ࡱ>  @ 0kbjbjPP $r::k1&\ T&j:q8Ų$\Rd1@q@LLL*LLL^ @@*V0**T,ղL!6LW, ղղղ&&DSjXDSķ&&jXSolutions Guide: Please do not present as your own. I sometimes post solutions that are totally mine, from the books solutions manual, or a mix of my work and the books solutions manual. But this is only meant as a solutions guide for you to answer the problem on your own. I recommend doing this with any content you buy online whether from me or from someone else. P21Reviewing basic financial statements The income statement for the year ended December 31, 2006, the balance sheets for December 31, 2006 and 2005, and the statement of retained earnings for the year ended December 31, 2006, for Technica, Inc., are given on pages HYPERLINK "javascript:findAnchor('page_82')" 82and HYPERLINK "javascript:findAnchor('page_83')" 83. Briefly discuss the form and informational content of each of these statements. Technica, Inc. Income Statement for the Year Ended December 31, 2006 Sales revenue $600,000 Less: Cost of goods sold 460,000 Gross profits $140,000 Less: Operating expenses General and administrative expenses $30,000 Depreciation expense 30,000 Total operating expense 60,000 Operating profits $ 80,000 Less: Interest expense 10,000 Net profits before taxes $ 70,000 Less: Taxes 27,100 Earnings available for common stockholders $ 42,900 Earnings per share (EPS) $2.15 Technica, Inc. Balance Sheets December 31 Assets 2006 2005 Cash $ 15,000 $ 16,000 Marketable securities 7,200 8,000 Accounts receivable 34,100 42,200 Inventories 82,000 50,000 Total current assets $138,300 $116,200 Land and buildings $150,000 $150,000 Machinery and equipment 200,000 190,000 Furniture and fixtures 54,000 50,000 Other 11,000 10,000 Total gross fixed assets $415,000 $400,000 Less: Accumulated depreciation 145,000 115,000 Net fixed assets $270,000 $285,000 Total assets $408,300 $401,200 Liabilities and Stockholders Equity Accounts payable $ 57,000 $ 49,000 Notes payable 13,000 16,000 Accruals 5,000 6,000 Total current liabilities $ 75,000 $ 71,000 Long-term debt $150,000 $160,000 Stockholders equity Common stock equity (shares outstanding: 19,500 in 2006 and 20,000 in 2005) $110,200 $120,000 Retained earnings 73,100 50,200 Total stockholders equity $183,300 $170,200 Total liabilities and stockholders equity $408,300 $401,200 Technica, Inc. Statement of Retained Earnings for the Year Ended December 31, 2006 Retained earnings balance (January 1, 2006) $50,200 Plus: Net profits after taxes (for 2006) 42,900 Less: Cash dividends (paid during 2006) 20,000 Retained earnings balance (December 31, 2006) $73,100 Income statement: In this one-year summary of the firms operations, Technica, Inc. showed a net profit for 2006 and the ability to pay cash dividends to its stockholders. Balance sheet: The financial condition of Technica, Inc. at December 31, 2005 and 2006 is shown as a summary of assets and liabilities. Technica, Inc. has an excess of current assets over current liabilities, demonstrating liquidity. The firms fixed assets represent over one-half of total assets ($270,000 of $408,300). The firm is financed by short-term debt, long-term debt, common stock, and retained earnings. It appears that it repurchased 500 shares of common stock in 2006. Statement of retained earnings: Technica, Inc. earned a net profit of $42,900 in 2006 and paid out $20,000 in cash dividends. The reconciliation of the retained earnings account from $50,200 to $73,100 shows the net amount ($22,900) retained by the firm.  P22Financial statement account identification Mark each of the accounts listed in the following table as follows: In column (1), indicate in which statementincome statement (IS) or balance sheet (BS)the account belongs. In column (2), indicate whether the account is a current asset (CA), current liability (CL), expense (E), fixed asset (FA), long-term debt (LTD), revenue (R), or stockholders equity (SE). Account name (1) Statement (2) Type of account Accounts payable _______ _______ Accounts receivable _______ _______ Accruals _______ _______ Accumulated depreciation _______ _______ Administrative expense _______ _______ Buildings _______ _______ Cash _______ _______ Common stock (at par) _______ _______ Cost of goods sold _______ _______ Depreciation _______ _______ Equipment _______ _______ General expense _______ _______ Interest expense _______ _______ Inventories _______ _______ Land _______ _______ Long-term debts _______ _______ Machinery _______ _______ Marketable securities _______ _______ Notes payable _______ _______ Operating expense _______ _______ Paid-in capital in excess of par _______ _______ Preferred stock _______ _______ Preferred stock dividends _______ _______ Retained earnings _______ _______ Sales revenue _______ _______ Selling expense _______ _______ Taxes _______ _______ Vehicles _______ _______  (a)(b)Account NameStatementType of AccountAccounts payableBSCLAccounts receivableBSCAAccrualsBSCLAccumulated depreciationBSFA*Administrative expenseISEBuildingsBSFACashBSCACommon stock (at par)BSSECost of goods soldISEDepreciationISEEquipmentBSFAGeneral expenseISEInterest expenseISEInventoriesBSCALandBSFALong-term debtBSLTDMachineryBSFAMarketable securitiesBSCANotes payableBSCLOperating expenseISEPaid-in capital in excess of parBSSEPreferred stockBSSEPreferred stock dividendsISERetained earningsBSSESales revenueISRSelling expenseISETaxesISEVehiclesBSFA * Here we have to remember that Accumulated Depreciation is actually a Contra Asset Account P423Funding your retirement You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between retirement and death (a psychic told you would die exactly 30 years after you retire). You know that you will be able to earn 11% per year during the 30-year retirement period. 1. How large a fund will you needwhen you retirein 20 years to provide the 30-year, $20,000 retirement annuity? 2. How much will you needtodayas a single amount to provide the fund calculated in partaif you earn only 9% per year during the 20 years preceding retirement? 3. What effect would an increase in the rate you can earn both during and prior to retirement have on the values found in partsaandb?Explain. (a) PVA = PMT (PVIFA11%,30) (b) PV = FV (PVIF9%,20) PVA = $20,000 (8.694) PV = $173,880 (0.178) PVA = $173,880.00 PV = $30,950.64 Calculator solution: $173,875.85 Calculator solution: $31,024.82 (c) Both values would be lower. In other words, a smaller sum would be needed in 20 years for the annuity and a smaller amount would have to be put away today to accumulate the needed future sum. P432Funding budget shortfalls As part of your personal budgeting process, you have determined that in each of the next 5 years you will have budget shortfalls. In other words, you will need the amounts shown in the following table at the end of the given year to balance your budgetthat is, to make inflows equal outflows. You expect to be able to earn 8% on your investments during the next 5 years and wish to fund the budget shortfalls over the next 5 years with a single amount. End of year Budget shortfall 1 $ 5,000 2 4,000 3 6,000 4 10,000 5 3,000 How large must the single deposit today into an account paying 8% annual interest be to provide for full coverage of the anticipated budget shortfalls? What effect would an increase in your earnings rate have on the amount calculated in parta?Explain.(a) YearBudget Shortfall  PVIF8%,n = Present Value1$5,0000.926=$4,63024,0000.857=3,42836,0000.794=4,764410,0000.735=7,35053,0000.681=2,043$22,215Calculator solution:$22,214.03 A deposit of $22,215 would be needed to fund the shortfall for the pattern shown in the table. (b) An increase in the earnings rate would reduce the amount calculated in part (a). The higher rate would lead to a larger interest being earned each year on the investment. The larger interest amounts will permit a decrease in the initial investment to obtain the same future value available for covering the shortfall. P446Loan amortization schedule Joan Messineo borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments. 1. Calculate the annual, end-of-year loan payment. 2. Prepare a loan amortization schedule showing the interest and principal breakdown of each of the three loan payments. 3. Explain why the interest portion of each payment declines with the passage of time. (a) PMT = $15,000 ( (PVIFA14%,3) PMT = $15,000 ( 2.322 PMT = $6,459.95 Calculator solution: $6,460.97 (b) End of YearLoan PaymentBeginning of Year PrincipalPaymentsEnd of Year PrincipalInterestPrincipal1$6,459.95$15,000.00$2,100.00$4,359.95$10,640.052$6,459.9510,640.051,489.614,970.345,669.713$6,459.955,669.71793.765,666.190 (The difference in the last years beginning and ending principal is due to rounding.) (c) Through annual end-of-the-year payments, the principal balance of the loan is declining, causing less interest to be accrued on the balance. P448Monthly loan payments Tim Smith is shopping for a used car. He has found one priced at $4,500. The dealer has told Tim that if he can come up with a down payment of $500, the dealer will finance the balance of the price at a 12% annual rate over 2 years (24 months). Assuming that Tim accepts the dealers offer, what will hismonthly(end-of-month) payment amount be? Use a financial calculator or HYPERLINK "javascript:findAnchor('ch04equ16')" Equation 4.15a(found in footnote 9) to help you figure out what Timsmonthlypayment would be if the dealer were willing to finance the balance of the car price at a 9% annual rate. (a) PMT = $4,000 ( (PVIFA1%,24) PMT = $4,000 ( (21.243) PMT = $188.28 Calculator solution: $188.29 (b) PMT = $4,000 ( (PVIFA0.75%,24) PMT = $4,000 ( (21.889) PMT = $182.74 Calculator solution: $182.74 P6 15Basic bond valuation Complex Systems has an outstanding issue of $1,000-par-value bonds with a 12% coupon interest rate. The issue pays interestannuallyand has 16 years remaining to its maturity date. A. If bonds of similar risk are currently earning a 10% rate of return, how much should the Complex Systems bond sell for today? B. Describe thetwopossible reasons why similar-risk bonds are currently earning a return below the coupon interest rate on the Complex Systems bond. C. If the required return were at 12% instead of 10%, what would the current value of Complex Systems bond be? Contrast this finding with your findings in partaand discuss. 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"#$%&'()*+,-./012345678:;<=>?@ABCDEFGHIJLMNOPQRSTUVWXYZ[\]^_`abcdefghijkmnopqrstuvwxyz{|}~k&&&k1XtXTXT8@D( C TB  c $D|NB  S DB S  ?k1  ttpage_82page_83page_318E, -*m1E, -*m1޻޻L޻ ޻޻̼zo 3 : m1 D K m18*urn:schemas-microsoft-com:office:smarttagsdate 1122005200631DayMonthYearbjEMEM, 4 ( 0  **+ +N,X,a,j,0000000000000000000000m1gnX]{}""''''**** +#+V,X,,,0000000000m133333333333333x}9 + 9ZKO6WTZal9/) "$$$'H(--00m1xR KKMSl9 "$p'@(*-0j1m1*:j(b2=s*UQ-sd-LL7K152D'9|tRAFC!Llh3ZrWKFZdPVZ{%=V6!n=M=5XA=U=5XFV}V6!DwS fm~5x}E$,./ELNOhjqr"#<>DEdegst{&':CLMemuv  '01>GPQvw 3578  & ' ( ) * + ,    F N O P Q R 08@AX`his{ .6>?PX`amu}~ (089Zbjk{  (01:BJKLMNOSWXeo 47:;NQSTadfgqtwx 0356WZ]^nqtuTZjk $%'./17889>DUXbetuw~() ""###9#B#X#Y#Z#[#\#e#o#p#q#s#}##################$$$$$o'p''"(@(B(H(** +,----00j1m1""q&0@vvXvvttUU"#y'y(y*y+k1@@@"@H@@(@T@@.@`@@4@l@@8@`UnknownG:Ax Times New Roman5Symbol3& :Cx Arial3:Ax Times7& [ @Verdana7K@Cambria?5 :Cx Courier New;Wingdings qhff` *Y` *Y!hh24R1R1 3qHP?' mP2 1 Michael Ryan BusinessTutorT             Oh+'0$(   ( 4 @LT\dlP21Michael RyanNormalBusinessTutor3Microsoft Word 10.0@@m@G` *G&VT$m H    ."System 0X  -@Cambria-  2 [, S#2 [F olutions Guide:   2 [ @2 [# Please do not present as your own.       ( 2 [ 2 [ 22 [ I sometimes post solutions --  2 [X that    &2 , are totally mine,   - j2 ? from the books solutions manual, or a mix of my work and the -     -   -  - (     82 , books solutions manual. But t  - ! V2 2 his is only meant as a solutions guide for you to    -          2 ,  answer th( ,2  e problem on your own. -   ( V2 12 I recommend doing this with any content you buy  --   (       M2 E,, online whether from me or from someone else. ( - -  - -  2 E`  @Cambria- 2 ,  2 , @Times-2 , P2 2 X  2 4, 1 2 4A @Times-A2 $ Reviewing basic financial statements         " 2 F - 2 4 2 dh The income statement for the year ended December 31, 2006, the balance sheets for December 31, 2006 and  !   !     !         !    2 k 2005, and the statement of retained earnings for the year ended December 31, 2006, for Technica, Inc., are      !           "        2  gi 2   ven on pages   2  -  Jr2  82 Jr- @ !)-  2  2  anda 2 / -  Jr2 : 83 Jr- @ !):-  2 c 2 mQ . Briefly discuss the form and informational content of each of these statements.       !   !          !  2   2 . Technica, Inc.   2 . 2 . $#2 =. Income Statement!   ! 2 =. 2 =. $%2 m+. for the Year Ende   (2 mU. d December 31, 2006 !   2 m. 2  ^ Sales revenue   2 ^  2 w[9  2 [9 2 w6. $600,000  2 6. /2 1^ Less: Cost of goods sold      2 1l^  2 1w[9  2 1[9 -2 16. 460,0000 - @ !6- 2 16. 2  ^ Gross profits   2 ^  2 w[9  2 [9 2 w6. $140,000  2 6. /2 . Less: Operating expenses    2 }.  2 V7^ @Symbol-@"Arial-- 2 ^ - 2 ^ j-@2 i#^ General and administrative expensess        2 ^  ^'2 V[9 $30,0000  2 V![9  2 VR6.  2 Vp6.  2 7^ - 2 ^ - 2 ^ j-)2 i^ Depreciation expense    2 ^  ^'-2 [9 30,000 - @ !t- 2 ![9  2 R6.  2 p6.  2 ^ @1Courier New-- 2 P^ o- 2 i^ -.2 ^ Total operating expenses     2 ^  ^' 2 w[9  2 [9 -2 6. 60,000 - @ !t- 2 6. 2 ^ Operat 2 E ^ ing profits    2 ^  2 w[9  2 [9 2 6. $ 80,000   2 6. ,2 t^ Less: Interest expense    2 tC^  2 tw[9  2 t[9 -2 t6. 10,000 - @ !ty- 2 t6. /2 ^ Net profits before taxes     2 [^  2 w[9  2 [9 2 6. $ 70,000   2 6. 2 7  ^ Less: Taxes  2 7 ^  2 7 w[9  2 7 [9 -2 7 6. 27,100 - @ !t< - 2 7 6. J2 *^ Earnings available for common stockholders      !!    2 ^  2 w[9  2 [9 2 6. $ 42,900   2 6. /2 ^ Earnings per share (EPS)     2 x^  2 w[9  2 [9 2 6. $2.159  2 6.  2 ]  Technica, Inc.   2 ]  2 ]  $ 2  Balance Sheets    2   2 .  2 . -2  + December 31" - 2 q+ -2 R . Asse2 R $. ts- 2 R B. -2 R k+ 2006- 2 R + -2 R 9 2005- 2 R  - @ ! ,- - @ ! - - @ ! - -                           ՜.+,D՜.+, hp  Hewlett-PackardYR1 +P2–1P (a) PVA  PMT(PVIFA11%,30) (b) PV  FV(PVIF9%,20)E PVA  $20,000(8.694) PV  $173,880  (0.178)/ PVA  $173,880.00 PV  $30,950.64J Calculator solution: $173,875.85 Calculator solution: $31,024.82Y (c) Both values would be lower. In other words, a smaller sum would be needed in (a) X A deposit of $22,215 would be needed to fund the shortfall for the pattern showY (b) An increase in the earnings rate would reduce the amount calculated in part + (a) PMT  $15,000 ( (PVIFA14%,3) PMT  $15,000 ( 2.322 PMT  $6,459.95' Calculator solution: $6,460.97 (b) Z (The difference in the last year’s beginning and ending principal is due to rouY (c) Through annual end-of-the-year payments, the principal balance of the loan i* (a) PMT  $4,000 ( (PVIFA1%,24)" PMT  $4,000 ( (21.243) PMT  $188.28% Calculator solution: $188.29- (b) PMT  $4,000 ( (PVIFA0.75%,24)" PMT  $4,000 ( (21.889) PMT  $182.74% Calculator solution: $182.748 (a) Bo  I ( (PVIFAkd%,n)  M ( (PVIFkd%,n)8 Bo  120 ( (PVIFA10%,16)  M ( (PVIF10%,16)3 Bo  $120 ( (7.824)  $1,000 ( (0.218) Bo  $938.88  $218 Bo  $1,156.88' Calculator solution: $1,156.47[ (b) Since Complex Systems’ bonds were issued, there may have been a shift in the8 (c) Bo  I ( (PVIFAkd%,n)  M ( (PVIFkd%,n)8 Bo  120 ( (PVIFA12%,16)  M ( (PVIF12%,16)3 Bo  $120 ( (6.974)  $1,000 ( (0.163) Bo  $836.88  $163 Bo  $999.88$ Calculator solution: $1,000X When the required return is equal to the coupon rate, the bond value is equal t" (a) Po $2.40 ( 0.12 Po $20" (b) Po $2.40 ( 0.20 Po $12Y (c) As perceived risk increases, the required rate of return also increases, cau Title Headings* 8@ _PID_HLINKSAp2o#javascript:findAnchor('ch04equ16')a!javascript:findAnchor('page_83')`!javascript:findAnchor('page_82')  !"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklmnopqrstuvwxyz{|}~      !"#$%&'()*+,-./0123456789:;<=>?@ABCDEFGHIJKLMNOPQRSTUVWXYZ[\]^_`abcdefghijklnopqrstuvwxyz{|}~Root Entry FGData d1TablefWordDocument$rSummaryInformation(mT(DocumentSummaryInformation8CompObjj  FMicrosoft Word Document MSWordDocWord.Document.89q