Question

7.   Present and future value tables of $1 at 3% are presented below:

N            FV $1     PV $1     FVA $1 PVA $1 FVAD $1              PVAD $1

1             1.030000             0.97087               1.0000   0.97087               1.0300   1.00000

2             1.06090               0.94260               2.0300   1.91347               2.0909   1.97087

3             1.09273               0.91514               3.0909   2.82861               3.1836   2.91347

4             1.12551               0.88849               4.1836   3.71710               4.3091   3.82861

5             1.15927               0.86261               5.3091   4.57971               5.4684   4.71710

6             1.19405               0.83748               6.4684   5.41719               6.6625   5.57971

7             1.22987               0.81309               7.6625   6.23028               7.8923   6.41719

8             1.26677               0.78941               8.8923   7.01969               9.1591   7.23028

9             1.30477               0.76642               10.1591               7.78611               10.4639               8.01969

10           1.34392               0.74409               11.4639               8.53020               11.8078               8.78611

11           1.38423               0.72242               12.8078               9.25262               13.1920               9.53020

12           1.42576               0.70138               14.1920               9.95400               14.6178               10.25262

13           1.46853               0.68095               15.6178               10.63496             16.0863               10.95400

14           1.51259               0.66112               17.0863               11.29607             17.5989               11.63496

15           1.55797               0.64186               18.5989               11.93794             19.1569               12.29607

16           1.60471               0.62317               20.1569               12.56110             20.7616               12.93794

Donald wants to invest money in a 6% CD account that compounds semiannually. Donald would like the account to have a balance of $100,000 four years from now. How much must Donald deposit to accomplish his goal?

   A. $22,510

   B. $88,849

   C. $78,941

   D. $25,336

8.   On May 1, Rat Race Co. agreed to sell the assets of its Footwear Division to Mikes Inc. for $80 million. The sale was completed on December 31, 2015. The following additional facts pertain to the transaction:

The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.

The book value of Footwear's assets totaled $48 million on the date of the sale.

Footwear's operating income was a pretax loss of $10 million in 2015.

Rat Race's income tax rate is 40%.

In the 2015 income statement for Rat Race Co., it would report income from discontinued operations of

   

   A. $9.2 million.

   B. $26 million.

   C. $22 million.

   D. $13.2 million.

9.   Loan C has the same principal amount, payment amount, and maturity date as Loan D. However, Loan C is structured as an annuity due, while Loan D is structured as an ordinary annuity. Loan C's interest rate is

   A. the same as Loan D.

   B. less than Loan D.

   C. higher than Loan D.

   D. indeterminate compared to Loan D.

10.   On May 1, Rat Race Co. agreed to sell the assets of its Footwear Division to Mike's Inc. for $80 million. The sale was completed on December 31, 2015. The following additional facts pertain to the transaction:

The Footwear Division qualifies as a component of the entity according to GAAP regarding discontinued operations.

The book value of Footwear's assets totaled $48 million on the date of the sale.

Footwear's operating income was a pretax loss of $10 million in 2015.

Rat Race's income tax rate is 40%.

Suppose that the Footwear Division's assets had not been sold by December 31, 2015, but were considered held for sale. Assume that the fair value of these assets at December 31 was $80 million. In the 2015 income statement for Rat Race Co., under discontinued operations it would report a

A. $10 million loss

   B. $13.2 million income

   C. $6 million loss

   D. 16% gain.

11. To determine the future value factor for an annuity due for period n when given tables only for an ordinary annuity,

   A. obtain the FVA factor for n + 1 and deduct 1.

   B. obtain the FVA factor for n and deduct 1.

   C. obtain the FVA factor for n + 1 and add 1.

   D. obtain the FVA factor for n – 1 and add 1

12.   Sadie is planning on a cruise for her 30th birthday. She wants to know how much she should set aside at the beginning of each month at 6% interest to accumulate the sum of $4,800 in five years. She should use a table for the

   A. future value of an ordinary annuity of $1.

   B. future value of an annuity due of $1.

   C. present value of an annuity due of $1.

   D. future value of $1.

13. Safari Inc. offers a new employee a lump sum signing bonus at the date of employment. Alternatively, the employee can take $8,000 at the date of employment plus $20,000 at the end of each of his first three years of service. Assuming the employee's time value of money is 10% annually, what lump sum at employment date would make him indifferent between the two options?

A. $23,026

   B. $62,711

   C. $57,737

   D. $8,000

Answer 1

7.

C

Working note:

Effective annual interest rate R = (1+6%/2)^2 -1 = 6.09%

Deposit required = P

Then,

100000 = P*(1+6.09%)^4

P = 100000/1.0609^4

P = $78940.92 or $78941

8.

D

Working note:

Gross income = (80-48) – 10 = $22 Million

Tax rate = 40%

So, income after tax = 22*(1-40%) = $13.2 Million

9.

C.

Interest rate of loan C will be higher than that of loan D.

12.

B

Since the deposit takes place in the beginning of the month on a monthly basis to accumulate the sum in the future, then future value of annuity due table will help.

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