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ACTL10001 Chapter Notes - Chapter 5: Countable Set, Financial Transaction, Effective Interest Rate

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orangemole587
11 Jul 2020
School
University of Melbourne
Department
Actuarial Studies
Course
ACTL10001
Professor
Shuanming Li

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Document Summary

Uncertainties that may arise when valuing a series of payments: Uncertain about the number of payments to be made. Uncertain about the amounts of a known number of payments. A discrete random variable can take only one of a countable set of values. The probability function of a discrete random variable x is represented by pr(x=x) where x is a possible value of the random variable. The expected value of a random variable x (e(x)) s defined by the summation of xpr(x=x) over all possible values. E(k(x)) = summation of tpx from t=1 to infinity. If a payment under an insurance policy, or any other financial transaction, depends on the occurrence of a certain event, we call the event a contingent event. The principle of equivalence says that the fair value of the amount paid now is the expected value of the probability distribution.

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Related Questions

1. “These days in particular, international stocks are toovolatile to hold in a diversified portfolio.” Discuss.

2. You work for a publicly traded company that is considering abid for another firm. As part of this work, you have been taskedwith valuing this ‘target’ firm. The target firm is closely held bya single family; the firm is the only valuable asset that thefamily holds. What is the role of idiosyncratic risk in preparingan initial bid for the target firm?

3. True, False or Uncertain (Justify your answer). An economicdownturn may cause many firms to ‘streamline’ their productionactivities, focusing on a single product line. In thosecircumstances, the CAPM is less useful than it would be otherwise,when firms have more diversified lines of business.

4. True, False or Uncertain (Justify your answer). I have theopportunity to hold an equally-weighted portfolio of 10,000investment projects which are uncorrelated with each other, or theeconomy. The investment projects are extremely volatile. Inequilibrium, I should expect to earn approximately the risk-freerate.

1. Beginning inventory plus purchases equals:

a) cost of goods sold

b) goods available for sale

c) net purchases

d) ending inventory

 

2. Accounts receivable:

a) arise from the purchase of goods or services on credit

b) are amounts owed to a business by its customers.

c) are reported on the income statement.

d) will be collected within the discount period or when due.

 

3. A perpetual inventory system will always give updated balances for:

a) goods available for sale and sales revenue

b) inventory and cost of goods sold

c) accounts receivable and inventory

d) Inventory and sales revenue

 

4. What is the primary goal of internal controls for cash payments?

a) To make payments as quickly as possible

b) To ensure that payments are made only for properly authorized transactions

c) To independently verify cash payments

d) To ensure the lowest prices possible are paid

Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017:

may 2016 $186,000
june 186,000
july 372,000
august 540,000
september 720,000
october 360,000
november 360,000
december 90,000
january 2017 180,000

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:

may 2016 $90,000
June 90,000
july 126,000
august 881,000
september 307,000
october 234,000
november 162,000
december 90,000

a.General and administrative salaries are approximately $26,000 a month. Lease payments under long-term leases are $9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are $2,600 a month. Income tax payments of $63,000 are due in September and December. A progress payment of $180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of $90,000 should be maintained throughout the cash budget period.

Prepare a monthly cash budget for the last 6 months of 2016. If no entry required, enter "0". Use minus sign to enter losses, loans outstanding or any other negative amounts.

may june july august september october november december january
collecions and purchases worksheet
sales (gross) $ $ $ $ $ $ $ $ $
collections
during month of sale $ $ $ $ $ $ $ $
during 1st month after sale $ $ $ $ $ $ $ $
during 2nd month after sale $ $ $ $ $ $ $ $
total collections $ $ $ $ $ $
purchases
labor and raw materials $ $ $ $ $ $ $ $
payments for labor and raw materials $ $ $ $ $ $ $
cash gain or loss for month
collections $ $ $ $ $ $
payments for labor and raw materials $ $ $ $ $ $
general and administrative salaries $ $ $ $ $ $
lease payments $ $ $ $ $ $
miscellaneous expenses $ $ $ $ $ $
income tax payments $ $ $ $ $ $
design studio payment $ $ $ $ $ $
total payments $ $ $ $ $ $
net cash gain (loss) during month $ $ $ $ $ $
Loan Requirement or cash surplus
cash at start of month $ $ $ $ $ $
cumulative cash $ $ $ $ $ $
target cash balance $ $ $ $ $ $
cumulative surplus cash or loans outstanding to maintain $90,000 target cash balance
$ $ $ $ $ $

b. Prepare monthly estimates of the required financing or excess funds - that is, the amount of money Bowers will need to borrow or will have available to invest. Round your answers to the nearest dollar. Enter loans outstanding with minus sign.

July $
august $
september $
october $
november $
december $