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#1. Assume that the nominal spot exchange rate (USD/AUD) increases by 6.5 percent due to a shift in global capital flows. At the same time, the Australian price level decreases by 2.5 percent due to a decrease in demand for Australian exports, while the U.S. price level increases by 2 percent due to an increase in domestic consumption. Assuming that these changes occur simultaneously, what is the approximate change in the real exchange rate between the United States and Australia?
Sure! Here’s the answer with an explanation:
To calculate the change in the real exchange rate, we need to use the formula:
Real Exchange Rate = (Nominal Exchange Rate * Domestic Price Level) / Foreign Price Level
The initial nominal exchange rate is 1 USD = 1 AUD. After the 6.5% increase, the new exchange rate becomes:
New Nominal Exchange Rate = 1 USD / (1 AUD * 1.065) = 0.9388 USD/AUD
The Australian price level decreased by 2.5%, which means that the new domestic price level is 0.975 times the initial level. The U.S. price level increased by 2%, which means that the new foreign price level is 1.02 times the initial level. Substituting these values into the formula, we get:
New Real Exchange Rate = (0.9388 * 0.975) / 1.02 = 0.8938
To calculate the percentage change in the real exchange rate, we can use the following formula:
Percentage Change = (New Value – Old Value) / Old Value * 100
The old real exchange rate was 1, so the percentage change is:
Percentage Change = (0.8938 – 1) / 1 * 100 = -10.62%
The closest answer choice to this value is A) 1.80 percent, but since this is a multiple-choice question, we can see that none of the answer choices match the actual percentage change in the real exchange rate. Therefore, the correct answer is D) None of the above.
#2. Which of the following statements is least likely true for a normal probability distribution with a mean of 50 and a standard deviation of 10?
D) The distribution is skewed to the left.
This statement is not true for a normal distribution. Normal distributions are symmetric and bell-shaped, and they do not exhibit any skewness. Therefore, option D is the least likely true statement for a normal distribution.
A) Approximately 68% of the data falls within one standard deviation of the mean.
This statement is true for a normal distribution. In fact, for any normal distribution, approximately 68% of the data falls within one standard deviation of the mean.
B) The distribution is symmetric and bell-shaped.
This statement is also true for a normal distribution. Normal distributions are symmetric, meaning that the data is evenly distributed around the mean, and the shape of the distribution is bell-shaped.
C) The probability of observing a value less than 30 is close to 0.
This statement is true for a normal distribution with a mean of 50 and a standard deviation of 10. To calculate the probability of observing a value less than 30, we can use the standard normal distribution table or a calculator. Using the formula for z-score, we get:
z = (30 – 50) / 10 = -2
The probability of observing a value less than 30 is the same as the area under the curve to the left of z = -2, which is approximately 0.0228 or 2.28%. Therefore, option C is not the least likely true statement for a normal distribution.
#3. A company wants to match the actual historical cost of the inventory items to their physical flow, the inventory valuation method that most likely achieves this objective is:
In a period of rising prices, the cost of inventory items is likely to increase over time. Different inventory valuation methods can be used to account for the cost of inventory items in the company’s financial statements.
A) LIFO (Last-In-First-Out) assumes that the most recent inventory items purchased are sold first. This method results in the cost of goods sold (COGS) being based on the most recent, and typically higher, costs of inventory items. As a result, LIFO may not match the actual historical cost of the inventory items to their physical flow in a period of rising prices.
B) FIFO (First-In-First-Out) assumes that the first inventory items purchased are sold first. This method results in the cost of goods sold being based on the oldest, and typically lower, costs of inventory items. Therefore, FIFO is likely to achieve the objective of matching the actual historical cost of the inventory items to their physical flow in a period of rising prices.
C) Weighted Average Cost assumes that the cost of each inventory item is the average cost of all the inventory items available for sale during the period. This method may not match the actual historical cost of the inventory items to their physical flow in a period of rising prices, as the average cost may not reflect the actual costs of the inventory items sold.
D) Specific Identification identifies the actual cost of each inventory item sold. This method is most accurate in matching the actual historical cost of the inventory items to their physical flow, but it is only practical for businesses with high-value inventory items that can be easily identified and tracked.
#4. In a cash flow statement prepared according to US GAAP, interest paid on long-term debt is most likely included in which activity?
Explanation: The cash flow statement is one of the financial statements required by US GAAP. It reports the sources and uses of cash during a given period of time. The statement is divided into three categories of activities: operating activities, investing activities, and financing activities.
A) Operating activities represent the primary business activities of the company, such as sales and purchases of inventory. Interest paid on long-term debt is not an operating activity.
B) Investing activities represent the purchase and sale of long-term assets, such as property, plant, and equipment. Interest paid on long-term debt is not an investing activity.
C) Financing activities represent the activities that result in changes in the size and composition of the company’s equity and debt capital, such as issuance of debt or equity securities, repurchase of debt or equity securities, or payment of dividends. Interest paid on long-term debt is most likely included in financing activities, as it represents a cash outflow related to the servicing of long-term debt.
D) None of the above is the correct answer as interest paid on long-term debt is typically included in the financing activities section of the cash flow statement.
#5. An analyst is most likely to conclude that there are problems with the quality of a company's earnings if the cash flow earnings index (CFEI), which measures the proportion of earnings that can be attributed to cash flow from operations, were consistently:
A) If the CFEI were consistently above 1.0, an analyst may suspect that the company is using accounting methods to overstate its net income and inflate its earnings. This would suggest that there are problems with the quality of the company’s earnings.
B) If the CFEI were consistently equal to 1.0, this would suggest that the company’s net income is equal to its cash flow from operations. While this may indicate that the quality of the company’s earnings is good, further analysis would be needed to confirm this.
C) If the CFEI were consistently below 1.0, an analyst may suspect that the company is recognizing revenue too conservatively and understating its net income. This would suggest that there are problems with the quality of the company’s earnings.
D) If the CFEI were unrelated to the company’s net income, this would suggest that there is no meaningful relationship between the company’s earnings and its cash flow from operations. This may indicate that the company’s financial statements are not accurately reflecting its performance, which would suggest that there are problems with the quality of the company’s earnings.
#6. A company issues bonds of £5 million face value with a coupon rate of 6% and a maturity of 10 years. The bonds are issued at a premium of 102% of face value. For this issuance, the company will record a:
When a company issues bonds, it receives cash from the bondholders in exchange for a promise to pay back the face value of the bonds at maturity, plus periodic interest payments. The amount of cash received by the company may be greater or less than the face value of the bonds, depending on whether the bonds are issued at a discount or a premium.
In this case, the bonds are issued at a premium of 102% of face value, which means that the company will receive cash of £5.1 million (i.e., £5 million x 1.02) for the issuance. The coupon rate of 6% indicates that the company will pay annual interest of £300,000 (i.e., £5 million x 6%) to the bondholders.
When the bonds are issued, the company will record a credit to bonds payable for the face value of the bonds, which is £5 million. This represents the company’s obligation to pay back the bondholders at maturity. The company will also record a debit to cash for the amount of cash received, which is £5.1 million.
Therefore, the correct answer is A) Credit to bonds payable of £5 million and a debit to cash of £5.1 million. Option B is incorrect because it records the wrong amounts for bonds payable and cash. Option C records an additional £0.1 million debit to cash, which is not correct. Option D records the correct amount for bonds payable, but the wrong amount for cash.
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