Question

MBA/MSF 655, Financial Management & Strateyy 24 Assume the following regarding a growing annuity valuation problem: Your salary at the end of the last year that you work is $90,000. your income stream to begin at the end of your first aume all amounts are "end- payment equal to 70% of your last working year's salary. (Assume all amounts are of-year payments.) You plan to be retired for 25 years. ke your retirement income will grow at a constant rate equal to a 3.07 ( compensate for expected inflation). Using a discount rate of 8%, what is the present value at the beginning of your first year of retirement, i.e. one period prior to the first retirement payment) of your projected zo year retirement income stream? a. 960,730 b. 916,893 c. 672,511 d. 211,573 e. 3,308,543 f. 483, 107 (if using a bubble answer sheet, just write "t" in to select f) 25 Which of the following would least likely be considered as signaling a potential problem regarding the "quality of earnings" for a firm? a. the firm has experienced a significant increase in earnings relative to the industry overall b. the firm's accounts receivable account is increasing at a rate faster than the firm's increase in sales. c. the firm has announced a delay in their release of financial statements due to a change in auditors d. the firm's accounts receivable account is increasing, but at a rate slower than the firm's increase in sales. e. all of the above would be considered signals of potential problems regarding he firms quality of earnings

Answer 1

Year The first year cashflow is 70% of last years working salary. The annual cashflow is growing at the rate of 3.5% to keep u with the inflation The discount rate is 8% The present value =916893 approximately Cash flow Divide by 1.084 number of year Present value 63000 1.080 58333.333 65205.00 1.166 55902.778 3 67487.18 1.260 53573.495 69849.23 1.360 51341.266 72293.95 1.469 49202.047 74824.24 1.587 47151.962 77443.09 1.714 45187.297 80153.59 1.851 43304.493 82958.97 1.999 41500.139 85862.53 2.159 39770.966 88867.72 2.332 38113.843 91978.09 2.518 36525.766 95197.33 2.720 35003.859 98529.23 2.937 33545.365 101977.75 3.172 32147.641 105546.98 3.426 30808.156 109241.12 3.700 29524.483 113064.56 3.996 28294.296 117021.82 4.316 27115.367 121117.58 4.661 25985.560 125356.70 5.034 24902.829 129744.18 5.437 23865.211 134285.23 5.871 22870.827 24 138985.21 6.341 21917.876 143849.69 6.848 21004.631 16 23 Sum 916893.486

The correct answer is (d) the firm accounts receivable is increasing but at a rate slower than the increase in sales. Because if the accounts receivable is increasing at a slow rate then the sales are being either made on cash basis or revenues are collected quickly which is not a negative sign regarding quality of earning. If the firm is experiencing significant Increase in earning relative to industry it might be earning manipulation. Accounts receivables growing faster than sales means that revenues are being recognized too early or too much of credit sales is being done. Change in auditor is also a negative sign regarding the quality of earnings.