783,397
Total Assets 3,840,118 9,407,276
Current Liabilities
Accounts payable and accrued expenses 475,990 1,684,705
Other current liability 27,778 77,862
Total current liabilities 503,768 1,762,567
Long term debt 444,180 4,427,905
Stockholder’s equity
Common stock 2,420,774 2,420,774
Retained Earnings 471,395 796,029
Total Equity 2,892,170 3,216,804
Total Liabilities and equity 3,840,118 9,407,276

XYZ Inc.

Income Statement for Year 1 and Year 2
Sales
Sales 3,372,371 5,476,925
Other Income 72,886 97,742
Total Sales 3,445,257 5,574,667
Operating expenses
Cost of products sold 1,366,116 2,175,456
Depreciation 357,000 616,337
Selling, general, and administrative expenses 1,035,971 1,677,590
Interest expense 39,976 398,511
Interest income 8,248 18,735
Total Expenses 2,790,815 4,849,159
Earnings before income taxes 654,443 725,508
Income taxes 268,322 290,203
Profit after taxes 386,121 435,304
Dividends 98,166 110,671
Addition to Retained earnings 287,955 324,634

Based on the balance sheet and income statements and your own judgment you make the following assumptions:

    1. The accounts receivable will be maintained as a faction of sales which is the average value estimated using the last two years financial statements.
    2. Inventory will be maintained as a fraction of sales which is the average value estimated using the last two years financial statements.
    3. Fixed assets will be maintained as a fraction of sales which is the average value estimated using the last two years financial statements.
    4. Depreciation is 10% of the average fixed assets at costs.
    5. Accounts payable and accrued expenses, and other current liabilities will be maintained as respective fractions of sales which are the average value estimated using the last two years financial statements.
    6. Long-term debt is a fraction of sales which is the average value estimated using the last two years financial statements.
    7. There will not be any new equity raised.
    8. Sales are expected to grow at 30% for the next three years, 15% for the following 2 years, and thereafter it will stabilized at 5%.
    9. Other income is expected to grow at 3%.
    10. Cost of goods sold, and selling general and administrative expense are respective fraction of sales which are the average value estimated using the last two years financial statements.
    11. The interest expense is approximate as 9% of the long-term debt which the interest income is 5% of the cash and cash equivalents.
    12. Income tax rate will be 40%
    13. Dividend payout ratio will be 15%.
    14. The number of shares outstanding will be 2,000,000
    15. The average asset for firms in XYZ’s industry is 1.20 and the average WACC is 15.52%
    16. Estimate the following
      1. Free Cash Flow
      2. Enterprise value
      3. Equity value
      4. Equity price per share

 

 

ANSWER

 

  1. A
A       Total Interest $174,827.14
  Loan Amount $250,000.00   Principle Outstanding  
  Rate of interest 7.50%   5th Year $194,403.19
  Term (years) 15   10th Year $114,586.78
        15th Year $0.00
  Present Value annuity factor 8.83      
  Instalment (annual) $28,321.81      
           
Years Opening Installment Interest Payment towards Principle Closing
1 250,000 28321.81 18,750.0 9,571.8 240,428.19
2 240,428.19 28321.81 18,032.1 10,289.7 230,138.50
3 230,138.50 28321.81 17,260.4 11,061.4 219,077.07
4 219,077.07 28321.81 16,430.8 11,891.0 207,186.05
5 207,186.05 28321.81 15,539.0 12,782.9 194,403.19
6 194,403.19 28321.81 14,580.2 13,741.6 180,661.62
7 180,661.62 28321.81 13,549.6 14,772.2 165,889.43
8 165,889.43 28321.81 12,441.7 15,880.1 150,009.33
9 150,009.33 28321.81 11,250.7 17,071.1 132,938.22
10 132,938.22 28321.81 9,970.4 18,351.4 114,586.78
11 114,586.78 28321.81 8,594.0 19,727.8 94,858.98
12 94,858.98 28321.81 7,114.4 21,207.4 73,651.59
13 73,651.59 28321.81 5,523.9 22,797.9 50,853.65
14 50,853.65 28321.81 3,814.0 24,507.8 26,345.87
15 26,345.87 28321.81 1,975.9 26,345.9 –
    Total Interest 174,827.1  

 

1.B

B       Total Interest $167,155.56
  Loan Amount $250,000.00   Principle Outstanding  
  Rate of interest Per Month 0.63%   5th Year $195,239.79
  Term Months 180   10th Year $115,657.09
        15th Year $0.00
  Present Value annuity factor 107.87      
  Instalment Monthly $2,317.53      
           
Months Opening Installment Interest Payment towards Principle Closing
1 250,000 2317.53090000683 1,562.50 755.03 249,244.97
2 249,244.97 2317.53090000683 1,557.78 759.75 248,485.22
3 248,485.22 2317.53090000683 1,553.03 764.50 247,720.72
4 247,720.72 2317.53090000683 1,548.25 769.28 246,951.44
5 246,951.44 2317.53090000683 1,543.45 774.08 246,177.36
6 246,177.36 2317.53090000683 1,538.61 778.92 245,398.44
7 245,398.44 2317.53090000683 1,533.74 783.79 244,614.65
8 244,614.65 2317.53090000683 1,528.84 788.69 243,825.96
9 243,825.96 2317.53090000683 1,523.91 793.62 243,032.34
10 243,032.34 2317.53090000683 1,518.95 798.58 242,233.76
11 242,233.76 2317.53090000683 1,513.96 803.57 241,430.19
12 241,430.19 2317.53090000683 1,508.94 808.59 240,621.60
13 240,621.60 2317.53090000683 1,503.88 813.65 239,807.95
14 239,807.95 2317.53090000683 1,498.80 818.73 238,989.22
15 238,989.22 2317.53090000683 1,493.68 823.85 238,165.37
16 238,165.37 2317.53090000683 1,488.53 829.00 237,336.38
17 237,336.38 2317.53090000683 1,483.35 834.18 236,502.20
18 236,502.20 2317.53090000683 1,478.14 839.39 235,662.80
19 235,662.80 2317.53090000683 1,472.89 844.64 234,818.17
20 234,818.17 2317.53090000683 1,467.61 849.92 233,968.25
21 233,968.25 2317.53090000683 1,462.30 855.23 233,113.02
22 233,113.02 2317.53090000683 1,456.96 860.57 232,252.45
23 232,252.45 2317.53090000683 1,451.58 865.95 231,386.49
24 231,386.49 2317.53090000683 1,446.17 871.37 230,515.13
25 230,515.13 2317.53090000683 1,440.72 876.81 229,638.32
26 229,638.32 2317.53090000683 1,435.24 882.29 228,756.02
27 228,756.02 2317.53090000683 1,429.73 887.81 227,868.22
28 227,868.22 2317.53090000683 1,424.18 893.35 226,974.86
29 226,974.86 2317.53090000683 1,418.59 898.94 226,075.93
30 226,075.93 2317.53090000683 1,412.97 904.56 225,171.37
31 225,171.37 2317.53090000683 1,407.32 910.21 224,261.16
32 224,261.16 2317.53090000683 1,401.63 915.90 223,345.26
33 223,345.26 2317.53090000683 1,395.91 921.62 222,423.64
34 222,423.64 2317.53090000683 1,390.15 927.38 221,496.25
35 221,496.25 2317.53090000683 1,384.35 933.18 220,563.08
36 220,563.08 2317.53090000683 1,378.52 939.01 219,624.06
37 219,624.06 2317.53090000683 1,372.65 944.88 218,679.18
38 218,679.18 2317.53090000683 1,366.74 950.79 217,728.40
39 217,728.40 2317.53090000683 1,360.80 956.73 216,771.67
40 216,771.67 2317.53090000683 1,354.82 962.71 215,808.96
41 215,808.96 2317.53090000683 1,348.81 968.72 214,840.24
42 214,840.24 2317.53090000683 1,342.75 974.78 213,865.46
43 213,865.46 2317.53090000683 1,336.66 980.87 212,884.58
44 212,884.58 2317.53090000683 1,330.53 987.00 211,897.58
45 211,897.58 2317.53090000683 1,324.36 993.17 210,904.41
46 210,904.41 2317.53090000683 1,318.15 999.38 209,905.03
47 209,905.03 2317.53090000683 1,311.91 1,005.62 208,899.41
48 208,899.41 2317.53090000683 1,305.62 1,011.91 207,887.50
49 207,887.50 2317.53090000683 1,299.30 1,018.23 206,869.27
50 206,869.27 2317.53090000683 1,292.93 1,024.60 205,844.67
51 205,844.67 2317.53090000683 1,286.53 1,031.00 204,813.67
52 204,813.67 2317.53090000683 1,280.09 1,037.45 203,776.22
53 203,776.22 2317.53090000683 1,273.60 1,043.93 202,732.29
54 202,732.29 2317.53090000683 1,267.08 1,050.45 201,681.84
55 201,681.84 2317.53090000683 1,260.51 1,057.02 200,624.82
56 200,624.82 2317.53090000683 1,253.91 1,063.63 199,561.19
57 199,561.19 2317.53090000683 1,247.26 1,070.27 198,490.92
58 198,490.92 2317.53090000683 1,240.57 1,076.96 197,413.95
59 197,413.95 2317.53090000683 1,233.84 1,083.69 196,330.26
60 196,330.26 2317.53090000683 1,227.06 1,090.47 195,239.79
61 195,239.79 2317.53090000683 1,220.25 1,097.28 194,142.51
62 194,142.51 2317.53090000683 1,213.39 1,104.14 193,038.37
63 193,038.37 2317.53090000683 1,206.49 1,111.04 191,927.33
64 191,927.33 2317.53090000683 1,199.55 1,117.99 190,809.35
65 190,809.35 2317.53090000683 1,192.56 1,124.97 189,684.37
66 189,684.37 2317.53090000683 1,185.53 1,132.00 188,552.37
67 188,552.37 2317.53090000683 1,178.45 1,139.08 187,413.29
68 187,413.29 2317.53090000683 1,171.33 1,146.20 186,267.09
69 186,267.09 2317.53090000683 1,164.17 1,153.36 185,113.73
70 185,113.73 2317.53090000683 1,156.96 1,160.57 183,953.16
71 183,953.16 2317.53090000683 1,149.71 1,167.82 182,785.34
72 182,785.34 2317.53090000683 1,142.41 1,175.12 181,610.22
73 181,610.22 2317.53090000683 1,135.06 1,182.47 180,427.75
74 180,427.75 2317.53090000683 1,127.67 1,189.86 179,237.89
75 179,237.89 2317.53090000683 1,120.24 1,197.29 178,040.60
76 178,040.60 2317.53090000683 1,112.75 1,204.78 176,835.82
77 176,835.82 2317.53090000683 1,105.22 1,212.31 175,623.51
78 175,623.51 2317.53090000683 1,097.65 1,219.88 174,403.63
79 174,403.63 2317.53090000683 1,090.02 1,227.51 173,176.12
80 173,176.12 2317.53090000683 1,082.35 1,235.18 171,940.94
81 171,940.94 2317.53090000683 1,074.63 1,242.90 170,698.04
82 170,698.04 2317.53090000683 1,066.86 1,250.67 169,447.37
83 169,447.37 2317.53090000683 1,059.05 1,258.48 168,188.89
84 168,188.89 2317.53090000683 1,051.18 1,266.35 166,922.54
85 166,922.54 2317.53090000683 1,043.27 1,274.27 165,648.27
86 165,648.27 2317.53090000683 1,035.30 1,282.23 164,366.04
87 164,366.04 2317.53090000683 1,027.29 1,290.24 163,075.80
88 163,075.80 2317.53090000683 1,019.22 1,298.31 161,777.49
89 161,777.49 2317.53090000683 1,011.11 1,306.42 160,471.07
90 160,471.07 2317.53090000683 1,002.94 1,314.59 159,156.48
91 159,156.48 2317.53090000683 994.73 1,322.80 157,833.68
92 157,833.68 2317.53090000683 986.46 1,331.07 156,502.61
93 156,502.61 2317.53090000683 978.14 1,339.39 155,163.22
94 155,163.22 2317.53090000683 969.77 1,347.76 153,815.46
95 153,815.46 2317.53090000683 961.35 1,356.18 152,459.28
96 152,459.28 2317.53090000683 952.87 1,364.66 151,094.62
97 151,094.62 2317.53090000683 944.34 1,373.19 149,721.43
98 149,721.43 2317.53090000683 935.76 1,381.77 148,339.65
99 148,339.65 2317.53090000683 927.12 1,390.41 146,949.25
100 146,949.25 2317.53090000683 918.43 1,399.10 145,550.15
101 145,550.15 2317.53090000683 909.69 1,407.84 144,142.31
102 144,142.31 2317.53090000683 900.89 1,416.64 142,725.66
103 142,725.66 2317.53090000683 892.04 1,425.50 141,300.17
104 141,300.17 2317.53090000683 883.13 1,434.40 139,865.76
105 139,865.76 2317.53090000683 874.16 1,443.37 138,422.39
106 138,422.39 2317.53090000683 865.14 1,452.39 136,970.00
107 136,970.00 2317.53090000683 856.06 1,461.47 135,508.53
108 135,508.53 2317.53090000683 846.93 1,470.60 134,037.93
109 134,037.93 2317.53090000683 837.74 1,479.79 132,558.14
110 132,558.14 2317.53090000683 828.49 1,489.04 131,069.10
111 131,069.10 2317.53090000683 819.18 1,498.35 129,570.75
112 129,570.75 2317.53090000683 809.82 1,507.71 128,063.03
113 128,063.03 2317.53090000683 800.39 1,517.14 126,545.90
114 126,545.90 2317.53090000683 790.91 1,526.62 125,019.28
115 125,019.28 2317.53090000683 781.37 1,536.16 123,483.12
116 123,483.12 2317.53090000683 771.77 1,545.76 121,937.36
117 121,937.36 2317.53090000683 762.11 1,555.42 120,381.93
118 120,381.93 2317.53090000683 752.39 1,565.14 118,816.79
119 118,816.79 2317.53090000683 742.60 1,574.93 117,241.86
120 117,241.86 2317.53090000683 732.76 1,584.77 115,657.09
121 115,657.09 2317.53090000683 722.86 1,594.67 114,062.42
122 114,062.42 2317.53090000683 712.89 1,604.64 112,457.78
123 112,457.78 2317.53090000683 702.86 1,614.67 110,843.11
124 110,843.11 2317.53090000683 692.77 1,624.76 109,218.35
125 109,218.35 2317.53090000683 682.61 1,634.92 107,583.43
126 107,583.43 2317.53090000683 672.40 1,645.13 105,938.30
127 105,938.30 2317.53090000683 662.11 1,655.42 104,282.88
128 104,282.88 2317.53090000683 651.77 1,665.76 102,617.12
129 102,617.12 2317.53090000683 641.36 1,676.17 100,940.94
130 100,940.94 2317.53090000683 630.88 1,686.65 99,254.29
131 99,254.29 2317.53090000683 620.34 1,697.19 97,557.10
132 97,557.10 2317.53090000683 609.73 1,707.80 95,849.30
133 95,849.30 2317.53090000683 599.06 1,718.47 94,130.83
134 94,130.83 2317.53090000683 588.32 1,729.21 92,401.62
135 92,401.62 2317.53090000683 577.51 1,740.02 90,661.60
136 90,661.60 2317.53090000683 566.63 1,750.90 88,910.70
137 88,910.70 2317.53090000683 555.69 1,761.84 87,148.86
138 87,148.86 2317.53090000683 544.68 1,772.85 85,376.01
139 85,376.01 2317.53090000683 533.60 1,783.93 83,592.08
140 83,592.08 2317.53090000683 522.45 1,795.08 81,797.00
141 81,797.00 2317.53090000683 511.23 1,806.30 79,990.70
142 79,990.70 2317.53090000683 499.94 1,817.59 78,173.11
143 78,173.11 2317.53090000683 488.58 1,828.95 76,344.16
144 76,344.16 2317.53090000683 477.15 1,840.38 74,503.78
145 74,503.78 2317.53090000683 465.65 1,851.88 72,651.90
146 72,651.90 2317.53090000683 454.07 1,863.46 70,788.44
147 70,788.44 2317.53090000683 442.43 1,875.10 68,913.34
148 68,913.34 2317.53090000683 430.71 1,886.82 67,026.52
149 67,026.52 2317.53090000683 418.92 1,898.62 65,127.90
150 65,127.90 2317.53090000683 407.05 1,910.48 63,217.42
151 63,217.42 2317.53090000683 395.11 1,922.42 61,295.00
152 61,295.00 2317.53090000683 383.09 1,934.44 59,360.56
153 59,360.56 2317.53090000683 371.00 1,946.53 57,414.03
154 57,414.03 2317.53090000683 358.84 1,958.69 55,455.34
155 55,455.34 2317.53090000683 346.60 1,970.94 53,484.41
156 53,484.41 2317.53090000683 334.28 1,983.25 51,501.15
157 51,501.15 2317.53090000683 321.88 1,995.65 49,505.50
158 49,505.50 2317.53090000683 309.41 2,008.12 47,497.38
159 47,497.38 2317.53090000683 296.86 2,020.67 45,476.71
160 45,476.71 2317.53090000683 284.23 2,033.30 43,443.41
161 43,443.41 2317.53090000683 271.52 2,046.01 41,397.40
162 41,397.40 2317.53090000683 258.73 2,058.80 39,338.60
163 39,338.60 2317.53090000683 245.87 2,071.66 37,266.94
164 37,266.94 2317.53090000683 232.92 2,084.61 35,182.33
165 35,182.33 2317.53090000683 219.89 2,097.64 33,084.68
166 33,084.68 2317.53090000683 206.78 2,110.75 30,973.93
167 30,973.93 2317.53090000683 193.59 2,123.94 28,849.99
168 28,849.99 2317.53090000683 180.31 2,137.22 26,712.77
169 26,712.77 2317.53090000683 166.95 2,150.58 24,562.19
170 24,562.19 2317.53090000683 153.51 2,164.02 22,398.18
171 22,398.18 2317.53090000683 139.99 2,177.54 20,220.63
172 20,220.63 2317.53090000683 126.38 2,191.15 18,029.48
173 18,029.48 2317.53090000683 112.68 2,204.85 15,824.64
174 15,824.64 2317.53090000683 98.90 2,218.63 13,606.01
175 13,606.01 2317.53090000683 85.04 2,232.49 11,373.52
176 11,373.52 2317.53090000683 71.08 2,246.45 9,127.07
177 9,127.07 2317.53090000683 57.04 2,260.49 6,866.58
178 6,866.58 2317.53090000683 42.92 2,274.61 4,591.97
179 4,591.97 2317.53090000683 28.70 2,288.83 2,303.14
180 2,303.14 2317.53090000683 14.39 2,303.14 0.00
    Total Interest 167,155.56  

 

1.C

C       Total Interest $144,997.66
  Loan Amount $250,000.00   Term of loan months 157.20
  Rate of interest Per Month 0.63%   Term of loan in years 13.10
  Term Months 180   Principle Outstanding  
        5th Year $185,181.95
  Present Value annuity factor 107.87   10th Year $82,908.31
  Instalment Monthly $2,317.53      
           
Months Opening Installment Interest Payment towards Principle Closing
1 250,000 2317.53090000683 1,562.50 755.03 249,244.97
2 249,244.97 2317.53090000683 1,557.78 759.75 248,485.22
3 248,485.22 2317.53090000683 1,553.03 764.50 247,720.72
4 247,720.72 2317.53090000683 1,548.25 769.28 246,951.44
5 246,951.44 2317.53090000683 1,543.45 774.08 246,177.36
6 246,177.36 2317.53090000683 1,538.61 778.92 245,398.44
7 245,398.44 2317.53090000683 1,533.74 783.79 244,614.65
8 244,614.65 2317.53090000683 1,528.84 788.69 243,825.96
9 243,825.96 2317.53090000683 1,523.91 793.62 243,032.34
10 243,032.34 2317.53090000683 1,518.95 798.58 242,233.76
11 242,233.76 2317.53090000683 1,513.96 803.57 241,430.19
12 241,430.19 2317.53090000683 1,508.94 808.59 240,621.60
13 240,621.60 2317.53090000683 1,503.88 813.65 239,807.95
14 239,807.95 2317.53090000683 1,498.80 818.73 238,989.22
15 238,989.22 2317.53090000683 1,493.68 823.85 238,165.37
16 238,165.37 2317.53090000683 1,488.53 829.00 237,336.38
17 237,336.38 2317.53090000683 1,483.35 834.18 236,502.20
18 236,502.20 2317.53090000683 1,478.14 839.39 235,662.80
19 235,662.80 2317.53090000683 1,472.89 844.64 234,818.17
20 234,818.17 2317.53090000683 1,467.61 849.92 233,968.25
21 233,968.25 2317.53090000683 1,462.30 855.23 233,113.02
22 233,113.02 2317.53090000683 1,456.96 860.57 232,252.45
23 232,252.45 2317.53090000683 1,451.58 865.95 231,386.49
24 231,386.49 2317.53090000683 1,446.17 871.37 230,515.13
25 230,515.13 2567.53090000683 1,440.72 1,126.81 229,388.32
26 229,388.32 2567.53090000683 1,433.68 1,133.85 228,254.46
27 228,254.46 2567.53090000683 1,426.59 1,140.94 227,113.52
28 227,113.52 2567.53090000683 1,419.46 1,148.07 225,965.45
29 225,965.45 2567.53090000683 1,412.28 1,155.25 224,810.20
30 224,810.20 2567.53090000683 1,405.06 1,162.47 223,647.74
31 223,647.74 2567.53090000683 1,397.80 1,169.73 222,478.00
32 222,478.00 2567.53090000683 1,390.49 1,177.04 221,300.96
33 221,300.96 2567.53090000683 1,383.13 1,184.40 220,116.56
34 220,116.56 2567.53090000683 1,375.73 1,191.80 218,924.76
35 218,924.76 2567.53090000683 1,368.28 1,199.25 217,725.51
36 217,725.51 2567.53090000683 1,360.78 1,206.75 216,518.76
37 216,518.76 2567.53090000683 1,353.24 1,214.29 215,304.47
38 215,304.47 2567.53090000683 1,345.65 1,221.88 214,082.59
39 214,082.59 2567.53090000683 1,338.02 1,229.51 212,853.08
40 212,853.08 2567.53090000683 1,330.33 1,237.20 211,615.88
41 211,615.88 2567.53090000683 1,322.60 1,244.93 210,370.95
42 210,370.95 2567.53090000683 1,314.82 1,252.71 209,118.24
43 209,118.24 2567.53090000683 1,306.99 1,260.54 207,857.69
44 207,857.69 2567.53090000683 1,299.11 1,268.42 206,589.27
45 206,589.27 2567.53090000683 1,291.18 1,276.35 205,312.92
46 205,312.92 2567.53090000683 1,283.21 1,284.33 204,028.60
47 204,028.60 2567.53090000683 1,275.18 1,292.35 202,736.25
48 202,736.25 2567.53090000683 1,267.10 1,300.43 201,435.82
49 201,435.82 2567.53090000683 1,258.97 1,308.56 200,127.26
50 200,127.26 2567.53090000683 1,250.80 1,316.74 198,810.53
51 198,810.53 2567.53090000683 1,242.57 1,324.97 197,485.56
52 197,485.56 2567.53090000683 1,234.28 1,333.25 196,152.31
53 196,152.31 2567.53090000683 1,225.95 1,341.58 194,810.74
54 194,810.74 2567.53090000683 1,217.57 1,349.96 193,460.77
55 193,460.77 2567.53090000683 1,209.13 1,358.40 192,102.37
56 192,102.37 2567.53090000683 1,200.64 1,366.89 190,735.48
57 190,735.48 2567.53090000683 1,192.10 1,375.43 189,360.05
58 189,360.05 2567.53090000683 1,183.50 1,384.03 187,976.01
59 187,976.01 2567.53090000683 1,174.85 1,392.68 186,583.33
60 186,583.33 2567.53090000683 1,166.15 1,401.39 185,181.95
61 185,181.95 2567.53090000683 1,157.39 1,410.14 183,771.81
62 183,771.81 2567.53090000683 1,148.57 1,418.96 182,352.85
63 182,352.85 2567.53090000683 1,139.71 1,427.83 180,925.02
64 180,925.02 2567.53090000683 1,130.78 1,436.75 179,488.27
65 179,488.27 2567.53090000683 1,121.80 1,445.73 178,042.54
66 178,042.54 2567.53090000683 1,112.77 1,454.77 176,587.78
67 176,587.78 2567.53090000683 1,103.67 1,463.86 175,123.92
68 175,123.92 2567.53090000683 1,094.52 1,473.01 173,650.92
69 173,650.92 2567.53090000683 1,085.32 1,482.21 172,168.70
70 172,168.70 2567.53090000683 1,076.05 1,491.48 170,677.23
71 170,677.23 2567.53090000683 1,066.73 1,500.80 169,176.43
72 169,176.43 2567.53090000683 1,057.35 1,510.18 167,666.25
73 167,666.25 2567.53090000683 1,047.91 1,519.62 166,146.63
74 166,146.63 2567.53090000683 1,038.42 1,529.11 164,617.52
75 164,617.52 2567.53090000683 1,028.86 1,538.67 163,078.85
76 163,078.85 2567.53090000683 1,019.24 1,548.29 161,530.56
77 161,530.56 2567.53090000683 1,009.57 1,557.96 159,972.59
78 159,972.59 2567.53090000683 999.83 1,567.70 158,404.89
79 158,404.89 2567.53090000683 990.03 1,577.50 156,827.39
80 156,827.39 2567.53090000683 980.17 1,587.36 155,240.03
81 155,240.03 2567.53090000683 970.25 1,597.28 153,642.75
82 153,642.75 2567.53090000683 960.27 1,607.26 152,035.49
83 152,035.49 2567.53090000683 950.22 1,617.31 150,418.18
84 150,418.18 2567.53090000683 940.11 1,627.42 148,790.76
85 148,790.76 2567.53090000683 929.94 1,637.59 147,153.17
86 147,153.17 2567.53090000683 919.71 1,647.82 145,505.35
87 145,505.35 2567.53090000683 909.41 1,658.12 143,847.23
88 143,847.23 2567.53090000683 899.05 1,668.49 142,178.74
89 142,178.74 2567.53090000683 888.62 1,678.91 140,499.83
90 140,499.83 2567.53090000683 878.12 1,689.41 138,810.42
91 138,810.42 2567.53090000683 867.57 1,699.97 137,110.45
92 137,110.45 2567.53090000683 856.94 1,710.59 135,399.86
93 135,399.86 2567.53090000683 846.25 1,721.28 133,678.58
94 133,678.58 2567.53090000683 835.49 1,732.04 131,946.54
95 131,946.54 2567.53090000683 824.67 1,742.87 130,203.68
96 130,203.68 2567.53090000683 813.77 1,753.76 128,449.92
97 128,449.92 2567.53090000683 802.81 1,764.72 126,685.20
98 126,685.20 2567.53090000683 791.78 1,775.75 124,909.45
99 124,909.45 2567.53090000683 780.68 1,786.85 123,122.60
100 123,122.60 2567.53090000683 769.52 1,798.01 121,324.59
101 121,324.59 2567.53090000683 758.28 1,809.25 119,515.34
102 119,515.34 2567.53090000683 746.97 1,820.56 117,694.78
103 117,694.78 2567.53090000683 735.59 1,831.94 115,862.84
104 115,862.84 2567.53090000683 724.14 1,843.39 114,019.45
105 114,019.45 2567.53090000683 712.62 1,854.91 112,164.54
106 112,164.54 2567.53090000683 701.03 1,866.50 110,298.04
107 110,298.04 2567.53090000683 689.36 1,878.17 108,419.87
108 108,419.87 2567.53090000683 677.62 1,889.91 106,529.96
109 106,529.96 2567.53090000683 665.81 1,901.72 104,628.25
110 104,628.25 2567.53090000683 653.93 1,913.60 102,714.64
111 102,714.64 2567.53090000683 641.97 1,925.56 100,789.08
112 100,789.08 2567.53090000683 629.93 1,937.60 98,851.48
113 98,851.48 2567.53090000683 617.82 1,949.71 96,901.77
114 96,901.77 2567.53090000683 605.64 1,961.89 94,939.87
115 94,939.87 2567.53090000683 593.37 1,974.16 92,965.72
116 92,965.72 2567.53090000683 581.04 1,986.50 90,979.22
117 90,979.22 2567.53090000683 568.62 1,998.91 88,980.31
118 88,980.31 2567.53090000683 556.13 2,011.40 86,968.91
119 86,968.91 2567.53090000683 543.56 2,023.98 84,944.93
120 84,944.93 2567.53090000683 530.91 2,036.63 82,908.31
121 82,908.31 2567.53090000683 518.18 2,049.35 80,858.95
122 80,858.95 2567.53090000683 505.37 2,062.16 78,796.79
123 78,796.79 2567.53090000683 492.48 2,075.05 76,721.74
124 76,721.74 2567.53090000683 479.51 2,088.02 74,633.72
125 74,633.72 2567.53090000683 466.46 2,101.07 72,532.65
126 72,532.65 2567.53090000683 453.33 2,114.20 70,418.45
127 70,418.45 2567.53090000683 440.12 2,127.42 68,291.03
128 68,291.03 2567.53090000683 426.82 2,140.71 66,150.32
129 66,150.32 2567.53090000683 413.44 2,154.09 63,996.23
130 63,996.23 2567.53090000683 399.98 2,167.55 61,828.67
131 61,828.67 2567.53090000683 386.43 2,181.10 59,647.57
132 59,647.57 2567.53090000683 372.80 2,194.73 57,452.84
133 57,452.84 2567.53090000683 359.08 2,208.45 55,244.39
134 55,244.39 2567.53090000683 345.28 2,222.25 53,022.13
135 53,022.13 2567.53090000683 331.39 2,236.14 50,785.99
136 50,785.99 2567.53090000683 317.41 2,250.12 48,535.87
137 48,535.87 2567.53090000683 303.35 2,264.18 46,271.69
138 46,271.69 2567.53090000683 289.20 2,278.33 43,993.36
139 43,993.36 2567.53090000683 274.96 2,292.57 41,700.79
140 41,700.79 2567.53090000683 260.63 2,306.90 39,393.89
141 39,393.89 2567.53090000683 246.21 2,321.32 37,072.57
142 37,072.57 2567.53090000683 231.70 2,335.83 34,736.74
143 34,736.74 2567.53090000683 217.10 2,350.43 32,386.31
144 32,386.31 2567.53090000683 202.41 2,365.12 30,021.20
145 30,021.20 2567.53090000683 187.63 2,379.90 27,641.30
146 27,641.30 2567.53090000683 172.76 2,394.77 25,246.53
147 25,246.53 2567.53090000683 157.79 2,409.74 22,836.79
148 22,836.79 2567.53090000683 142.73 2,424.80 20,411.98
149 20,411.98 2567.53090000683 127.57 2,439.96 17,972.03
150 17,972.03 2567.53090000683 112.33 2,455.21 15,516.82
151 15,516.82 2567.53090000683 96.98 2,470.55 13,046.27
152 13,046.27 2567.53090000683 81.54 2,485.99 10,560.28
153 10,560.28 2567.53090000683 66.00 2,501.53 8,058.75
154 8,058.75 2567.53090000683 50.37 2,517.16 5,541.59
155 5,541.59 2567.53090000683 34.63 2,532.90 3,008.69
156 3,008.69 2567.53090000683 18.80 2,548.73 459.96
157 459.96 462.83 2.87 459.96 0.00
    Total Interest 144,997.66  

 

1.D

Particulars A B C
Total Interest $174,827.14 $167,155.56 $144,997.66
Principle Outstanding      
5th Year $194,403.19 $195,239.79 $185,181.95
10th Year $114,586.78 $115,657.09 $82,908.31
15th Year 0 0

 

1.E

E      
The reason behind the different interest amounts in all three scenerio is the frequency of payment of installment. In case instalment is paid once in an year which increases the interest of an year on principle at the time of payment however when installments are paid monthly the interest part is paid off monthly hence don’t get added up principle, hence interest is applied on a lesser amount of principle than in case A. Further in case C with an extra payment the principle part started declining much earlier, as installments started contributing a higher part towards interest much faster than case A and B hence intrest is lowest.

 

2.A

Life after Retirement (Years) 15
Amount Required every Year 60000
Time left in retirement (years) 20
Rate of Return for 15 years after retirement 8%
Pv factor for 15 years 8.56
Present value of total fund required for 15 years after retirement at the end of 20 years from now $513,568.72
PV factor for 20 years from now 9.82
Amount required to be saved per annum before retirement $52,308.11

 

2.B

Rate of Return for 15 years after retirement 4.50%
Pv factor for 15 years 10.74
Present value of total fund required for 15 years after retirement at the end of 20 years from now $644,372.74
Rate of Return for 20 years before retirement 9%
PV factor for 20 years from now 9.13
Amount required to be saved per annum before retirement $70,588.76

 

2.C

Option A is better as it entails a lesser amount to be saved per annum before retirement. This is because of the higher rate of return after retirement when contribution will be zero and only way to increase the value of money will be rate of return.

 

3.

Month Day Year Ticker Ret Adjdiv Market Growth rate  
12 31 1986 GE 21.83% 0.0988 15.65%    
12 31 1987 GE 5.29% 0.1104 1.74% 12%  
12 30 1988 GE 4.86% 0.1217 17.61% 10%  
12 29 1989 GE 48.71% 0.1417 28.48% 16%  
12 31 1990 GE -8.13% 0.16 -6.08% 13%  
12 31 1991 GE 37.37% 0.1733 33.78% 8%  
12 31 1992 GE 15.10% 0.1933 9.06% 12%  
12 31 1993 GE 26.04% 0.2175 11.59% 13%  
12 30 1994 GE 0.21% 0.2483 -0.64% 14%  
12 29 1995 GE 45.13% 0.2817 35.73% 13%  
12 31 1996 GE 40.28% 0.3167 21.23% 12%  
12 31 1997 GE 50.95% 0.36 30.43% 14%  
12 31 1998 GE 40.99% 0.4167 22.34% 16%  
12 31 1999 GE 53.56% 0.4867 25.68% 17%  
12 29 2000 GE -6.00% 0.57 -11.25% 17%  
12 31 2001 GE -15.07% 0.66 -11.07% 16%  
12 31 2002 GE -37.71% 0.73 -20.88% 11%  
12 31 2003 GE 30.75% 0.77 33.15% 5%  
12 31 2004 GE 20.68% 0.82 13.02% 6%  
12 30 2005 GE -1.43% 0.91 7.31% 11%  
12 29 2006 GE 9.35% 1.03 16.24% 13%
Answer-A CAGR of dividend 12.44%                    
Answer-B Average annual growth rate 12.48%                    
Answer-C CAGR shall be used in gordon’s model as the model is based on constant growth rates, CAGR is nothing but the mean depiction of flactuating growth rates .                      
Answer-D D2- Dividend                      
  D2= Dividend X (Growth)^2                      
  1.30                      
Answer-E Rate of return 18.23%                    
  Expected Dividend of next year 1.16                    
  Price as per gordon’s model at begining of 2008 $20.00                    
Answer-F Beta of the stock 1.32                    
Answer-G GE is an aggressive stock as the beta is higher than 1, which means any change in market will impact GE’s stock 1.32 times.                      
Answer-H As per CAPM                      
  Expected rate of return next year Re= Rf+ (Rm-Rf)Beta                    
  5.65%                  

 

4.

XYZ Inc.            
Balance Sheet for Year 1 and Year 2 30% growth in sales 15% growth in sales 5% growth
Year Y1 Y2 Y3 Y4 Y5 Y6 Y7 Y8- Perpetual
Current Assets
Cash and cash equivalence 164,964 467,649 665,640 960,816 1,332,390 2,483,940 3,826,217 5,988,873
Accounts receivables 335,677 648,010 639,397 831,216 1,080,580 1,242,667 1,429,067 1,500,521
Inventory 126,477 508,220 412,553 536,319 697,215 801,797 922,066 968,170
Total current Assets 627,118 1,623,879 1,717,590 2,328,350 3,110,185 4,528,404 6,177,351 8,457,563
Property and equipment
At cost 3,570,000 8,756,733 8,012,376 10,416,089 13,540,916 15,572,054 17,907,862 18,803,255
Less accumulated depreciation 357,000 973,337 801,238 1,041,609 1,354,092 1,557,205 1,790,786 1,880,325
Net property and equipment 3,213,000 7,783,397 7,211,139 9,374,480 12,186,825 14,014,848 16,117,076 16,922,929
Total Assets 3,840,118 9,407,276 8,928,728 11,702,831 15,297,009 18,543,252 22,294,426 25,380,493
Current Liabilities
Accounts payable and accrued expenses 475,990 1,684,705
Other current liability 27,778 77,862
Total current liabilities 503,768 1,762,567 1,473,118 1,915,053 2,489,569 2,863,004 3,292,455 3,457,078
Long term debt 444,180 4,427,905 3,166,855 4,116,912 5,351,985 6,154,783 7,078,001 7,431,901
Stockholder’s equity
Common stock 2,420,774 2,420,774 2,420,774 2,420,774 2,420,774 2,420,774 2,420,774 2,420,774
Retained Earnings 471,395 796,029 1,867,982 3,250,092 5,034,681 7,104,691 9,503,196 12,070,741
Total Equity 2,892,170 3,216,804 4,288,756 5,670,866 7,455,455 9,525,465 11,923,970 14,491,515
Total Liabilities and equity 3,840,118 9,407,276 8,928,729 11,702,831 15,297,010 18,543,252 22,294,426 25,380,493
XYZ Inc.            
Income Statement for Year 1 and Year 2            
 
 
Sales
Sales 3,372,371 5,476,925 7,120,003 9,256,003 12,032,804 13,837,725 15,913,384 16,709,053
Other Income 72,886 97,742 100,674 103,694 106,805 110,009 113,310 116,709
Total Sales 3,445,257 5,574,667 7,220,677 9,359,698 12,139,610 13,947,734 16,026,693 16,825,762
Operating expenses
Cost of products sold 1,366,116 2,175,456 2,302,022 2,992,628 3,890,417 4,473,979 5,145,076 5,402,330
Depreciation 357,000 616,337 801,238 1,041,609 1,354,092 1,557,205 1,790,786 1,880,325
Selling, general, and administrative expenses 1,035,971 1,677,590 1,763,815 2,292,959 2,980,847 3,427,974 3,942,170 4,139,278
Interest expense 39,976 398,511 285,017 370,522 481,679 553,930 637,020 668,871
Interest income 8,248 18,735 33,282 48,041 66,620 124,197 191,311 299,444
Total Expenses 2,790,815 4,849,159 5,118,809 6,649,678 8,640,414 9,888,892 11,323,741 11,791,361
Earnings before income taxes 654,443 725,508 2,101,868 2,710,020 3,499,195 4,058,842 4,702,952 5,034,401
Income taxes 268,322 290,203 840,747 1,084,008 1,399,678 1,623,537 1,881,181 2,013,760
Profit after taxes 386,121 435,304 1,261,121 1,626,012 2,099,517 2,435,305 2,821,771 3,020,640
Dividends 98,166 110,671 189,168 243,902 314,928 365,296 423,266 453,096
Addition to Retained earnings 287,955 324,634 1,071,953 1,382,110 1,784,590 2,070,010 2,398,505 2,567,544
FCFF 197,991 295,176 371,574 1,151,550 1,342,277 2,162,656
Enterprise Value 15,867,343 171391.101108033 221190.608190545 241031.485290258 646627.363413935 652463.539057172 13934639.1752577
Equity Value 13,222,786
Equity price per share (equity value/ shares outstanding) 7

 

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