Prof Double R

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Final Exam

1. Why are forecasting and budgeting essential practices for businesses, governmental agencies, and individuals, and how do these processes help in planning for the amount, sources, and uses of cash?

2. Explain the relationship between microeconomics and macroeconomics. How do individual decisions in microeconomics, such as consumer spending and business production, affect the larger economy? Provide examples of how changes in macroeconomic factors like inflation or unemployment can influence everyday decisions made by households and firms.

3. You purchased a house on January 1, 2022, for
$300,000. You made a down payment of
15% of the house’s value, and the remaining
85% was financed through a
25-year loan with an annual percentage rate (APR) of
4.5%, compounded monthly. Monthly payments are to begin on January 1, 2022. You want to calculate the amount of your
monthly mortgage payment.

Answer: The formula to calculate the monthly payment for a mortgage is:

Excel:

1.
Excel: Open Excel.

1. In cell
A1, type Loan Amount.

1. In cell
B1, type 255000.

1. In cell
A2, type Annual Interest Rate.

1. In cell
B2, type 4.5%.

1. In cell
A3, type Number of Years.

1. In cell
B3, type 25.

1. In cell
A4, type Monthly Payment.

Now, use the
PMT function to calculate the monthly payment:

1. In cell
B4, type the formula:

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=PMT(B2/12, B3*12, -B1)

Explanation of the formula:

· B2/12 is the monthly interest rate (4.5% / 12 months).

· B3*12 is the total number of monthly payments (25 years × 12 months).

· -B1 is the loan amount ($255,000). It’s negative because it represents an outgoing payment.

1. Press
Enter.

Excel will calculate the monthly payment, which should display:

4.
USA Widgets Inc. issues preferred stock that pays an annual dividend of
$4.50 per share. The dividends are expected to grow each year at a rate of
0.25% (a growing perpetuity). The required rate of return for this type of stock is
3.5%. What is the approximate price at which this preferred stock will most likely sell today?

Answer:

Excel: Open Excel.

1. In cell
A1, type Dividend Today.

1. In cell
B1, type 4.50.

1. In cell
A2, type Growth Rate.

1. In cell
B2, type 0.25%.

1. In cell
A3, type Required Rate of Return.

1. In cell
B3, type 3.5%.

1. In cell
A4, type Price Today.

Now, use the formula for the price of a growing perpetuity:

1. In cell
B4, type the formula:

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=B1 * (1 + B2) / (B3 – B2)

Explanation of the formula:

· B1 is the dividend today ($4.50).

· B2 is the growth rate (0.25%).

· B3 is the required rate of return (3.5%).

1. Press
Enter.

Excel will calculate the stock price, which should display:

5. A
$2,000 bond from
Expo Corp. has a coupon rate of
6%, pays interest semiannually, and matures in
eight years. If the yield to maturity (YTM) is
8%, what is the bond’s value today?

Answer:

Excel:

1. Open Excel.

1. In cell
A1, type Face Value.

1. In cell
B1, type 2000.

1. In cell
A2, type Coupon Payment.

1. In cell
B2, type 60.

1. In cell
A3, type Number of Periods.

1. In cell
B3, type 16.

1. In cell
A4, type YTM (Per Period).

1. In cell
B4, type 4%.

Now, calculate the bond value using the
PV function for the coupon payments and the face value.

For the coupon payments: 10. In cell
A5, type PV of Coupons. 11. In cell
B5, type the formula:

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=PV(B4, B3, -B2, 0)

For the face value: 12. In cell
A6, type PV of Face Value. 13. In cell
B6, type the formula:

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=PV(B4, B3, 0, -B1)

Finally, calculate the total bond value: 14. In cell
A7, type Bond Value. 15. In cell
B7, type the formula:

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=B5 + B6

Excel will calculate the bond’s value, which should display:

6.
Ocean Blue Ltd. has issued preferred stock (cumulative) with a par value of
$150.00 and an annual dividend rate of
6.5%. The preferred stock is currently selling for
$50.00 per share. What is the yield or return on this preferred stock?

Answer:

Excel:

1. Open Excel.

1. In cell
A1, type Par Value.

1. In cell
B1, type 150.

1. In cell
A2, type Dividend Rate.

1. In cell
B2, type 6.5%.

1. In cell
A3, type Current Price.

1. In cell
B3, type 50.

Calculate the Annual Dividend:

1. In cell
A4, type Annual Dividend.

1. In cell
B4, type the formula:
=B1*B2

1. Press
Enter. This will calculate the annual dividend as:

Calculate the Yield:

1. In cell
A5, type Yield or Return.

1. In cell
B5, type the formula:
=B4/B3

1. Press
Enter. The result will be:

7. You purchase
150 shares of
ABC Corp at
$350 per share. After
four months, you sell the shares for
$365 per share, and you receive a dividend of
$1.25 per share during that time. What is your total dollar return on the investment, including both capital gains and dividend income?

Answer:

Excel:

1. Open Excel.

1. In cell
A1, type Number of Shares.

1. In cell
B1, type 150.

1. In cell
A2, type Purchase Price per Share.

1. In cell
B2, type 350.

1. In cell
A3, type Selling Price per Share.

1. In cell
B3, type 365.

1. In cell
A4, type Dividend per Share.

1. In cell
B4, type 1.25.

Step 1: Calculate the Capital Gain

1. In cell
A5, type Capital Gain.

1. In cell
B5, type the formula:

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=(B3 – B2) * B1

Press
Enter. This will give you the capital gain of:.

Step 2: Calculate the Dividend Income

1. In cell
A6, type Dividend Income.

1. In cell
B6, type the formula:

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=B4 * B1

Press
Enter. This will give you the dividend income of:

Step 3: Calculate the Total Dollar Return

1. In cell
A7, type Total Dollar Return.

1. In cell
B7, type the formula:

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=B5 + B6

Press
Enter. This will give you the total dollar return of:

8. How does the
standard deviation of returns in a portfolio change as the number of stocks within the portfolio increases? Explain the role of diversification in reducing portfolio risk and whether there is a limit to the benefits of adding more stocks to the portfolio.

9. You are considering investing in a new project that requires an initial investment of
$50,000. The project is expected to generate cash flows of
$15,000 at the end of each of the next
5 years. The required rate of return (discount rate) for this project is
10%. What is the
Net Present Value (NPV) of this investment, and should you proceed with the project?

Answer:

Excel:

1. Open Excel.

1. In cell
A1, type Year.

1. In cells
A2

, type the years
1,
2,
3,
4, and
5 (for the 5 years of cash flows).

1. In cell
B1, type Cash Flow.

1. In cells
B2

, enter the cash flows for each year, which is
15,000 for each year.

1. In cell
B7, type Initial Investment.

1. In cell
C7, enter the
initial investment as
-50,000 (negative because it’s an outflow).

1. In cell
A8, type Discount Rate.

1. In cell
B8, enter the discount rate, which is
10% (0.10).

Step 1: Calculate the NPV using the NPV function:

1. In cell
A9, type NPV.

1. In cell
B9, type the formula:

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=NPV(B8, B2:B6) + C7

·
B8 is the discount rate (10%),

·
B2

are the cash flows for years 1 to 5,

·
C7 is the initial investment (-$50,000).

1. Press
Enter.

Excel will calculate the NPV and display the result, which should be:.

10. John owns five stocks:
United Healthcare,
Pfizer,
Johnson & Johnson,
CVS Health, and
Merck.
Sara owns five stocks:
Microsoft,
Coca-Cola,
Netflix,
Amazon, and
Nike. Based on the industries these companies operate in, who has a more diversified portfolio, and why is diversification important for reducing risk in an investment strategy?

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