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Questions and Answers of
Corporate Finance
If you put up $38,000 today in exchange for a 5.8 percent, 15-year annuity, what will the annual cash flow be?
Given an interest rate of 4.1 percent per year, what is the value at date t = 7 of a perpetual stream of $5,200 payments that begins at date t = 15?
You want to buy a new sports car from Muscle Motors for $68,000. The contract is in the form of a 60-month annuity due at an APR of 6.4 percent. What will your monthly payment be?
Your company will generate $57,000 in annual revenue each year for the next seven years from a new information database. If the appropriate interest rate is 7.8 percent, what is the present value of
If you deposit $4,000 at the end of each of the next 20 years into an account paying 9.7 percent interest, how much money will you have in the account in 20 years? How much will you have if you make
Your financial planner offers you two different investment plans. Plan X is a $30,000 annual perpetuity. Plan Y is a 15-year, $35,000 annual annuity. Both plans will make their first payment one year
You want to have $50,000 in your savings account 12 years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.2 percent
Dinero Bank offers you a five-year loan for $50,000 at an annual interest rate of 7.5 percent. What will your annual loan payment be?
Bond J has a coupon rate of 3 percent. Bond K has a coupon rate of 9 percent. Both bonds have 19 years to maturity, make semiannual payments, and have a YTM of 6 percent. If interest rates suddenly
Bourdon Software has 6.4 percent coupon bonds on the market with 18 years to maturity. The bonds make semiannual payments and currently sell for 106.8 percent of par. What is the current yield on the
Imagination Dragons Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds with a par value of $1,000 each to raise the money. The
Suppose your company needs to raise $47 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 6 percent, and you're evaluating two issue
Bond P is a premium bond with a coupon rate of 10 percent. Bond D has a coupon rate of 4 percent and is currently selling at a discount. Both bonds make annual payments, have a YTM of 7 percent, and
The YTM on a bond is the interest rate you earn on your investment if interest rates don't change. If you actually sell the bond before it matures, your realized return is known as the holding period
Jallouk Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,100
At one point, certain U.S. Treasury bonds were callable. Consider the prices in the following three Treasury issues as of May 15, 2014:The bond in the middle is callable in February 2015. What is the
When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former
Essary Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $948. At this price, the bonds yield 5.9 percent. What must
DMA Corporation has bonds on the market with 14.5 years to maturity, a YTM of 5.3 percent, a par value of $1,000, and a current price of $965. The bonds make semiannual payments. What must the
The 100-year bonds we discussed in the chapter have something in common with junk bonds. Critics charge that, in both cases, the issuers are really selling equity in disguise. What are the issues
Yan Yan Corp. has a $2,000 par value bond outstanding with a coupon rate of 4.9 percent paid semiannually and 13 years to maturity. The yield to maturity of the bond is 3.8 percent. What is the
Union Local School District has a bond outstanding with a coupon rate of 3.7 percent paid semiannually and 16 years to maturity. The yield to maturity on this bond is 3.9 percent, and the bond has a
Locate the Treasury issue in Figure 7.4 maturing in February 2038. What is its coupon rate? What is its bid price? What was the previous day's asked price? Assume a par value of $10,000.
Chamberlain Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,083, make semiannual
You purchase a bond with an invoice price of $1,035. The bond has a coupon rate of 5.9 percent, and there are four months to the next semiannual coupon date. What is the clean price of the bond?
You purchase a bond with a coupon rate of 4.7 percent and a clean price of $951. If the next semiannual coupon payment is due in two months, what is the invoice price?
Shinoda Corp. has 8 percent coupon bonds making annual payments with a YTM of 7.2 percent. The current yield on these bonds is 7.55 percent. How many years do these bonds have left until they mature?
You want to have $2.6 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 10.8 percent and the inflation rate is 3.7 percent. What real amount
A Japanese company has a bond outstanding that sells for 91.53 percent of its ¥100,000 par value. The bond has a coupon rate of 3.4 percent paid annually and matures in 16 years. What is the yield
Sqeekers Co. issued 15-year bonds a year ago at a coupon rate of 4.1 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 4.5 percent, what is the
Heginbotham Corp. issued 20-year bonds two years ago at a coupon rate of 5.3 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
You find a zero coupon bond with a par value of $10,000 and 17 years to maturity. If the yield to maturity on this bond is 4.9 percent, what is the price of the bond? Assume semiannual compounding
TwitterMe, Inc., is a new company and currently has negative earnings. The company's sales are $2.7 million and there are 130,000 shares outstanding. If the benchmark price-sales ratio is 4.3, what
Bayou Okra Farms just paid a dividend of $2.65 on its stock. The growth rate in dividends is expected to be a constant 4.5 percent per year indefinitely. Investors require a return of 15 percent for
Maloney, Inc., has an odd dividend policy. The company has just paid a dividend of $3.50 per share and has announced that it will increase the dividend by $4.50 per share for each of the next five
Momsen Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 20 percent over the following year, and then 6 percent per year
Summers Corp. currently has an EPS of $4.04, and the benchmark PE for the company is 21. Earnings are expected to grow at 5.5 percent per year.a. What is your estimate of the current stock price?b.
In practice, a common way to value a share of stock when a company pays dividends is to value the dividends over the next five years or so, then find the "terminal" stock price using a benchmark PE
Fly Away, Inc., has balance sheet equity of $7.3 million. At the same time, the income statement shows net income of $875,000. The company paid dividends of $345,000 and has 125,000 shares of stock
Consider four different stocks, all of which have a required return of 15 percent and a most recent dividend of $3.75 per share. Stocks W, X, and Y are expected to maintain constant growth rates in
Most corporations pay quarterly dividends on their common stock rather than annual dividends. Barring any unusual circumstances during the year, the board raises, lowers, or maintains the current
Storico Co. just paid a dividend of $2.65 per share. 7Z. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year
The Perfect Rose Co. has earnings of $2.35 per share. The benchmark PE for the company is 18. What stock price would you consider appropriate? What if the benchmark PE were 21?
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company
Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends
Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 30 percent for the next three years, with the growth rate falling off to a constant 4 percent thereafter. If the required
The next dividend payment by Halestorm, Inc., will be $2.04 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $37 per share,
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $10.25, but management expects to reduce the payout by 3 percent per year indefinitely. If you require a return of
Secolo Corporation stock currently sells for $68 per share. The market requires a return of 11 percent on the firm's stock. If the company maintains a constant 3.75 percent growth rate in dividends,
A7X Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 27 percent for the next eight years and then level off to a growth rate of 3.5 percent indefinitely. If the
Navel County Choppers, Inc., is experiencing rapid growth. The company expects dividends to grow at 16 percent per year for the next 11 years before leveling off at 4 percent into perpetuity. The
YGTB, Inc., currently has an EPS of $2.35 and an earnings growth rate of 8 percent. If the benchmark PE ratio is 21, what is the target share price five years from now?
Caan Corporation will pay a $3.56 per share dividend next year. The company pledges to increase its dividend by 3.75 percent per year indefinitely. If you require a return of 11 percent on your
Tell Me Why Co. is expected to maintain a constant 3.9 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.9 percent, what is the required return on the
Estes Park Corp. pays a constant $7.80 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on
Moraine, Inc., has an issue of preferred stock outstanding that pays a $3.50 dividend every year in perpetuity. If this issue currently sells for $85 per share, what is the required return?
What is the profitability index for the following set of cash flows if the relevant discount rate is 10 percent? What if the discount rate is 15 percent? If it is 22 percent?Year ___________Cash
The Sloan Corporation is trying to choose between the following two mutually exclusive design projects:Year _____Cash Flow (1) ____Cash Flow (II)0 ................ -$51,000................
Consider the following two mutually exclusive projects:Year _________Cash Flow (A) _____Cash Flow (B)0 .................-$455,000.................. -$65,0001....................
An investment has an installed cost of $638,400.The cash flows over the four-year life of the investment are projected to be $236,800, $257,380, $225,320, and $167,410. If the discount rate is zero,
RAK Corp. is evaluating a project with the following cash flows:Year _________Cash Flow0 .................. -$41,0001..................... 15,7002...................... 19,4003.....................
An investment project provides cash inflows of $675 per year for eight years. What is the project payback period if the initial cost is $1,700? What if the initial cost is $3,300? What if it is
An investment under consideration has a payback of seven years and a cost of $735,000. If the required return is 11 percent, what is the worst-case NPV? The best-case NPV? Explain. Assume the cash
This problem is useful for testing the ability of financial calculators and spreadsheets. Consider the following cash flows. How many different IRRs are there?Year ___________Cash Flow0
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up." As a result, the cemetery project will provide a net cash inflow of
A project has the following cash flows:Year _________________Cash Flow0 .......................... $53,0001 .......................... -29,0002 .......................... -37,000What is the IRR for
Anderson International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year Cash Flow0 ...................... -$1,450,0001 ...........................
Siva, Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?Year
An investment project has annual cash inflows of $2,800, $3,700, $5,100, and $4,300, for the next four years, respectively. The discount rate is 14 percent. What is the discounted payback period
An investment project costs $14,000 and has annual cash flows of $3,700 for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is 5
You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $15 million, which will be depreciated straight-line to zero
A project that provides annual cash flows of $15,400 for nine years costs $67,000 today. Is this a good project if the required return is 8 percent? What if it's 20 percent? At what discount rate
In March 2014, automobile manufacturer BMW announced plans to invest $1 billion to increase production at its South Carolina plant by 50 percent. BMW apparently felt that it would be better able to
What is the payback period for the following set of BASIC cash-flows?Year Cash Flow0.................... -$7,6001......................
What is the IRR of the following set of cash flows?Year Cash Flow0 ................. -$13,9001 ..................... 6,4002
A firm evaluates all of its projects by applying the IRR rule. If the required return is 14 percent, should the firm accept the following project?Year
Parker & Stone, Inc., is looking at setting up a new manufacturing plant in South Park to produce garden tools. The company bought some land six years ago for $3.5 million in anticipation of
Dog Up! Franks is looking at a new sausage system with an installed cost of $540,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the
Your firm is contemplating the purchase of a new $425,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $30,000 at
In the previous problem, suppose your required return on the project is 11 percent and your pretax cost savings are $150,000 per year. Will you accept the project? What if the pretax cost savings are
You are evaluating two different silicon wafer milling machines. The Techron I costs $270,000, has a three-year life, and has pretax operating costs of $69,000 per year. The Techron n costs $475,000,
Romo Enterprises needs someone to supply it with 140,000 cartons of machine screws per year to support its manufacturing needs over the next five years, and you've decided to bid on the contract. It
Warmack Machine Shop is considering a four- year project to improve its production efficiency. Buying a new machine press for $410,000 is estimated to result in $155,000 in annual pretax cost
Winnebagel Corp. currently sells 30,000 motor homes per year at $73,000 each and 14,000 luxury motor coaches per year at $ 120,000 each. The company wants to introduce a new portable camper to fill
Lang Industrial Systems Company (LISC) is trying to decide between two different conveyor belt systems. System A costs $290,000, has a four-year life, and requires $80,000 in pretax annual operating
Consider a project to supply 100 million postage stamps per year to the U.S. Postal Service for the next five years. You have an idle parcel of land available that cost $850,000 five years ago; if
A proposed new investment has projected sales of $635,000. Variable costs are 44 percent of sales, and fixed costs are $193,000; depreciation is $54,000. Prepare a pro forma income statement assuming
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago
Aria Acoustics, Inc. (AAI), projects unit sales for a new seven-octave voice emulation implant as follows:Year ____________Unit Sales1 ......................... 84,0002 .........................
A proposed cost-saving device has an installed cost of $645,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial
Your company has been approached to bid on a contract to sell 4,800 voice recognition (VR) computer keyboards per year for four years. Due to technological improvements, beyond that time they will be
Consider the following income statement:Sales .......................... $713,500Costs .......................... 497,300Depreciation ................... 87,400EBIT ................................
A proposed new project has projected sales of $164,000, costs of $87,000, and depreciation of $15,200. The tax rate is 35 percent. Calculate operating cash flow using the four different approaches
A piece of newly purchased industrial equipment costs $1,240,000 and is classified as seven-year property under MACRS. Calculate the annual depreciation allowances and end-of-the-year book values for
Consider an asset that costs $730,000 and is depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a five-year project; at the end of the project, the asset can
A five-year project has an initial fixed asset investment of $290,000, an initial NWC investment of $25,000, and an annual OCF of -$35,000. The fixed asset is fully depreciated over the life of the
An asset used in a four-year project falls in the five-year MACRS class for tax purposes. The asset has an acquisition cost of $6,500,000 and will be sold for $1,600,000 at the end of the project. If
Quad Enterprises is considering a new three-year expansion project that requires an initial fixed asset investment of $2.9 million. The fixed asset will be depreciated straight-line to zero over its
Consider a project with the following data: accounting break-even quantity = 14,200 units; cash break-even quantity = 10,300 units; life = five years; fixed costs = $170,000; variable costs = $27 per
At an output level of 53,000 units, you calculate that the degree of operating leverage is 3.21. If output rises to 57,000 units, what will the percentage change in operating cash flow be? Will the
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