Midterm Exam, Summer 2013
Jenny’s New year’s resolution is to start a retirement fund . She has opened an account with a local broker by
depositing $1000 in an investment fund. In the future she plans to invest $500 monthly into the fund. The investment
funds averages a return of 6% APR with monthly compounding
What will she have available for retirement after 30 years?
If Jenny wants a retirement fund of $1 million when she retires in 30 years, how much will she have to invest
each month with everything else the same?
Juan is evaluating his retirement plan. He estimates that he will have saved $750,000 when he retires in an account that earns at an APR of
4.00% compounded monthly. He plans to withdraw $60,000 annually at the end of each year after retiring.
How many years will Juan’s funds last?
To make the funds last 30 years, what APR (with monthly compounding) will he need?
Peggy Sue has $9,000 balance on a credit card today. She is committed to pay it off. The rate on the card is 18% APR with monthly compounding.
How many months would it take for Peggy Sue to reduce the balance to zero if she makes no more charges and makes an electronic payment of
$250 today and then every month thereafter makes a payment of $450?
How many months would it take Peggy Sue to reduce the balance to $1,000 if she makes no more charges and makes a payment at the end of
every month of $500 (no electronic payment today)?
If part a of this question is changed to making a payment of $100, (everything else the same) the function yields a #NUM! error. Why is this?
Honest John’s Car Dealership needs an easy way to determine monthly payments for customers who are inquiring about
cars. John wants a spreadsheet the will allow salespeople to enter the price of the car, the customer’s down payment,
length of the loan in years, and the APR (monthly compounding). For any values of these, the spreadsheet should
automatically display the monthly payment. Prepare this spreadsheet.
Pat Davis has $750,000 in a retirement fund. Pat plans to start taking out funds at the end of the coming
year. He expects that as he ages, he will need less money each year. His plan is to take out 12 monthly
payments of $10,000 in the first year. In the second year he would take out 5% less or 12 payments of
$9,500. Each year thereafter the payments would be similarly reduced by 5% less than the previous
year, etc. The fund earns interest at a rate of 4% EAR.
How much will be in the fund at the end of five years.
How long will the funds last for Pat with this scheme?
It has been proposed to Ruby that she invest $300 at the end of each month (starting at the end of the upcoming month) for 40
years in a high risk fund (no initial deposit) that earns 11% APR with monthly compounding, and then switch the funds in her
retirement years to a more conservative fund that earns a guaranteed 4% APR with monthly compounding. Assuming that the
high risk fund indeed pays at the stated rate, how much could she withdraw (equal amounts) at the start of each year during a
25 retirement period.
Nellie is evaluating two potential investments that she would buy today and sell in 10 years. One is a bond and one is shares of stock .
The 20 year bond has a face value of $100,000 and can be purchased to day for $90,000. It has 10 years until it matures. It pays semi-annual
coupons with an annual rate of 3%.
One hundred shares of the stock can be purchased today for $90,000. The company is forecasted to pay dividends of $500 quarterly for the 100
shares. The value of the stock in 10 years is expected to be $120,000.
Which is the better investment based on the rate of return of each investment if they have equal risks?
The Income and Balance Statements for the XYZ company is shown below for 2011 and 2012. What conclusions for a potential investor can be
drawn from these? Explain how you arrived at your conclusions. Record your answer below the financial statements.
Returns, Credits, etc.
Net Sales (Revenue) $14,995,000
Cost of Goods Sold (COGS)
Selling General and Admin.
Research and Development
Earnings Before Interest and Taxes (EBIT)
Income Tax @ 30%
Finished Goods Inventory
Total Current Assets
Long term Assets
Equipment and machines
Total Fixed Assets
Total Current Liabilities
Long Term Liabilities
Bank Loans @ 6%
Mortgage @ 4.5%
Total Long Term Liabilities
Total Liabilities and Stockholders equity
Current Stock Price
Current Outstanding Shares
The XYZ company, INC. has the following financial statements for 2012. Below are listed the forecasted
changes from 2012 to 2013. Revise the 2012 numbers to show the 2013 numbers in column E that would reflect
these changes. In the solution, show all line items (changes and unchanged) for 2013. The Income tax rate is
Sales increase by
Hourly wages increase by
Staff salaries increased by
Interest declined by
Everything else stayed the same
Office Equipment rental
Marketing and Web site
Taxes @ 20%
Cash on Hand Beginning of Year
Loan Principal Paid
Change in cash balance
Cash on Hand End of Year
You would like to retire in 10 years. You have been a conservative investor in your 401K fund over the past 25 years and your retirement fund has fallen behind and 10 years
may not be enough time to build a comfortable retirement fund given your current strategy. You have studied the current economy and now must choose whether you invest
in bonds, stocks, or a combination to help you reach your goal. Develop and justify your 10 year strategy based on the pros and cons that an investor should consider when
considering investing in Bonds versus Stocks or both. Answer in the space below, or in an attached Word document. Limit this to 500 words or less.