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Gabriel Health Services Ltd. requires $1.5 million in financing over the next two years. The firm can borrow at 5 percent per year over the two years. However, with some economic forecasting, it has been suggested that financing in the first year will be 3.5 percent and 6.25 percent in the second year. a. Determine the total interest charges under both possibilities.

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Gorgeous Georgie Pty Ltd (Georgie) is a private company with manystrategic investments. The
finance director is concerned that he might be required toconsolidate some of these investments in
accordance with AASB 127. Details of the investment relationshipsare as follows:
(a) Georgie has a 25 percent interest in the share capital of LBXPty Ltd (LBX) which is a company
involved in the same industry as Georgie. The remaining 75 percentof the share capital is owned by
LBX's founders Mr and Mrs T. Mr and Mrs T are unfamiliar with theindustry and so have given
Georgie three out of the five seats available on the board ofdirectors. Georgie takes the lead on all
decisions but the business is closely monitored by Mr and Mrs T whohold the other two board
positions.
(b) Georgie has a substantial loan receivable from BBT Pty Ltd(BBT) but owns no shares in it. BBT,
as a result of the current economic climate has experiencedsignificant trading problems. BBT has
failed to make its regular payments under the loan agreement.Georgie has become concerned about
the recoverability of the loan and has reached an agreement withthe management of BBT that
Georgie's executives will take control of the company's financesfor a period of five years. An
executive of Georgie has been given control of BBT's cheque bookand makes all payments. Georgie
has not gained any seats on BBT's board of directors, which isstill dominated by BBT's share holders.
(c) Georgie owns 50 percent of Aqua Pty Ltd (Aqua) with the other50 percent being owned by Blue
Pty Ltd (Blue). Both companies have equal voting rights and anequal share of seats on the board of
directors. Under an agreement with Blue, Georgie supplies financeto the company on normal
commercial terms. The loan is fully secured against the assets ofthe company. Blue provides the
management and entrepreneurial flair to Aqua. Under the agreementBlue will receive a management
fee tied to the net profits of Aqua after allowing for interestpayments on the loan from Georgie. In
times of no profits the interest payments will still be met butBlue will not receive any remuneration.
(d) Georgie operates as the trustee company for the Georgie TradingTrust. The Trust is a
discretionary trust with the nominated beneficiaries being thedirectors of Georgie. These directors are
Mr M, Mrs A and Mr J. Over the years the Trust has distributed itsincome in the following
proportions: Mr M 70, Mrs A 20, Mr J 10. Under the terms of theTrust Deed Georgie has complete
control over the operating and financing decisions of theTrust.
(e) Georgie holds a 75 percent interest in JIB Pty Ltd (JIB). Theinterest was created when Georgie
Charles Sturt University Subject Outline
ACC322 201130 W I-12 February 2011-Version 1 Page 13 of 19
converted a substantial loan it made to JIB into equity at theinvitation of JIB when JIB began to trade
poorly and recovery of the loan seemed uncertain. JIB has a largedeficiency in net assets and has
been consolidated for many years. Georgie is a passive investor,having no seats on the board of
directors and no say in the financing or operating decisions ofJIB.
Required
Advise Georgie's finance director of AASB 127's requirements withrespect to control. For each of the
above investments indicate where the control rests and whether ornot consolidation is required. Give
reasons for each piece of advice.

1. If a firm wants to grow at a rate faster than its sustainablegrowth rate, it could _____.
I. issue new equity shares
II. increase its debt ratio
III. increase its dividend payout ratio
IV. reduce its return on sales
A. I and II only
B. III and IV only
C. I, II and III only
D. II and III only
E. I, II, III and IV

2. The box Store has an inventory period of 50 days, areceivables period of 55 days and a payables period of 40 days.Compute the cash cycle time.
A. 35 days
B. 45 days
C. 65 days
D. 105 days
E. 145 days

3. What is the sustainable growth rate for a firm with netincome of $2.5 million, cash dividends of $1.5 million, and acurrent and expected return on equity of 18%?
A. 18.0%
B. 15.4%
C. 10.8%
D. 7.2%
E. 4.9%

4. As of the most recent fiscal year end, Box GoTo (BGT) hadtotal assets of $500 million, a current and expected ROE of 13%, adividend payout ratio of 35%, and a ratio of equity to total assetof 40%. BGT projects sales growth of 15% for the current year. Whatis BGT's estimated total external financing need?
A. zero
B. $75 million
C. $58.1 million
D. $46.7 million
E. $32.75 million

5. Consider the situation where you have won a $10 millionlottery to be received in 25 annual equal payments of $400,000.What will happen to the present value of these winnings if theinterest rate increases during the next 25 years?
A. it will not change
B. it will be worth more
C. it will be worth less

6. When you receive your monthly statement regarding your bankcredit card, it shows that the monthly rate of interest is 1.8%.What is the annual effective rate of interest you are being chargedon your credit card?
A. 22.87%
B. 23.87%
C. 14.98%
D. 1.8%
E. 21.6%

7. Calculate the NPV of the following cash flows: you invest$3,000 today and receive back $300 one year from now, $700 twoyears from now and $1,100 four years from now. (Note: nothing threeyears from now) Assume that the interest rate is 7%.
A. $1,269
B. -$4,731
C. -$1,269
D. $4,731
E. $5,470

8. The earnings of BGB Computers have grown from $3.20 (yr0) to$6.90 (yr6) in 6 years. Determine the annual compound rate(CAGR).
A. 8.8%
B. 12.1%
C. 13.7%
D. 46%
E. 16.6%

9. A rule of thumb with using the internal rate of return is toinvest in a project if the IRR is _____________ than theopportunity cost of capital.
A. greater
B. less
C. less than or equal to
D. indeterminate relative to

10. Consider a zero coupon bond (one with zero interestpayments). If the bond has a maturity value in seven years of $1000and you would currently pay $850 for the bond, what is the yield tomaturity?
A. -3.5%
B. -2.35%
C. 23.5%
D. 2.35%
E. 17.6%

11. If you purchased a $10,000 certificate of deposit (CD) todaywith a nominal annual interest rate of 12%, with monthlycompounding, what would be the CD worth when it matures in 6years?
A. $20,471
B. $21,159
C. $20,191
D. $20,208
E. $10,615

12. The manufacturing manager of CyberProducts Inc. estimatesthat she can save the company $16,000 cash per year over the next 8years by implementing a recycling plan. What is the value of thesavings today if the appropriate interest rate for the firm is 9%?Assume cash flows occur at the end of the year.
A. $68,460
B. $117,600
C. $73,020
D. $115,500
E. $88,557

13. You take out a $350,000, 30 year mortgage (monthly paymentsand compounding) at an annual 8 percent rate. The scheduled monthlypayment will be what amount (rounded to nearest dollar)?
A. $28,000
B. $2,591
C. $2,568
D. $2,333
E. $12,911

14. If the exchange rate between the U.S. dollar and theJapanese yen is $0.00745 per yen, the dollar interest rate is 6%per year, and the Japanese interest rate is 7% per year, what isthe "break-even" value of the future dollar/yen exchange rate oneyear from now (the rate at which the returns will have equalvalue)?
A. $135.49 per yen
B. $135.23 per yen
C. $0.00752 per yen
D. $0.00738 per yen
E. $0.00745 per yen

15. What is the real interest rate (rounded to nearest 100th ofa percent) if the nominal interest rate is 9% per year and the rateof inflation is 6% per year?
A. 6.75%
B. 2.75%
C. 2.83%
D. 8.50%
E. 9.00%

16. Suppose your child is 9 years old and you are planning toopen a fund to provide for the child's college education.Currently, tuition for one year of college is $22,000. How muchmust you invest now in order to pay enough for the first year ofcollege nine years from now, if you think you can earn a rate ofinterest that is 4% more than the inflation rate? Assume thattuition moves with inflation.
A. $8,500
B. $10,129
C. $16,988
D. $15,457
E. $21,154

17. You have determined the present value of an expected cashinflow stream. Which of the following would cause the stream tohave a higher present value?
A. The discount rate increases.
B. Total cash flows remain the same but are paid over a shorterperiod of time.
C. The discount rate decreases.
D. Statements (b) and (c) are both correct.
E. Statements (a) and (b) are both correct.

18. Lucinda is currently thirty years old and she plans toretire at age sixty (30 more years to work). She is expected tolive to age eighty-five (25 years of retirement). Her labor incomeis $45,000 per year and she intends to maintain a constant level ofreal consumption spending over the next fifty-five years. Assuminga real interest rate of 4% per year, no taxes, and no growth inreal labor income, what is the value of Lucinda's humancapital?
A. $35,196
B. $40,005
C. $994,888
D. $778,141
E. $45,000

19. Let us suppose you have a choice between investing in a banksavings account which pays 9% compounded annually (Bank Yearly) andone which pays 8.5% compounded daily (Bank Daily). (Assume this isbased on 365 days). What is the Bank Daily effective annual rate(EAR), and using only effective annual rates, which bank would youprefer? (round EARs to 100th of a percent)
A. 8.87%, Bank Yearly
B. 8.87%, Bank Daily
C. 9.00%, either Bank Yearly or Bank Daily (indifferent)
D. 8.50%, Bank Daily
E. 8.50%, Bank Yearly

20. You are 60 years old and are considering whether it pays tobuy an annuity from an insurance company. For a cost of $25,000,the insurance company will pay you $3,000 per year for the rest ofyour life starting one year from now. Assume you can earn 8% peryear on your money in a bank account and you expect to live untilage 80 (another 20 years). What implied interest rate is theinsurance company paying you and should you buy the annuity?
A. Greater than 10%; Yes, buy
B. Greater than 10%; No, don't buy
C. Less than 8%; Yes, buy
D. Less than 8%; No, don't buy
E. Between 8% & 10%; No, don't buy

21-25 are short answer

21. You have just taken out a $300,000, 30 year mortgage(monthly payments and compounding) at an annual 8 percent rate.Scheduled monthly payments are $2,201.29. You decide to pay anadditional $100 each month towards the mortgage (you make thescheduled payment plus an extra $100 each month). How many paymentsmust you make before the mortgage is paid off? (round up to thenext whole payment)

22. If you can at most afford $1,200 a month and current annualmortgage rates are 6%, what is the most you can borrow to be repaidover 30 years? (Assume monthly payments/compounding and round yourfinal answer to the nearest dollar)

23. You want to buy a new Subaru Forester. You plan to borrow theentire purchase price of $25,000. Subaru offers two choices: (i) animmediate $1500 rebate and financing at the regular rate of 7.2%APR for 48 months, or (ii) low percentage financing for 48 months.What financing rate (stated per annum, APR) would make you beindifferent between the rebate and the low percentage loan? (assumemonthly compounding & payments and round your final answer to100th of a percent)

24. Your financial planning client wishes to have investmentsavings in 20 years that will provide $1.0 million dollars ofpurchasing power, measured in today's (real) dollars. The currentbalance of the client's investment account is $75,000. Nominalinvestment rates of return are 9.2% per annum, the expectedinflation rate is 4% per annum, and the real rate of return is 5%per annum. In todayҀ™s (real) dollars, how much must the client saveper month starting at the end of the current month to accomplishthis goal, given these rates of return? Assume monthly compounding.(round your final answer to the nearest dollar)

25. What is the value today of a security that promises to pay$1,000 in one quarter, with payments increasing at 1% per quarterthereafter? Payments are made each quarter forever. Our opportunitycost of capital is 12% per annum. (round your final answer to thenearest dollar)

Read the Ethical Dilemma, Anything for a BUC, and share yourthoughts by answering the following ethical question also posed atthe end of the story. What should you do? When answering thequestion elaborate, expand upon, and support your thoughts.

The bank of Universal City (BUC) is a medium-size state bankingorganization that is located in Louisiana. BUC offers a goodvariety of products and services, including checking and savingsaccounts, a bill-paying service, credit cards, business consulting,insurance, and investing services. The CEO of BUC, Chuck Charles,has publicly stated that he intends to grow the bank's assets by 15percent annually for the next five years. Although 15 percent is afairly robust growth rate, it is not an impossible goal for BUC. nfact, last year, which was the first year the plan was implemented,the bank's assets grew nearly 20 percent. However, much of thegrowth occurred because there was a significant increase inpopulation when a large manufacturing firm relocated to UniversalCity 18 months ago. With only three weeks remaining in the currentfiscal year, Mr. Charles is concerned that actual growth for theyear will fall well short of what is needed to keep the bank ontrack to achieve it's overall growth projections. As a result, Mr.Charles has instructed the vice president in charge of Univest,which is the investment management division of BUC, to find a wayto increase the amount of investment funds the bank currentlymanages. As the assistant to the vice president of Univest, you areresponsible for sales and thus get paid a commission for the fundsthe division manages. Your boss and the CEO of BUC gave you names(leads) of persons and organizations they think are good prospectsfor Univest. After contacting the prospects, you discover the onlyone who seems interested is Rudolph Radcliff, the head of a radicalreligious organization based in Universal City. It has been rumoredthat the organization, which is called Righteous Freedom Choice(RFC) funds foundations based in countries that are not friendly tothe United States. It is suspected that some of the organizationsRFC sponsors support terrorists activities around the world. A fewdays ago, a colleague told you that he thought RFC would be movingits funds to a new investment organization because the firm thatcurrently manages the funds refused to continue as its investmentadviser; it was discovered that the funds had been received fromorganizations that are involved in illicit activities. Thisinformation was reported to your colleague during a conversationthat he had with two prominent businesspersons at a charity galathe previous weekend. Your colleague noted, however, that the toneof the conversation suggested that the two businesspersons were noton friendly terms with Mr. Radcliff. When your colleague relayedthis information to you, you did not ask questions, such as thenames of the businesspersons, because you didn't expect to beinvolved with RFC. Now, you need to make a decision whether topursue RFC's funds to help Univest and BUC meet their growthobjectives. Unfortunately, the colleague who told you theinformation about RFC is on vacation for the next few weeks andcannot be contracted to answer questions you might have. Univest'ssales have been stagnant this year. As a result, if sales don'tincrease substantially during the next several weeks, thecommission you earn will be much lower than normal. And, if yourcommission does not increase, you and your spouse will have toconsider moving from the luxurious house that you purchased fiveyears ago. What should you do?

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