BMMF5103 Due Date: 24th March Assignment 1 (NOTE: Please Type your answer in MS word. Handwritten assignment will NOT BE ACCPTED. If you do not know how to write equation, frmula or make graph in MS document, please ask me.) Question 1 (a) If a goa

BMMF5103 Due Date: 24th March
Assignment 1
(NOTE: Please Type your answer in MS word. Handwritten assignment will NOT BE ACCPTED. If you do not know how to write equation, frmula or make graph in MS document, please ask me.)
Question 1
(a) If a goal of a firm is to maximize the shareholder’s wealth, does that mean that profit is not important at all? Explain.
(4 marks)
(b) What is agency problem? How can it be reduced?
(4 marks)

(c) By giving one example, describe how corporate social responsibility can be consistent with effort of the management to maximize the firm’s value.
(4 marks)

[Total: 12 MARKS]
Question 2
(a) How much would Roderick have after 6 years if he has $500 now and leaves it invested at 5.5% with annual compounding? That is, find the FV? (2 marks)
(b) Your bank offers a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. If you invest $2,000 in the CD, how much will you have when it matures? That is, find the FV? (2 marks)
(c) Suppose a State of North Carolina bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today? That is, find the PV? (2 marks)
(d) You have purchased a U.S. Treasury bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate will you earn on this bond? (2 marks)
(e) Your investment account pays 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20? (2 marks)
(f) You want to purchase a motorcycle 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today? (3 marks)
(g) What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%? (3 marks)

[TOTAL: 16 MARKS]

Question 3
(a) Your company’s current ratio is 0.5x, while your competitor’s current ratio is 1.5x. Both firms want to “window dress” the coming end-of-year financial statements. As part of the window dressing strategy, each firm will double its current liabilities by adding short-term debt and placing the funds obtained in the cash account. Describe the actual results of these transactions.
(3 marks)

(b) A fire has destroyed a large percentage of the financial records of the Sunlight Inc. You have the task of piecing together information in order to release a financial report. You have found the return on equity to be 18%. If sales were $4 million, the debt ratio was 0.40, and total liabilities were $2 million, what was the return on assets (ROA)?
(5 marks)
(c) Creative Technologies corp. has the following information:

Annual sales $1,200,000
Current liabilities $375,000
Days sales outstanding (DSO) (365-day year) 40
Inventory Turnover ratio 4.8
Current ratio 1.2

The company’s current assets consist of cash, inventories, and accounts receivable. How much cash does the company have on its balance sheet?
(8 marks)

[TOTAL: 16 MARKS]







Question 4
(a) An investment has four possible returns, each with its own probability given here:

Return –12% –2% 8% 30%
Probability 0.2 0.25 0.35 0.2

(i) Calculate expected return
(ii) Calculate the variance and the standard deviations of returns
(4 marks)

(b) HBC is considering three possible capital investment projects. The projected returns depend on the future state of the economy as given here:
Projected Return
State of the Economy Probability of outcome 1 2 3
Recession 0.2 10% 8% 12%
Stable 0.60 15 13 10
Boom 0.2 21 25 8

(i) Calculate each project’s expected return, variance, and standard deviation.
(ii) Rank the projects on the basis of (1) expected return and (2) risk. Which project would you choose?
(8 marks)

(c) Alex is considering investment in a project with beta coefficient of 1.75. What would you recommend him to do if this investment has an 11.5% rate of return, risk free rate is 5.5%, and the rate of return of the market portfolio of assets is 8.5%.
(4 marks)

[TOTAL: 16 MARKS]