Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Question
Chapter 12, Problem 1M
Summary Introduction
Case summary:
Company S hired Person X. Person X accepted the job because he felt that the company had a good potential growth. At the end of the first day, Person C met Person X and introduced him to the 401(k) plan. It is a retirement plan that the companies offer to their employees.
The employee has to contribute money from his pre-tax income to the 401(k) plan. The company would also contribute a maximum of 5 percent of the salary to the plan. The plan has the following options for investments:
- 1. Investment in company stock
- 2. Investment in B “S and P” 500 index fund
- 3. Investment in B small-cap fund
- 4. Investment in B large-company stocks fund
- 5. Investment in B Bond fund
- 6. Investment in B
money market fund
Characters in the case:
- Company S: The recruiter
- Person X: The new employee
- Person C: The employee of Company S working in Finance section of the company.
To determine: The advantages of investing in mutual funds when compared to the company stock.
Introduction:
Mutual fund refers to the investment in a group or portfolio of assets.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
You are the senior accountant for Terrier Company and the Board of Directors is discussing the possibility of implementing a retirement plan for the employees of the company. They have asked for your guidance on whether they should move forward with creating a plan for retirement benefits, and if so, what type of plan would be beneficial to the employees while also creating the least amount of risk for the company (from an accounting and economic standpoint). Prepare a memo to the Board addressing the 3 choices they have:
1) Do not implement a plan
2) Implement a defined contribution plan
3) Implement a defined benefit plan.
In your memo you should define each type of plan (DC vs. DB) and describe the pro’s and con’s of each of the 3 choices. Pro/con arguments should be focused on both the impact to the financial statements AND the impact to the employees of the organization (and how that could ultimately hurt or benefit the business). You should use at least 3 outside sources to…
You are the senior accountant for Terrier Company and the Board of Directors is discussing the possibility of implementing a retirement plan for
the employees of the company. They have asked for your guidance on whether they should move forward with creating a plan for retirement
benefits, and if so, what type of plan would be beneficial to the employees while also creating the least amount of risk for the company (from an
accounting and economic standpoint). Prepare a memo to the Board addressing the 3 choices they have:
1) Do not implement a plan
2) Implement a defined contribution plan
3) Implement a defined benefit plan.
In your memo you should define each type of plan (DC vs. DB) and describe the pro's and con's of each of the 3 choices. Pro/con arguments
should be focused on both the impact to the financial statements AND the impact to the employees of the organization (and how that could
ultimately hurt or benefit the business). You should use at least 3 outside sources to…
Please help with questions 1-3. Not sure how to start this
A JOB AT EAST COAST YACHTS You recently graduated from college and your job search led you to East Coast Yachts. Because you felt the company’s business was seaworthy, you accepted a job offer. The first day on the job, while you are finishing your employment paperwork, Dan Ervin, who works in Finance, stops by to inform you about the company’s 401(k) plan. A 401(k) plan is a retirement plan offered by many companies. Such plans are tax-deferred savings vehicles, meaning that any deposits you make into the plan are deducted from your current pretax income, so no current taxes are paid on the money. For example, assume your salary will be $50,000 per year. If you contribute $3,000 to the 401(k) plan, you will pay taxes on only $47,000 in income. There are also no taxes paid on any capital gains or income while you are invested in the plan, but you do pay taxes when you withdraw money at retirement. As is fairly common, the…
Chapter 12 Solutions
Fundamentals of Corporate Finance
Ch. 12.1 - Prob. 12.1ACQCh. 12.1 - Why are unrealized capital gains or losses...Ch. 12.1 - What is the difference between a dollar return and...Ch. 12.2 - Prob. 12.2ACQCh. 12.2 - Why doesnt everyone just buy small stocks as...Ch. 12.2 - What was the smallest return observed over the 88...Ch. 12.2 - About how many times did large-company stocks...Ch. 12.2 - What was the longest winning streak (years without...Ch. 12.2 - How often did the T-bill portfolio have a negative...Ch. 12.3 - Prob. 12.3ACQ
Ch. 12.3 - What was the real (as opposed to nominal) risk...Ch. 12.3 - Prob. 12.3CCQCh. 12.3 - What is the first lesson from capital market...Ch. 12.4 - In words, how do we calculate a variance? A...Ch. 12.4 - With a normal distribution, what is the...Ch. 12.4 - Prob. 12.4CCQCh. 12.4 - What is the second lesson from capital market...Ch. 12.5 - Prob. 12.5ACQCh. 12.5 - Prob. 12.5BCQCh. 12.6 - What is an efficient market?Ch. 12.6 - Prob. 12.6BCQCh. 12 - Chase Bank pays an annual dividend of 1.05 per...Ch. 12 - The risk premium is computed as the excess return...Ch. 12 - Prob. 12.4CTFCh. 12 - Prob. 12.5CTFCh. 12 - Prob. 12.6CTFCh. 12 - Investment Selection [LO4] Given that Fannie Mae...Ch. 12 - Prob. 2CRCTCh. 12 - Risk and Return [LO2, 3] We have seen that over...Ch. 12 - Market Efficiency Implications [LO4] Explain why a...Ch. 12 - Efficient Markets Hypothesis [LO4] A stock market...Ch. 12 - Semistrong Efficiency [LO4] If a market is...Ch. 12 - Efficient Markets Hypothesis [LO4] What are the...Ch. 12 - Stocks versus Gambling [LO4] Critically evaluate...Ch. 12 - Efficient Markets Hypothesis [LO4] Several...Ch. 12 - Efficient Markets Hypothesis [LO4] For each of the...Ch. 12 - Calculating Returns [LO1] Suppose a stock had an...Ch. 12 - Calculating Yields [LO1] In Problem 1, what was...Ch. 12 - Prob. 3QPCh. 12 - Prob. 4QPCh. 12 - Nominal versus Real Returns [LO2] What was the...Ch. 12 - Bond Returns [LO2] What is the historical real...Ch. 12 - Prob. 7QPCh. 12 - Risk Premiums [LO2, 3] Refer to Table 12.1 in the...Ch. 12 - Calculating Returns and Variability [LO1] Youve...Ch. 12 - Calculating Real Returns and Risk Premiums [LO1]...Ch. 12 - Calculating Real Rates [LO1] Given the information...Ch. 12 - Prob. 12QPCh. 12 - Prob. 13QPCh. 12 - Calculating Returns and Variability [LO1] You find...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Arithmetic and Geometric Returns [LO1] A stock has...Ch. 12 - Using Return Distributions [LO3] Suppose the...Ch. 12 - Prob. 18QPCh. 12 - Distributions [LO3] In Problem 18, what is the...Ch. 12 - Blumes Formula [LO1] Over a 40-year period an...Ch. 12 - Prob. 21QPCh. 12 - Calculating Returns [LO2, 3] Refer to Table 12.1...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Using Probability Distributions [LO3] Suppose the...Ch. 12 - Prob. 1MCh. 12 - Prob. 2MCh. 12 - Prob. 3MCh. 12 - Prob. 4MCh. 12 - A measure of risk-adjusted performance that is...Ch. 12 - Prob. 6M
Knowledge Booster
Similar questions
- Suppose you have a job that pays you $15,000 a year. You receive a credit application in the mail stating that you have been pre-approved for $3,000 in credit, but that you must make at least $18,000 a year to receive the card. What should you do?arrow_forwardSuppose you have just finished your third year of college and expect to graduate with a bachelor's degree in accounting after completing two more semesters of coursework. The salary for entry-level positions with an accounting degree is approximately $48,000 in your area. Shelton Industries has just offered you a position in its northwest regional office. The position has an annual salary of $40,000 and would not require you to complete your undergraduate degree. If you accept the position, you would have to move to Seattle. Required: For each of the following costs, choose 'Yes' to indicate if the cost or benefit is a relevant cost or benefit, irrelevant cost or benefit, sunk cost, or opportunity cost (can choose "Yes" in more than one column if applicable). (Select 'No' in the inappropriate cells.) $40,000 salary from Shelton Anticipated $48,000 salary with an accounting degree Tuition and books for years 1 to college Cost to relocate to Seattle Tuition and books for remaining two…arrow_forwardConsider the following scenario in relation to your Notary, Loan Signing Agent and Marriage officiant practice in Hawaii and determine the opportunity cost of leaving your job to become an entrepreneur. You currently make $90,000 per year at your job plus benefits (equal to 30% of your salary). On January 1 of the New Year, you start your own business. After the first year, your accountant informs you that you made $45,000 and out of that you paid $6,000 for health insurance. What was your opportunity cost? If your opportunity cost is higher than you would like, how can you lower your opportunity cost in the future years?arrow_forward
- Dr. Helen Brown is the sister of one of your old high school teachers. You have been given her email address by someone who thinks she might have advice for you during your job search. Please ‘send’ her an email introducing yourself and asking for help. I'm looking for a current job in accounting.arrow_forward(Comprehensive Problem) Suppose that you are in the fall of your senior year and are faced with the choice of either getting a job when you graduate or going to law school. Of course, your choice is not purely financial. However, to make an informed decision you would like to know the financial implications of the two alternatives. Let's assume that your alternatives are as follows: If you take the "get a job" route you expect to start off with a salary of $45,000 per year. There is no way to predict what will happen in the future, your best guess is that your salary will grow at 5 percent per year until you retire in 41 years. As a law student, you will be paying $25,000 per year tuition for each of the 3 years you are in graduate school. However, you can then expect a job with a starting salary of $70,000 per year. Moreover, you expect your salary to grow by 9 percent per year until you retire 36 years later. Clearly, your total expected lifetime salary will be higher if you become a…arrow_forwardEvaluate Pete Donaldson’s ethical behavior. b. Suppose that you have been hired as the chief finance officer for Donaldson Mining Supplies. You have been told that the $30,000 has been donated to the company. During the second week of your employment, the father-in-law drops in unexpectedly and introduces himself. He then asks you how the company is doing and wants to know if his $30,000 loan is still likely to be repaid in 3 years. Suppose also that same day you overhear an employee mention that the safety equipment is no longer usable because regulations now require a newer and different model. b.1 Assume that you have yet to prepare the financial statements for the loan application. What should you do? b.2 Suppose that the financial statements have been prepared and submitted to the bank. In fact, that morning, you had received a call from the bank, indicating that a decision was imminent and that the line of credit would likely be approved. What should you do under these…arrow_forward
- You are elated to have landed the summer job of your dreams as an accounting intern with Wheaton Corporation, a company providing fertilizer and farm products to Canadian farmers. Your supervisor and mentor, Mr. B. Kount, greets you with a tough assignment on your first day of work. He handed over a sheet containing some hastily scribbled notes and a comment, “I wish to start you off with something light and easy. Here are some notes on our pension fund operations for 2017. Could you please sort this out by the end of the day? And did I tell you our firm is currently with ASPE but considering a switch to IFRS in 2021.” The note contained the following information: Beginning projected benefit obligation (PBO), $568,000.The plan is underfunded by 60% of this amount and the regulatory agencies consider this to be quite heavily underfunded. Past service costs were recorded on January 1, 2017(? To be determined by the Intern). The current service costs for 2017 amounted to…arrow_forwardYour friend started their own company a few years ago. During covid they experienced a lot ofchallenges, especially with leave pay. He also heard about IAS19 but is not sure what it is about. Heis asking for your advice regarding short-term employee benefits, as well as your assistance basedon the following information relating to the company:At the end of the current financial year being the 30 June 2022, the company has 80 middlemanagers, 20 top managers and 10 partners in the company. As compensation for their services,the following compensation packages are awarded:• Middle managers are compensated with an average salary of R900 000 per annum and havea total of 25 days annual leave.• Top managers are compensated with an average salary of R1 200 000 per annum, with atotal of 22 days leave per annum.• Partners in the company are paid an average salary of R1 800 000 per annum.Per their employment contracts, annual leave may be carried forward for one financial period andis…arrow_forward(Comprehensive Problem) Suppose that you are in the fall of your senior year and are faced with the choice of either getting a job when you graduate or going to law school. Of course, your choice is not purely financial. However, to make an informed decision you would like to know the financial implications of the two alternatives. Let's assume that your alternatives are as follows: If you take the "get a job" route you expect to start off with a salary of $35,000 per year. There is no way to predict what will happen in the future, your best guess is that your salary will grow at 3 percent per year until you retire in 44 years. As a law student, you will be paying $30,000 per year tuition for each of the 3 years you are in graduate school. However, you can then expect a job with a starting salary of $80,000 per year. Moreover, you expect your salary to grow by 7 percent per year until you retire 38 years later. Clearly, your total expected lifetime salary will be higher if you become a…arrow_forward
- Case Given: Maysum decided to start a printing company called, Maysum Inc. This company was his dream job and he saved up $30 000 to start the company therefore he didn't need a loan from the bank. Maysum did his first job for $300 to customer Mantao. Mantao paid him $200 and the rest on account. Maysum was running out of supplies so he had to buy pens, notebooks, paper etc for $500. He decided that he should pay his rent for $200 and gas for $100. Maysum was getting really busy and needed to buy a computer. He paid $500 for an Acer laptop on account. He received a call from Mantao who told him she sent him the money she owed him. Maysum is doing really well and decided to buy another store to continue his printing business. The store costs $5000. He needed a loan from the bank to purchase this store. After receiving the loan he decided to pay off the Acer laptop. Prepare 3 financial statements and determine if Maysum is making money. To do: You are going to make up the ledger accounts…arrow_forwardAssume you wrote up a proposal requesting $5000 for charity. The money would be used to buy food that volunteers (employees from the company) would distribute to the homeless on Saturday. The proposal is approved and you receive the money. However, the CEO comes to you and asks, "What will be the return on the investment?" How would you reply?arrow_forwardChristopher Cross graduated from college five years ago with a finance undergraduate degree. Although he is satisfied with his current job, his goal is to become an investment banker. He feels that an MBA degree would allow him to achieve this goal. After examining schools, he narrowed his choice to either Toronto University or Thompson Rivers University. Although internships are encouraged by both schools, to get class credit for internship, no salary can be paid. Other than internships, neither school will allow its students to work while enrolled in its MBA program. Christopher currently works at a fund management firm of Wilcox and Smith. His annual salary at the firm is $60,000 per year, and his salary is expected to increase at 2.5 percent per year until retirement. He is currently 27 years old and expects to work till he is 65 years old. His current job includes a fully paid health insurance plan, and his current average tax rate is 27 percent. Christopher has a savings account…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning
Cornerstones of Cost Management (Cornerstones Ser...
Accounting
ISBN:9781305970663
Author:Don R. Hansen, Maryanne M. Mowen
Publisher:Cengage Learning