Why are forecasting and budgeting essential practices for businesses, governmental agencies, and individuals
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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