Question

13 As an auditor, you are asked to verity the financial statements of a corporation. If a company declares that its return on equity is 18 percent, its sales are $4 million, its debt ratio is 0.40 and its total liabilities are $2 million, what should its return on total assets be? Assume the company has no preferred shares

A) 0.80%

B) 1.25%

C) 10.80%

D) 12.60 %

E) There is insufficient information to answer

Answer : 10.80%

9 Your mother has just retired. The balance In her investment account is $600 000 and she wants to receive monthly payments of $5 000. If she receives the payments at the end of the month, and the current interest rate is 7 percent , compounded quarterly, how many months will her investment account last for (round to the nearest month A) -91 months

B) 120 months

C) 170 months

D) 206 MONTHS

E) None of the choices given above

MegaSolt is about to issue new preferred shares. These shares have a par value of $1100, issuing expenses are $200, and the tax rate is 35%. Dividends are expected to be %50, paid every six months. What is the after-tax cost of preferred shares?

A) 6.8%

B)10.3%

C) 10.6%

D) 11.4%

E) none of the above

You are planning to buy a new machine. It is expected to generate annual revenues of $75000 and the annual operating expenses will amount to $15000. The machine is expected to require major upgrades costing $50000 at the end of the 10th and the 15th operating years. At the end of its 20th operating year, a salvage value of $110000 is anticipated. Assuming a rate of 15%, what is the most you should be willing to pay today to purchase the machine?

Answer 1

Ans to Q 13 is already given so I am not providing it again.

Q 9.	Principle	600,000.00
	Monthly	5,000.00
	Interest rate	7%
	Compounding	Quarterly
	No. of periods	4
	Compounded interest rate	0.0175
	Period of annuity
		I am attaching the period of annuity formula in image.
	Here,
	i	0.0175	Interest rate
	PVAD	600,000.00	Principle
	PmtAD	5,000.00	Monthly
	n	4	No. of periods
	ln	Natural logarithm base function (log base e)
	By solving through above formula, Ans will be 206 months. Ans. D

Megasolt	Preference Shares
	Par Value	1,100.00	A
	Issue cost	200.00	B
	Tax Rate	35%	C
	Dividend	50.00	D
	Paid	Twice
	Period	2.00	E
	Total Dividend	100.00	F=D*E
	Net realized from issue	900.00	G=A-B
	Cost of preference share	11.11%	H=F/G
	So Ans is D

New Machine: The maximum amount that can be paid the present value of net cash inflows from the machinery
	A	B	C	D	E=A-B-C+D	F	G=E*F
Year	Annual Revenue	Annual Operating expenses	Upgrade costs	Salvage	Net Inflow	Present Value Factor at 15%	Present Value of Net Inflows
1	75,000.00	15,000.00	-	-	60,000.00	0.86957	52,173.91
2	75,000.00	15,000.00	-	-	60,000.00	0.75614	45,368.62
3	75,000.00	15,000.00	-	-	60,000.00	0.65752	39,450.97
4	75,000.00	15,000.00	-	-	60,000.00	0.57175	34,305.19
5	75,000.00	15,000.00	-	-	60,000.00	0.49718	29,830.60
6	75,000.00	15,000.00	-	-	60,000.00	0.43233	25,939.66
7	75,000.00	15,000.00	-	-	60,000.00	0.37594	22,556.22
8	75,000.00	15,000.00	-	-	60,000.00	0.32690	19,614.11
9	75,000.00	15,000.00	-	-	60,000.00	0.28426	17,055.74
10	75,000.00	15,000.00	50,000.00	-	10,000.00	0.24718	2,471.85
11	75,000.00	15,000.00	-	-	60,000.00	0.21494	12,896.59
12	75,000.00	15,000.00	-	-	60,000.00	0.18691	11,214.43
13	75,000.00	15,000.00	-	-	60,000.00	0.16253	9,751.68
14	75,000.00	15,000.00	-	-	60,000.00	0.14133	8,479.72
15	75,000.00	15,000.00	50,000.00	-	10,000.00	0.12289	1,228.94
16	75,000.00	15,000.00	-	-	60,000.00	0.10686	6,411.89
17	75,000.00	15,000.00	-	-	60,000.00	0.09293	5,575.55
18	75,000.00	15,000.00	-	-	60,000.00	0.08081	4,848.31
19	75,000.00	15,000.00	-	-	60,000.00	0.07027	4,215.92
20	75,000.00	15,000.00	-	110,000.00	170,000.00	0.06110	10,387.05
						Total	363,776.96
			The most you should be willing to pay today to purchase the machine is $ 363,776.96

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