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RCE2601 ASSIGNMENT2 WITH COMPLETE ANSWERS 100% TRUSTED WORKINGS
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RCE2601 ASSIGNMENT2 WITH COMPLETE ANSWERS 100% TRUSTED WORKINGS
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RCE2601 ASSIGNMENT2 WITH COMPLETE ANSWERS 100% TRUSTED WORKINGSQuestion 1: Financial Ratios
Q: Calculate the current ratio and quick ratio given the following information:
● Current assets: $120,000
● Inventory: $30,000
● Current liabilities: $60,000
A:
● Current ratio = Current assets / Current liabilities
Current ratio=120,00060,000=2.0\text{Current ratio} = \frac{120,000}{60,000} =
2.0Current ratio=60,000120,000=2.0
● Quick ratio = (Current assets - Inventory) / Current liabilities
Quick ratio=120,000−30,00060,000=90,00060,000=1.5\text{Quick ratio}
= \frac{120,000 - 30,000}{60,000} = \frac{90,000}{60,000} = 1.5Quick
ratio=60,000120,000−30,000=60,00090,000=1.5
Question 2: Time Value of Money
Q: What is the future value of $5,000 invested for 5 years at an annual interest rate of 6%
compounded annually?
A:
● Future Value (FV) = Present Value (PV) × (1 + r)^n
FV=5,000×(1+0.06)5=5,000×1.3382=6,691\text{FV} = 5,000 \times (1 + 0.06)^5 =
5,000 \times 1.3382 = 6,691FV=5,000×(1+0.06)5=5,000×1.3382=6,691
Question 3: Break-even Analysis
Q: Calculate the break-even point in units given the following information:
● Fixed costs: $50,000
● Variable cost per unit: $20
● Selling price per unit: $50
A:
● Break-even point (units) = Fixed costs / (Selling price per unit - Variable cost
per unit) Break-even point (units)=50,00050−20=50,00030=1,667 units\
text{Break-even point (units)} = \frac{50,000}{50 - 20} = \frac{50,000}
{30} = 1,667 \text{ units}Break-even point (units)=50−2050,000=3050,000
=1,667 units
Question 4: Cost of Capital
,Q: If a company's debt-equity ratio is 0.5, the cost of debt is 8%, the cost of equity is 12%, and
the tax rate is 30%, what is the company's weighted average cost of capital (WACC)?
A:
● WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)
○ E = Market value of equity
○ D = Market value of debt
○ V = E + D = Total market value of the firm's financing (equity and debt)
○ Re = Cost of equity
○ Rd = Cost of debt
○ Tc = Corporate tax rate
● Given: E/V = 2/3, D/V = 1/3 (since Debt/Equity ratio is 0.5, D/E = 1/2, hence
D/V = 1/3 and E/V = 2/3)
WACC=(23)×0.12+(13)×0.08×(1−0.3)\text{WACC} = \left(\frac{2}{3}\
right) \times 0.12 + \left(\frac{1}{3}\right) \times 0.08 \times (1 -
0.3)WACC=(32)×0.12+(31)×0.08×(1−0.3)
WACC=0.08+0.01867=0.09867≈9.87%\text{WACC} = 0.08 + 0.01867 =
0.09867 \approx 9.87\%WACC=0.08+0.01867=0.09867≈9.87%
Question 5: Dividend Discount Model (DDM)
Q: Calculate the price of a stock expected to pay a dividend of $2 next year, with a dividend
growth rate of 5%, and an investor's required rate of return of 10%.
A:
● Price (P) = Dividend / (Required rate of return - Growth rate)
P=20.10−0.05=20.05=40\text{P} = \frac{2}{0.10 - 0.05} = \frac{2}{0.05}
= 40P=0.10−0.052=0.052=40
Question 6: Internal Rate of Return (IRR)
Q: Calculate the IRR for an investment with the following cash flows:
● Year 0: -$10,000
● Year 1: $3,000
● Year 2: $4,000
● Year 3: $5,000
A: The IRR is the rate (r) that makes the Net Present Value (NPV) of the cash flows
equal to zero. You can use the trial and error method or a financial calculator to find
IRR: NPV=∑CFt(1+r)t=0NPV = \sum \frac{CF_t}{(1 + r)^t} = 0NPV=∑(1+r)tCFt=0
−10,000+3,000(1+r)1+4,000(1+r)2+5,000(1+r)3=0-10,000 + \frac{3,000}{(1 +
r)^1} + \frac{4,000}{(1 + r)^2} + \frac{5,000}{(1 + r)^3} =
0−10,000+(1+r)13,000+(1+r)24,000+(1+r)35,000=0 Using a financial calculator
or software, you would find that the IRR ≈ 12.3%.
Question 7: Net Present Value (NPV)
, Q: Calculate the NPV for an investment with the following cash flows at a discount rate of 8%:
● Initial Investment: $12,000
● Year 1: $3,000
● Year 2: $4,000
● Year 3: $5,000
A: NPV=−12,000+3,000(1+0.08)1+4,000(1+0.08)2+5,000(1+0.08)3NPV = -12,000
+ \frac{3,000}{(1 + 0.08)^1} + \frac{4,000}{(1 + 0.08)^2} + \frac{5,000}{(1 +
0.08)^3}NPV=−12,000+(1+0.08)13,000+(1+0.08)24,000+(1+0.08)35,000
NPV=−12,000+2,777.78+3,429.75+3,969.16=−12,000+10,176.69=−1,823.31NPV
= -12,000 + 2,777.78 + 3,429.75 + 3,969.16 = -12,000 + 10,176.69 = -
1,823.31NPV=−12,000+2,777.78+3,429.75+3,969.16=−12,000+10,176.69=−1,8
23.31
Question 8: Capital Budgeting
Q: Given the following information, decide whether the company should proceed with the
project:
● Initial investment: $50,000
● Cash inflows for 5 years: $15,000 annually
● Required rate of return: 10%
A:
● Calculate NPV: NPV=−50,000+∑15,000(1+0.10)t for t = 1 to 5NPV = -50,000
+ \sum \frac{15,000}{(1 + 0.10)^t} \text{ for t = 1 to
5}NPV=−50,000+∑(1+0.10)t15,000 for t = 1 to 5
NPV=−50,000+15,0001.1+15,0001.12+15,0001.13+15,0001.14+15,0001.1
5NPV = -50,000 + \frac{15,000}{1.1} + \frac{15,000}{1.1^2} + \
frac{15,000}{1.1^3} + \frac{15,000}{1.1^4} + \frac{15,000}
{1.1^5}NPV=−50,000+1.115,000+1.1215,000+1.1315,000+1.1415,000
+1.1515,000
NPV=−50,000+13,636.36+12,396.69+11,269.72+10,245.20+9,313.09=−50
,000+56,861.06=6,861.06NPV = -50,000 + 13,636.36 + 12,396.69 +
11,269.72 + 10,245.20 + 9,313.09 = -50,000 + 56,861.06 =
6,861.06NPV=−50,000+13,636.36+12,396.69+11,269.72+10,245.20+9,313
.09=−50,000+56,861.06=6,861.06 Since NPV is positive, the company
should proceed with the project.
Question 9: Payback Period
Q: Calculate the payback period for an investment with the following cash flows:
● Initial Investment: $20,000
● Year 1: $6,000
● Year 2: $7,000
● Year 3: $8,000
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