Date : March 5th, 2010Category : UncategorizedAuthor : Editor1 Comment
Mr. Rambo, President of Assault Weapons, Inc., was pleased to hear that he had three offers from major defense companies for his latest missile firing automatic ejector. He will use a discount rate of 12 percent to evaluate each offer.
Offer 1
$500,000 now plus $120,000 from the end of year 6 through 15. Also, if the product goes over $50 million in cumulative sales by the end of year 15, he will receive an additional $1,500,000. Rambo thought there was a 75% probability this would happen.
Offer 2
25% of the buyer’s gross margin for the next four years. The buyer in this case is Air Defense, Inc. (ADI). Its gross margin is 65%. Sales for year 1 are projected to be $1 million and then grow by 40% per year. This amount is paid today and is not discounted.
Offer 3
A trust fund would be set up for the next 9 years. At the end of that period, Rambo would receive the proceeds (and discount them back to the present at 12%). The trust fund called for semiannual payments for the next 9 years of $80,000 (a total of $160,000 per year). The payments would start immediately. Since the payments are coming at the beginning of each period instead of the end, this is an annuity due. To look up the future value of the annuity due in the tables, add 1 to n (18 + 1) and subtract 1 from the value in the table. Assume the annual interest rate on this annuity is 12% annually. Determine the present value of the trust fund’s final value.
Required:
Show work and find the present value of each of the three offers and then indicate which one has the highest present value.
Date : March 3rd, 2010Category : UncategorizedAuthor : Editor1 Comment
I know it may be alittle long..but please help me, I really appreciate it! Thanks to all the kind people on Yahoo Answers!
Totals: 1972 Start-up through FY 2000*
Total Lottery Ticket Sales $25.12 billion
Net Revenue to Aid Education $9.83 billion
Retailer Commissions $1.68 billion
Prizes to Players$12.86 billion
*http://www.Michigan.gov/lottery
The Big Game is a multi-state lottery game with BIG Jackpots.Seven states participate in The Big Game: Georgia, Illinois, Maryland, Massachusetts, Michigan, New Jersey and Virginia. By teaming up together, the member lotteries are able to offer players jackpots that start at $5 million. The jackpots grow until someone wins. Jackpots can grow as high as $200 million or more. In fact, The Big Game holds the record for the largest lottery jackpot ever in the United States: $363million! This jackpot rolled 18 times since last being hit! Two winning tickets — one sold in Michigan, and one sold in Illinois — matched all six numbers in this Big Game drawing, each worth an annuitized value of $181.5 million. The winners were Larry and Nancy Ross of Shelby Township, Michigan, and Joe and Sue Kainz of Lake County, Illinois.The Michigan Lottery can pay Big Game jackpot winnings inone of two ways: as an annuity or in one lump-sum/cash-option payment for the present cash value of the jackpot share. When a winnerselects annuity payments, the jackpot is paid out in equal installments over 26 years. When a winner selects the cash option, the Lottery paysthe winner the present cash value of the announced jackpot in onelump-sum payment, which is typically about 50% of the publishedvalue. In effect, the Lottery takes all of the money that would have been invested to fund the 26-year annuity and turns it all over to the winner, retaining absolutely none of the prize. Regardless of which option thewinner selects, the Michigan Lottery is required by law to withholdestimated income taxes for federal (28 percent) and state (4.2 percent), on any prize over $5,000. These amounts are estimates only, and the winner is required to satisfy any further tax liability for the year inwhich the prize award is claimed.
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Q1) Why do most winners select the cash option plan when given a choice?
Q2) If Michigan Lottery would like to give the annuity option an equal chance of being selected, how would it have to structure its payments?
Date : February 26th, 2010Category : UncategorizedAuthor : Editor3 Comments
I need simple explanation
I tried to understand this term with examples and comparison in several textbooks but I’m still in confusion. Most textbooks explain this topic along with “perpetuity” etc..
Date : February 19th, 2010Category : UncategorizedAuthor : Editor2 Comments
1. A firm has paid out Rs. 150,000 as dividends from its net income of Rs. 250,000. What is the retention ratio for the firm?
a. 12 %
b. 25 %
c. 40 %
d. 60 %
2. ROE = ____________________
a. ROA x Equity Multiplier
b. ROA x ( 1 + Debt Equity Ratio)
c. Profit Margin x Total Assets Turnover x Equity Multiplier
d. All of the given options
3. Which of the following is NOT an external use of financial statements information?
a. Evaluation of credit standing of new customer
b. Evaluation of financial worth of supplier
c. Evaluation of potential strength of the competitor
d. Evaluation of performance through profit margin and return on equity
4.If you plan to save Rs. 10,000 with a bank at an interest rate of 8%, what will be the worth of your amount after 4 years if bank offers simple interest?
a. Rs. 3,200
b. Rs. 10,084
c. Rs. 13,200
d. Rs. 15,240
5.Which of the following process can be defined as the process of generating earnings from previous earnings?
a. Discounting
b. Compounding
c. Factorization
d. None of the given options
6. Both future value and present value of a sum of money are based on:
a. Interest rate only
b. Number of time periods only
c. Both interest rate and number of time periods
d. Neither interest rate nor number of time periods
7. Which of the following is CORRECT regarding the present value discount factor?
a. It is greater than 1.0
b. It is equal to zero when discount rate is zero
c. It increases as the time period increases
d. It decreases as the discount rate increases
8. In how many years, an amount will be doubled at a discount rate of 8 percent?
a. 3 years
b. 6 years
c. 9 years
d. Cannot be determined without more information
9.What is the present value of the following end‐of‐year cash flows if the discount rate is 7 percent? Years 1 2 3 Cash Flow (Rs.) 600 950 1,200
a. Rs. 1,998
b. Rs. 2,004
c. Rs. 2,171
d. Rs. 2,371
10. In which of the following type of annuity, cash flows occur at the beginning of each period?
a. Ordinary annuity
b. Annuity due
c. Perpetuity
d. None of the given options
11. How many years will it take to pay off a Rs. 11,000 loan with a Rs. 1,241.08 annual payment and a 5% interest rate?
a. 6 years
b. 12 years
c. 24 years
d. 48 years
12. What is the effective annual rate of 7 percent compounded monthly?
a. 7.00 percent
b. 7.12 percent
c. 7.19 percent
d. 7.23 percent
13. A borrower is able to pay Rs. 40,000 in 5 years. Given a discount rate of 12 percent, what amount of money the lender should lend?
a. Rs. 14,186
b. Rs. 18,256
c. Rs. 22,697
d. Rs. 28,253
14. You have Rs. 1,000 to invest. You have 2 choices; first is the savings account A, which earns 8.75 percent compounded annually and second is the savings account B, which earns 8.50 percent compounded monthly. Which account should you choose and why?
a. Account A; because it has a higher effective annual rate
b. Account B; because it has a higher effective annual rate
c. Account A; because it has the higher quoted rate
d. Account B; because the quoted rate is higher
15. A company issues bonds with a Rs. 1,000 face value. What is the coupon rate if the coupon payments of Rs. 60 are paid every 6 months?
a. 3 percent
b. 6 percent
c. 9 percent
d. 12 percent
16. Which one of the following statements is INCORRECT regarding a bond?
a. A bond is an evidence of debt issued by a corporation or a governmental body
b. A bondholder has a part of ownership in the firm
c. A bond represents a loan made by investors to the issuer
d. When a corporation wishes to borrow from public on a long term basis, it does so by issuing or selling bonds
17. What will be the value of a Rs. 1,000 face‐value bond with an 8% coupon rate at a 15% required rate of return?
a. More than its face value
b. Less than its face value
c. Equal to its face value
d. Cannot be determined without more information
18. Which of the following relationships holds TRUE if a bond sells at a premium?
a. Bond Price < Par Value and YTM > coupon rate
b. Bond Price > Par Value and YTM > coupon rate
c. Bond Price > Par Value and YTM < coupon rate
d. Bond Price < Par Value and YTM < coupon rate
19. When corporations borrow, they generally promise to:
a. Make regular scheduled interest payments
b. Give the right of voting to bondholders
c. Repay half of the original amount borrowed
d. Give an ownership interest in the firm
20. Given two bonds identical but for coupon, the price of the lower‐coupon bond will change ________ that of the LD®G!AJ˜™>higher‐coupon bond for a given change in market interest rates.
a. More than
b. Equal to
c. Less than
d. None of the given options
A great high-yield safe investment is an annuity from an insurance company, because they offer a higher rate of return than banks. Better understand what interest rates and loans are and the termin…
A great high-yield safe investment is an annuity from an insurance company, because they offer a higher rate of return than banks. Better understand what interest rates and loans are and the termin…
When an asset has an annuity cash flow pattern, you can use the PV function for Capital Investment Decision. An annuity has equal payments at equal time intervals.
Most of the seniors face various financial problems in their post retirement time. However, n numbers of loan facilities are there in the market but very few of them are available for seniors. Since most of the seniors rely on their pension to meet various old age expenses, very few banks and financial institutions take interest in their loan application. Lenders, who believe in providing unbiased financial services to every consumer section, offer reverse mortgage facility for their senior consumers. Mortgage loans offer hassle free financial aid for all senior borrowers, as it does not bother them for unnecessary documentation and property evaluation. Reverse mortgage is especially tailored for seniors, who possess house property or a portion in any home, so that they may use their equity in hard earned asset to perk up their financial situation. Since money is essential for living a contented life, seniors also need to secure a solution for their hard days. Being a senior citizen does not mean that you will never need a large amount of money, as emergency financial expenses can appear without any prior notice. Therefore, if you are a senior and bothered for arrangement of finance, then annuity reverse mortgage can solve all your financial blues.
Annuity reverse mortgage is a financial arrangement in which a senior homeowner takes a loan against his or her home equity; moreover, he or she also receives regular monthly tax-free payments from the lender. These mortgage loans are also called home equity conversion mortgage, as they use home equity to secure the loan amount. Usually, with a traditional mortgage loan, the borrower makes monthly principal and interest payment but with annuity reverse mortgage the lender makes monthly payments to the borrower. However, as a borrower receives money, his or her home equity declines and loan balance increases.
With annuity reverse mortgage, the homeowner can live in his or her home for as long as he or she wants but with traditional mortgage loan, the borrower does not get the privilege to live in that home. In addition, with this loan a lender can recover the loan amount only from the value of mortgaged home, he or she cannot seek payment from the sale of any other asset. Therefore, other assets of the borrower are secured and come under non-recourse limit. However, secured loans and mortgage loans are quite similar but reverse mortgage loans should never be compared with secured loans, as both come under different provisions.
To obtain desired finance from annuity reverse mortgage, the borrower must own a home property but that property should not have any existing mortgage or liens. Since this mortgage loan is a first mortgage scheme, mortgaged home properties are not acceptable. Basically, the loan amount that a borrower receives from these loans is influenced by factors such as type of loan scheme, borrower’s age and value of proposed home property. Every lender agrees on the proposed loan amount only after evaluating all these factors, as it helps the lender in getting an idea about possible recovery of loan amount.
As we mentioned in other articles, the government only represents about 30% of our retirement income,, the company retirement pension plan offers another 30 % and many of us do not have one. It is up to individuals to invest wisely short and long term in order to make up for the short fall if he or she would like to live comfortably after retirement without giving up some retirement plan. Now you have reached your retirement age, there are some important investment options for your RRSP or 401k plan. In this article, we will discuss characteristics of non registered annuity. An annuity is non-registered when it is purchased with funds from money other than registered plan. Payments made under a non-registered annuity contain your principal and earned interest. Only the interest portion is taxable each year.
1. Non-registered fixed term annuity Annuity payments are fixed for the term of the plan and cannot be changed. The payment amount is determined by the interest rate for the term and the term chosen, if term is long than payment will be small, on other hand if the term is short than the payment will be large. Each payment includes principal and interest and only the interest portion of the payment is taxable for the year of receipt.
2. Non prescribe annuity The taxable interest portion of a non-prescribed annuity decreases annually. Therefore, taxes paid are higher during the first few years, gradually decreasing to zero over time.
3. Prescribe annuity Payments contain capital and interest income in a ratio that can not be changed and the tax payable is spread out evenly over the entire duration of the contract.
As we mentioned in other articles the government only represents about 30% of our retirement income, the company retirement pension plan offers another 30 % and many of us do not have one. It is up to individuals to invest wisely short and long term in order to make up for the short fall if he or she would like to live comfortably after retirement without giving up some retirement plans. Now you have reached your retirement age, there are some important investment options for your RRSP or 401k plan. In this article, we will discuss types of annuity.
1. Life annuity Life annuity is a financial contract signed between you and insurance companies that guarantee to makes a series of payments in the future to you in exchange for the immediate payment of a lump sum or a series of payments prior to the return payments. Depending on the types of life annuity, payments may not stop if you die, any payment may be paid to your spouse or beneficiary such as guaranteed term annuity.
2. Term certain annuity Term certain annuity provides you with a fixed monthly income until age 90, rather than for your full life. Should you die before age 90, your spouse receives the payments until her/his 90th year.The minimum term of term certain annuity is 3 years and the maximum term is 40 years.
3. Prescribed annuity Prescribe annuity has a tax preferred status. There is no tax on the return of capital, however the interest that is included in the annuitant’s income is level throughout the term of the annuity. The taxable amount is lower in the early years and higher in later years, since it can only be purchased by non-registered money.
4. Deferred annuity In deferred annuity, the proceeds from the plan must be used to purchase an annuity by a ’specific’ date in the future such as it may not begin later than the month of January of the year you turn age 70, although they can be put in place as early as age 60.
5. Immediate annuity Immediate annuity means as soon as you pay a lump sum, you can receive annuity payments immediately.
6. Cashable annuity If cashable annuity is a clause in the contract, the insurance company may allow you to cash in your annuity if you lose your health, or if interest rates are much higher than when you bought the annuity.
