1. A broker has advised you not to invest in oil industry stocks because, in her opinion, they are far too risky. She has shown you evidence of how wildly the prices of oil stocks have fluctuated in the recent past. She demonstrated that the standard deviation of oil stocks is very high relative to most stocks. Do you think the broker's advice is sound for a risk averse investor like you? Why or why not?
2. Peter Green bought a $10,000 Honda Civic with 10 percent down and financed the rest with a four-year loan at 8 percent stated annual interest rate, compounded monthly. What is his monthly payment if he starts the payment one month after the purchase?
3. What are the ingredients of financial planning model? Describe each in detail.
4. a. The Klaven Corporation has operating income (EBIT) of $750,000. The company's depreciation expense is $200,000. Klaven is 100 percent equity financed, and it faces a 40 percent tax rate. What is the company's net income? What is its net cash flow?
b. Ritter Corporation's accountants prepared the following financial statements for year-end 20X2. Determine operating cash flow of the company and provide an analysis of the current financial condition of the company.
|
RITTER CORPORATION
|
|
|
Income Statement
|
|
|
19X2
|
|
|
Revenue
|
|
$400
|
|
|
Expenses
|
|
250
|
|
|
Depreciation
|
|
50
|
|
|
Net Income
|
|
$100
|
|
|
Dividends
|
|
$50
|
|
|
|
|
|
|
|
RITTER CORPORATION
|
|
Balance Sheets
|
|
December 31
|
|
|
|
20X2
|
20X1
|
|
Assets
|
|
|
|
|
Current Assets
|
$150
|
$100
|
|
Net fixed assets
|
200
|
100
|
|
Total assets
|
|
$350
|
$200
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
Current liabilities
|
$75
|
$50
|
|
Long-term debt
|
75
|
0
|
|
Stockholders' equity
|
200
|
150
|
|
Total liabilities and equity
|
$350
|
$200
|