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Questions and Answers of
Corporate Finance
a. If you borrow $ 1,000 and agree to repay the loan in five equal annual payments at an interest rate of 12%, what will your payment be?b. What will your payment be if you make the first payment on
The $40 million lottery payment that you have just won actually pays $2 million per year for 20 years. The interest rate is 8%.a. If the first payment comes in I year, what is the present value of
Home loans typically involve "points," which are fees charged by the lender. Each point charged means that the borrower must pay 1 % of the loan amount as a fee. For example, if the loan is for
A couple will retire in 50 years; they plan to spend about $30,000 a year in retirement, which should last about 25 years. They believe that they can earn 8% interest on retirement savings.a. If they
You believe you will need to have saved $500,000 by the time you retire in 40 years in order to live comfortably. If the interest rate is 6% per year, how much must you save each year to meet your
You believe you will need to have saved $500,000 by the time you retire in 40 years in order to live comfortably. You also believe that you will inherit $100,000 in 10 years. If the interest rate is
You believe you will spend $40,000 a year for 20 years once you retire in 40 years. If the interest rate is 6% per year, how much must you save each year until retirement to meet your retirement goal?
A couple thinking about retirement decide to put aside $3,000 each year in a savings plan that earns 8% interest. In 5 years they will receive a gift of $10,000 that also can be invested.a. How much
A store will give you a 3% discount on the cost of your purchase if you pay cash today. Otherwise, you will be billed the full price with payment due in 1 month. What is the implicit borrowing rate
You've borrowed $4,248.68 and agreed to pay back the loan with monthly payments of $200. If the interest rate is 12% stated as an APR, how long will it take you to pay back the loan? What is the
In a discount interest loan, you pay the interest payment up front. For example, if a I-year loan is stated as $10,000 and the interest rate is 10%, the borrower "pays" .10 x $10,000 = $1,000
You deposit $ 1,000 in your bank account. a. If the bank pays 4% simple interest, how much will you accumulate in your account after 10 years? b. How much will you accumulate if the bank pays
Banks sometimes quote interest rates in the form of "add-on interest." In this case, if a 1 -year loan is quoted with a 20% interest rate and you borrow $ 1,000, then you pay back $1,200. But you
You borrow $1,000 from the bank and agree to repay the loan over the next year in 12 equal monthly payments of $90. However, the bank also charges you a loan initiation fee of $20, which is taken out
First National Bank pays 6.2% interest compounded semiannually. Second National Bank pays 6% interest compounded monthly. Which bank offers the higher effective annual interest rate?
Find the effective annual interest rate for each case. APR Compounding Period 12%.....................................1
Find the APR (the stated interest rate) for each case. Effective Annual Interest Rate Compounding Period 10.00%.............................................................1
Suppose you can borrow money at 8.6% per year (APR) compounded semiannually or 8.4% per year (APR) compounded monthly. Which is the better deal?
If you earn 6% per year on your bank account, how long will it take an account with $100 to double to $200?
In April 2013 a pound of apples cost $1.41, while oranges cost $1.05. Four years earlier the price of apples was only $1.20 a pound and that of oranges was $.91 a pound. a. What was the annual
An engineer in 1950 was earning $6,000 a year. Today she earns $60,000 a year. However, on average, goods today cost 8.8 times what they did in 1950. What is her real income today in terms of
Your consulting firm will produce cash flows of $100,000 this year, and you expect cash flow to keep pace with any increase in the general level of prices. The interest rate currently is 6%, and you
If investors are to earn a 3% real interest rate, what nominal interest rate must they earn if the inflation rate is zero? 4%? 6%?
If investors receive a 6% interest rate on their bank deposits, what real interest rate will they earn if the inflation rate over the year is zero? 3%? 6%?
You will receive $100 from a savings bond in 3 years. The nominal interest rate is 8%. (L05-5)a. What is the present value of the proceeds from the bond?b. If the inflation rate over the next few
Your wealthy uncle established a $1,000 bank account for you when you were born. For the first 8 years of your life, the interest rate earned on the account was 6%. Since then, rates have been only
If the interest rate this year is 8% and the interest rate next year will be 10%, what is the future value of $1 after 2 years? What is the present value of a payment of $1 to be received in 2 years?
What is the value of a perpetuity that pays $100 every 3 months forever? The interest rate quoted on an APR basis is 6%.
Suppose you take out a $100,000, 20-year mortgage loan to buy a condo. The interest rate on the loan is 6%, and to keep things simple, we will assume you make payments on the loan annually at the end
If the interest rate is 6% per year, how long will it take for your money to quadruple in value? If the inflation rate is 4% per year, what will be the change in the purchasing power of your money
Good news: You will almost certainly be a millionaire by the time you retire in 50 years. Bad news: The inflation rate over your lifetime will average about 3%. a. What will be the real value of $1
In the summer of 2007, Zimbabwe's official inflation rate was about 110% per month. What was the annual inflation rate?
You plan to retire in 30 years and want to accumulate enough by then to provide yourself with $30,000 a year for 15 years.a. If the interest rate is 10%, how much must you accumulate by the time you
A couple will retire in 50 years; they plan to spend about $30,000 a year in retirement, which should last about 25 years. They believe that they can earn 8% interest on retirement-savings. The
a. It is 2015, you've just graduated college, and you are contemplating your lifetime budget. Templates can be found in Connect. You think your general living expenses will average around $50,000 a
Solve the following crossword. (Round your final answers to the nearest dollar, but do not round intermediate calculations.)ACROSS 1. A rich uncle has promised to pay you $3,160 a year for the next
How long will it take for $400 to grow to $1,000 at the following interest rates? a. 4% b. 8% c. 16%
You invest $1,000 today and expect to sell your investment for $2,000 in 10 years. a. Is this a good deal if the interest rate is 6%? b. What if the interest rate is 10%?
Turn back to Table 6.1. What is the current yield of the 6.25% 2030 maturity bond? Why is this more than its yield to maturity?
A 30-year maturity bond with face value of $ 1,000 makes annual coupon payments and has a coupon rate of 8%. What is the bond's yield to maturity if the bond is selling for?a. $900?b. $1,000?c.
The table below shows some data for three zero-coupon bonds. The face value of each bond is $1,000.a. What is the yield to maturity of bond A? (Express your answer as a percentage rather than a
Perpetual Life Corp. has issued consol bonds with coupon payments of $60. (Consols pay interest forever and never mature. They are perpetuities.)a. If the required rate of return on these bonds at
Maxcorp's bonds sell for $1,065.15. The bond life is 9 years, and the yield to maturity is 7%. What is the coupon rate on the bonds? (Assume annual coupon payments.)
You buy an 8% coupon, 10-year maturity bond for $980. A year later, the bond price is $1,200. (Assume annual coupon payments.)a. What is the new yield to maturity on the bond?b. What is your rate of
A bond has 10 years until maturity, carries a coupon rate of 9%, and sells for $1,100. Interest is paid annually.a. If the bond has a yield to maturity of 9% 1 year from now, what will its price be
You buy an 8% coupon, 20-year maturity bond when its yield to maturity is 9%. (Assume semiannual "coupon payments.) Six months later, the yield to maturity is 10%. What is your return over the 6
Consider three bonds with 8% coupon rates, all making annual coupon payments and all selling at face value. The short-term bond has a maturity of 4 years, the intermediate-term bond has maturity 8
A 2-year maturity bond with face value of $1,000 makes annual coupon payments of $80 and is selling at face value. What will be the rate of return on the bond if its yield to maturity at the end of
A bond is issued with a coupon of 4% paid annually, a maturity of 30 years, and a yield to maturity of 7%. What rate of return will be earned by an investor who purchases the bond for $627.73 and
Suppose that you buy a 1 -year maturity bond with a coupon of 7% paid annually. If you buy the bond at its face value, what real rate of return will you earn if the inflation rate is a. 4%? b.
Suppose that you buy a TIPS (inflation-indexed) bond with a 1-year maturity and a coupon of 4% paid annually. If you buy the bond at its face value, and the inflation rate is 8%: a. What will be your
Suppose that you buy a TIPS (inflation-indexed) bond with a 2-year maturity and a coupon of 4% paid annually. If you buy the bond at its face value, and the inflation rate is 8% in each year: a.
Consider two bonds, a 3-year bond paying an annual coupon of 5% and a 10-year bond also with an annual coupon of 5%. Both currently sell at face value. Now suppose interest rates rise to 10%. a. What
Suppose that investors expect interest rates to fall sharply. Would you expect short-term bonds to offer higher or lower yields than long-term bonds?
The following table shows the prices of a sample of Treasury strips. Each strip makes a single payment at maturity. Calculate the interest rate offered by each of these strips.Years to MaturityPrice,
a. Several years ago, Castles in the Sand Inc. issued bonds at face value at a yield to maturity of 7%. Now, with 8 years left until the maturity of the bonds, the company has run into hard times
Suppose that Casino Royale has issued bonds that mature in 1 year. They currently offer a yield of 20%. However, there is a 50% chance that Casino will default and bondholders will receive nothing.
Bond A is a 10-year U.S. Treasury bond. Bond B is a 10-year corporate bond. True or false? a. If you hold bond A to maturity, your return will be equal to the yield to maturity. b. If you hold bond
A bond's credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 7.5%. A-rated bonds sell at yields of 7.8%. Suppose that a 10-year bond with a
Suppose interest rates increase from 8% to 9%. Which bond will suffer the greater percentage decline in price: a 30-year bond paying annual coupons of 8% or a 30-year zero-coupon bond?
Look again at the previous question. Can you explain intuitively why the zero exhibits greater interest rate risk even though it has the same maturity as the coupon bond?
Consider two 30-year maturity bonds. Bond A has a coupon rate of 4%, while bond B has a coupon rate of 12%. Both bonds pay their coupons semiannually. a. Construct an Excel spreadsheet showing the
Slush Corporation has two bonds outstanding, each with a face value of $2 million. Bond A is secured on the company's head office building; bond B is unsecured. Slush has suffered a severe downturn
A General Power bond carries a coupon rate of 8%, has 9 years until maturity, and sells at a yield to maturity of 7%. (Assume annual interest payments.)a. What interest payments to bondholders
A bond has 8 years until maturity, carries a coupon rate of 8%, and sells for $1,100.a. What is the current yield on the bond?b. What is the yield to maturity if interest is paid once a year?c. What
One bond has a coupon rate of 8%, another coupon rate of 12%. Both bonds pay interest annually, have 10-year maturities, and sell at a yield to maturity of 10%.a. If their yields to maturity next
Matter's outstanding bond issue has a coupon rate of 10%, and it sells at a yield to maturity of 9.25%. The firm wishes to issue additional bonds to the public at face value. What coupon rate must
Gentleman Gym just paid its annual dividend of $3 per share, and it is widely expected that the dividend will increase by 5% per year indefinitely.a. What price should the stock sell at? The discount
BMM Industries pays a dividend of $2 per quarter. The dividend yield on its stock is reported at 4.8%. What price is the stock selling at?
Reconsider Tattletale News from the previous problem.a. What is your prediction for the stock price in 1 year?b. Show that the expected rate of return equals the discount rate.
"It's competition for information that makes securities markets efficient." Is this statement correct? Explain
Some finance scholars cite well-documented behavioral biases to explain apparent cases of market inefficiency. Describe two of these biases.
Why do investments in financial markets almost always have zero NPVs, whereas firms can find many investments in their product markets with positive NPVs?
It seems that every month we read an article in The Wall Street Journal about a stock picker with a marvelous track record. Do these examples mean that financial markets are not efficient?
The president of Good Fortunes Inc. states at a press conference that the company has a 30-year history of ever-increasing dividend payments. Good Fortunes is widely regarded as one of the best-run
"Long-term interest rates are at record highs. Most companies, therefore, find it cheaper to finance with common stock or relatively inexpensive short-term bank loans." Discuss.
In Section 7.6 we gave two examples of market anomalies (the earnings announcement puzzle and the new-issue puzzle). Do you think that behavioral finance can help to explain these anomalies?
Computer Corp. reinvests 60% of its earnings in the firm. The stock sells for $50, and the next dividend will be $2.50 per share. The discount rate is 15%. What is the rate of return on the
Phoenix Industries has pulled off a miraculous recovery. Four years ago it was near bankruptcy. Today, it announced a $ 1 per share dividend to be paid a year from now, the first dividend since the
a. Return to the previous problem, and compute the value of Better Mousetraps for assumed sustainable growth rates of 6% through 9%, in increments of .5%.b. Compute the percentage change in the value
If the yield curve is downward-sloping, meaning that long-term interest rates are lower than short-term interest rates, what might investors believe about future short-term interest rates?
Amazon.com has never paid a dividend, but in July 2013 the market value of its stock was $139 billion. Does this invalidate the dividend discount model?
Steady As She Goes Inc. will pay a year-end dividend of $3 per share. Investors expect the dividend to grow at a rate of 4% indefinitely.a. If the stock currently sells for $30 per share, what is the
If the opportunity cost of capital is 11%, which of these projects is worth pursuing?
A proposed nuclear power plant will cost $2.2 billion to build and then will produce cash flows of $300 million a year for 15 years. After that period (in year 15), it must be decommissioned at a
A new computer system will require an initial outlay of $20,000, but it will increase the firm's cash flows by $4,000 a year for each of the next 8 years. Is the system worth installing if the
Here are the cash flows for a project under consideration:a. Calculate the project's net present value for discount rates of 0, 50%, and 100%.b. What is the IRR of the project?
Here are the cash flows for two mutually exclusive projects:a. At what interest rates would you prefer project A to B? (Hint: Try drawing the NPV profile of each project.)b. What is the IRR of each
Consider this project with an internal rate of return of 13.1%. Should you accept or reject the project if the discount rate is 12%? What is project NPV?YearCash
Consider projects A and B:Calculate IRRs for A and B. Which project does the IRR rule suggest is best? Which project is really best?
You are offered the chance to participate in a project that produces the following cash flows:The internal rate of return is 13.6%. If the opportunity cost of capital is 12%, would you accept
Consider the following cash flows:a. Confirm that one internal rate of return on this project is (a shade above) 7% and that the other is (a shade below) 34%.b. What is project NPV if the discount
Consider the following projects:a. Calculate the profitability index for A and B assuming a 22% opportunity cost of capital. b. According to the profitability index rule, which project(s) should you
You are a manager with an investment budget of $8 million. You may invest in the following projects. Investment and cash-flow figures are in millions of dollars.a. Why might these projects have
Consider projects A and B with the following cash flows:a. Which project has the higher NPV if the discount rate is 10%?b. Which has the higher profitability index?c. Which project is most
If you insulate your office for $10,000, you will save $1,000 a year in heating expenses. These savings will last forever. a. What is the NPV of the investment when the cost of capital is 8%?
A project that costs $2,500 to install will provide annual cash flows of $600 for the next 6 years.a. The firm accepts projects with payback periods of less than 5 years. What is this project's
A project has a life of 10 years and a payback period of 10 years. What must be true of project NPV?
Here are the expected cash flows for three projects:a. What is the payback period on each of the projects? b. Given that you wish to use the payback rule with a cutoff period of 2 years, which
Here are the cash-flow forecasts for two mutually exclusive projects:a. Which project would you choose if the opportunity cost of capital is 2%?b. Which would you choose if the opportunity cost of
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