ICE2_513_08 - AGEC513-Spring 2008 Dr Hikaru Peterson Name...

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Unformatted text preview: AGEC513--Spring 2008 Dr. Hikaru Peterson Name________________________ INCLASS EXERCISE 2 Due 8:30am, March 10 (Monday) Total 15 points This exercise is intended to provide more practices for Exam 2 scheduled in class on March 10. I recommend you work through the exercise prior to class on March 7, before Josh goes over the exercise in class. You are encouraged to study from this exercise to prepare for the exam. The completed exercise is due at the beginning of the exam to be graded. As in the exam, every answer must be accompanied by appropriate documentation of steps to receive any credit. If you're using formulas, the complete formula you evaluated to obtain your answer must be documented. If you're using a financial calculator, all inputs used to obtain your answer must be documented. 1. (4 points) In order to increase the value of your dry land crop acreage you decide to start a side business where you grow KSU foundation wheat, then clean, bag, and sell it as seed wheat in your area. The cost of the cleaning/bagging system and modifications to your planter and combine cost $155,000. You have 30% of that in your own liquid assets, and decide to finance the remaining 70% via an open ended line of credit with your bank at 7% interest. a. (1 point) How does your balance sheet for this sidebusiness look? Asset Debt & Equity b. (1 point) Complete the income statement for year 1, assuming a 30% tax rate. Revenue Seed Sales Less Operating Expenses Utilities Bagging Supplies Labor Total Operating Profit Less Interest Expenses Net income before tax Less Taxes Net income 86,000 33,000 10,000 10,000 53,000 c. (1 point) What is the return on equity at the end of year 1? 2 d. (1 point) At the end of year 1, your total investment depreciates 10%. You decide to spend your net income making repairs equal to the depreciation on your machine and spending the rest on amortization. How does your balance sheet look at this point? Asset Debt & Equity 2. (4 points) You're considering buying 5 bonds, each with a par value of $1,000 on the market for 96.75, a coupon rate of 5.2%, and 18 years to maturity. Interest will be paid semiannually. a. (2 points) If you place all cash flows from the bonds into your money market account earning 4.9%, how much are you going to have at the end of 18 years? b. (2 points) What will the annual rate of return on your initial purchase be? 3 3. (7 points) You have the opportunity to lock in a 20year contract to finish pigs for Smithfield/Murphy. Under the terms of the contract, they will take on the risk of purchasing and marketing the hogs and paying all feed, veterinarian, and utility bills. You have the responsibility of providing the production facilities and labor. Your bank agreed to finance your production facilities worth $500,000 as a 20year, adjustablerate loan that is currently at 8%. You estimate that it will take 2,000 hours of your time annually to fulfill the contract. You pay yourself $15 an hour. Smithfield pays you $25,000 each quarter from which you pay your own labor and the bank. a. (2 points) Calculate your quarterly labor and financing costs. b. (1 point) What is your quarterly net income in year 1? c. (2 points) What are the quarterly interest costs due to the bank and the amounts of amortization during the first year? d. (2 points) What is your quarterly net income in year 2 if the loan rate increases to 10%? ...
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