Question 1 [20 marks, maximum one page single space] :
a. Explain the di¤erence between a market-value balance sheet and a book-value balance sheet.
b. What is meant by over-the-counter trading?
c. Distinguish between a …rm’s capital budgeting decision and …nancing decision.
d. Based on the dividend growth model, what are the two components of the total return on a share of a
stock? Which do you think is typically larger? Also, in the context of the dividend growth model, is it true
that the growth rate in dividends and the growth rate in the price of the stock are identical?
Question 2 [Part I and II are separate - 20 marks]:
The …rm of Beryl Agatha had sales of $20,000 in 2005. The cost of goods sold was $13,000, general and
administrative expenses were $2,000, interest expenses were $1,000, and depreciation was $2,000. Working
capital increased $400 and capital expenditures were $1,800. The …rm’s tax rate is 35 percent.
a. What are the …rm’s earnings before interest and taxes?
b. What is the …rm’s net income?
c. What is the …rm’s cash ‡ow from operating activities?
Determine the net income and also the cash ‡ow from operations for the following …rm: $500,000 sales,
$10,000 cash dividends, $300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation
expense, $40,000 interest expense, and a tax rate of 34 percent.
Question 3 [20 marks]:
Your landscaping company can lease a truck for $8, 000 a year (paid at year-end) for 6 years. It can buy
the truck for $40, 000. The truck will be valueless after six years.
a. If the interest rate your company can earn on its funds is 7 percent, is it cheaper to buy or lease?
b. If the lease payments are an annuity due, is it cheaper to buy or lease?
On a recent trip south, you win the super jackpot in the Florida state lottery, with a payo¤ of $4,960,000.
On reading the …ne print, you discover that you have the following two options:
a. You receive $160,000 at the beginning of each year for 31 years. The income would be taxed at an
average rate of 28%. Taxes are withheld when cheques are issued.
b. You receive $1,750,000 now, but you do not have access to the full amount immediately. The $1,750,000
would be taxed at an average rate of 28%. You are able to take $446,000 of the after-tax amount now. The
remaining $814,000 will be placed in a 30-year annuity account that pays $101,055 on a before-tax basis at
the end of each year.
Using a discount rate of 6%, which option should you select?
Question 4 [20 marks]:
Are the following statements true or false? Provide simple examples to support your assessment.
a. If interest rates rise, bond prices rise.
b. If the bond’s yield to maturity is greater than its coupon rate, the price is greater than the bond’s