Question 1 (10 marks) The manager of Golden Ray Corporation receives a bonus if company profits exceed company profits exceed $1,000,000 this year. During the final week of the year, the manager changes an accounting policy that will increase reported profits from $950,000 to $1,025,000, triggering his bonus. The change in profits of $75,000 will reverse itself in the next year, and the accounting change has no impact on Golden Ray’s cash flow. Discuss the above situation as it relates to both an agency problem and efficient markets. Question 2
(10 marks) John won the lottery on Monday and can take either $50,000 per year for 20 years, or $500,000 today. Bill won the same lottery on Tuesday and has the same options for receiving the cash. A well respected financial advisor is hired by both John and Bill. The advisor recommends that John take the $50,000 per year for 20 years but advises Bill to take the $500,000 up front payment. How is it possible to give different advice to two clients regarding the exact same cash flows?
Question 3 (10 marks) What is meant by the term private placement? What are it´s advantages and disadvantages within the financial markets?
Question 4 (10 marks) You´re considering an investment that you expect will produce an 8% return next year, and you expect that your real rate of return on this investment will be 6%. What do you expect inflation to be next year?
Question 5 (10 marks) What is liquidity, and what is the rationale for its measurement?
Question 6 (10 marks) You are offered $1000 today, $10,000 in 12 years, or $25,000 in 25 years. Assuming that you can earn 11 percent on your money, which offer should you choose?
Question 7 (10 marks) In 10 years you are planning on retiring and buying your dream house in Florida. The house you are looking at currently costs $100,000 and is expected to increase in value each year at a rate of 5% annually. Assuming that you can earn 10% annually on your investments, how much must you invest at the end of each of the next 10 years to be able to buy your dream home when you retire?
Question 8 (10 marks) 8 a)
What is meant by the investor´s required rate of return?
8 b) How can the riskiness of an asset be measured?
8 c) How should the proposed measurement of risk be interpreted?
Question 10 (10 marks) Today, you purchased one share of Latham Corporation common stock for $30. What will the dividend yield, growth rate, and total rate of return be for the year, if the stock pays a dividend of $6.50 in one year, and sells for $32.50 at that time?
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