Agricultural Economics 330



Agricultural Economics 330

Examination 1

Instructor: Dr. David J. Leatham

Name: Seat Number: Section:

NOTE: SHOW A TIME LINE AND THE PRESENT VALUE OR FUTURE VALUE FORMULAS USED TO SOLVE EACH PROBLEM INVOLVING TIME. NO POINTS WILL BE GIVEN WITHOUT A TIME LINE AND FORMULAS EVEN IF YOU HAVE THE RIGHT ANSWER!

EXAM POINTS ARE IN PARENTHESIS.

(20) True or False

|True or False | |

| |Question: |

| |An options contract is a contract for the sale of a good at some point in the future at a specified price. |

| |The conversion period is the length of time it takes to retire the principal of a loan. |

| |The present value of an annuity can be calculated by adding each sum of money in the annuity. |

| |In the context of profitability, an investment is acceptable if the Net Present Value is zero or greater. |

| |The Net Present Value represents the investment profit over a zero rate of return on capital. |

| |The price of bonds goes up as interest rates go down. |

| |The market value of a contract is the future value of the remaining payments of a contract compounded at the market |

| |rate. |

| |An investment should always be considered profitable if the total cash inflows are greater than the total cash outflows.|

| |Stock investors are in a residual position in regards to claims on income and assets. |

| |If you want to reduce risk, choose a portfolio of stocks with different characteristics. |

(5) 2. Suppose a firm makes a profit before interest and taxes. Make a list of the entities that may have a claim on this money, or how the money can be used.

A. ______________________________________

B. ______________________________________

C. ______________________________________

D. ______________________________________

E. ______________________________________

(8) 3. Circle the correct word in the following statements.

A. (Secure / Efficient) markets mean that stock prices have adjusted for all information available and there are no sure bargains.

B. (Compounding / Discounting) converts future dollars to equivalent present dollars.

C. Businesses are net (Suppliers / Demanders) of securities.

D. (Annuity / Capital Budget) is series of payments of a fixed amount for a specified number of periods.

(10) 4. Suppose you wish to withdraw $80,000 in four years to buy a Mercedes. How much money would you need to deposit today in the Aggie First National Bank if the bank pays eight-percent interest, compounded annually? [58,802.39]

(10) 5. Suppose you deposit $20,000 in a savings account at Aggie First National Bank. If you have $40,000 in your savings account at the end of 14 years, what was the annual interest rate (assume annual compounding)? [5.076%]

(10) 6. Suppose that you purchase a tractor for $70,000 and sell it in 10 years for $30,000. What is the annualized cost (capital recovery) if your required return on capital is 12%? [PV=60,340.80, Annualized cost=10,679.37]

(12) 7. Suppose that today you purchase a bond that matures in 30 years for $800.00. The bond has a par value of $1,000, and pays a coupon of eight percent semiannually (8s where 8% is an annual rate). If you plan to sell the bond at the end of ten years and you expect that the bond will have a market rate of four percent when you sell it, calculate the annual yield on this ten-year investment. [14.45%]

8. Suppose Aggie International has hired you and are willing to pay you a signing bonus. They give will give you one of three options.

Option A: $10,000 today.

Option B: Pay you a bonus of $1,500 per year at the beginning of the year for eight years (eight annual payments). The first bonus payment will be given today.

Option C: $17,000 in 10 years.

(10) A. Calculate the Present Value of each option if the discount rate is six percent. [A: 1,000, B:9,873.57, C:9,492.71]

(5) B. If you have opportunities to invest your money at six percent, should you choose option A, B, or C? [Choose A]

10) C. Calculate the how much you would have in your savings account in ten years for option A, B, and C if the bonus is put in a savings account drawing six percent compounded annually. [A:17,908.48, B: 17,682.06, C: 17,000]

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