1.Vindaloo Corporation reported retained earnings of $400 on its year-end 2002 balance sheet.During 2003, the company reported a loss of $40 in net income, and it paid out a dividend of $60.What will...

1. A
2. B
3. B
4. B
5. B
6. A
7. E
8. B
9. D
10. D
11. C
12. B
13. B
14. A
15. B
16. B
17. A
18. A
19. E
20. B
21. D
22. A
23. C
24. B
25. D
26. C
27. D
28. C
29. C
30. E
SECTION 2
ANSWER 1.
Balance of retained earnings in the
eginning of year
$400
- loss for the cu
ent year ($40)
- dividend paid ($60)
= balance at the end of year 2003 $300
ANSWER 2.
Return on Assets = Net income/total assets
ROA = 8%
Total assets = $75
Sales = $100
Net Income/total assets = 8%
Net income =8% * $75
Net income = $6
Profit margin = Net profit/ Sales
Profit margin = 6/100
Profit margin = 6%
ANSWER 3.
Assets = $200
Sales = $100
Retention ratio = 40%
Equity multiplier = 2.0
Equity multiplier = total assets / Shareholder’s Equity
Shareholder’s Equity = total assets / Equity multiplier
= $200/2
=$100
Return on Equity = Net Income / Shareholder’s Equity
= (10% * $100) / $100
=10%
Sustainable growth rate = (ROE x Retention Ratio) / (1- ROE x Retention Ratio)
= (0.1 x 0.4) / (1- 0.1 x 0.4)
= 4.17%
ANSWER 4.
Yes, it is violation of the market efficiency.
Market efficiency hypothesis states, that all stocks are properly priced and no abnormal returns can be
earned by searching mispriced stocks and future stock price cannot be predicted as they follow a random
walk pattern.
But when some market return leads to abnormal returns, they violate this hypothesis
In this given situation, the
other-in-law is earning 200% return, however the normal market return is only
15%. Hence his performance is a violation of market efficiency.
ANSWER 5.
Principle = $3000
Weekly installments = $40
No of installments (n) = 52 * 2 =104
Total repaid amount = $40 * 104
=$4160
Interest amount = $4160 - $3000
= $1160
Interest rate (i) = principle* interest rate * no. of years
$1160= $3000*i*2
i= 19.33%
EAR = (1+i/n)^n - 1
I = interest rate = 19.33%
N= no. of installments = 104
EAR = (1+19.33% / 104) ^ 104 – 1
EAR = 21.31%
ANSWER 6.
Cash Flows
Year Project I Project II
0 -$18,000 -$12,000
1 $8,500 $6,500
2 $9,000 $6,000
3 $9,500 $7,000
1. PAYBACK PERIOD METHOD = TOTAL INVESTMENT/ NET ANNUAL CASH INFLOW
Project I Project II
TOTAL INVESTMENT -$18,000 -$12,000
CASH INFLOW YEAR 1 $8500
YEAR2 $9000
YEAR 3 $9,500
$17500
$270000
YEAR1 $6,500
YEAR 2 $6000
YEAR 3 $7000
$12500
$19500
PAYBACK PERIOD 2 YEARS 1 MONTH 1 YEAR 11 MONTHS
2. DISCOUNTED PAYBACK METHOD
I = 11%
PROJECT 1 PROJECT 2
Year CF PVF =
1/(1+i)^N
Discounte
d cash
flow =
CF*PVF
Cumulative
discounted
cash flow
CF PVF =
1/(1+i)^N
Discounte
d cash
flow =
CF*PVF
Cumulative
discounted
cash flow
0 -$18,000 1.00 -$18000 -$18000 -$12,000 1.00 -$12,000 -$12,000
1 $8,500 0.901 $7658.5 -$10341.5 $6,500 0.901 $5856.5...