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Questions and Answers of Corporate Finance

You are planning to invest $5000 in an account earning 9% per year for retirement.a. If you put the $5000 in an account at age 23, and withdraw it 42 years later, how much will you have?b. If you
Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are allowed to withdraw the money for the first time. The account currently has $3996 in
You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs $5000. You plan to put down $1000 and borrow $4000. You will need to make annual payments of $1000 at
You currently have a one-year-old loan outstanding on your car. You make monthly payments of $300. You have just made a payment. The loan has four years to go (i.e., it had an original term of five
You plan to deposit $500 in a bank account now and $300 at the end of one year. If the account earns 3% interest per year, what will the balance be in the account right after you make the second
You have just received a windfall from an investment you made in a friend’s business. She will be paying you $10,000 at the end of this year, $20,000 at the end of the following year, and $30,000
Suppose you receive $100 at the end of each year for the next three years.a. If the interest rate is 8%, what is the present value of these cash flows?b. What is the future value in three years of
You have a loan outstanding. It requires making three annual payments of $1000 each at the end of the next three years. Your bank has offered to allow you to skip making the next two payments in lieu
You want to endow a scholarship that will pay $10,000 per year forever, starting one year from now. If the school’s endowment discount rate is 7%, what amount must you donate to endow the
How would your answer to Problem 7 change if you endow it now, but it makes the first award to a student 10 years from today?
The British government has a consol bond outstanding paying £100 per year forever. Assume the current interest rate is 4% per year.a. What is the value of the bond immediately after a payment is
What is the present value of $1000 paid at the end of each of the next 100 years if the interest rate is 7% per year?
Your grandmother has been putting $1000 into a savings account on every birthday since your first (that is, when you turned one). The account pays an interest rate of 3%. How much money will be in
Assume that your parents wanted to have $160,000 saved for college by your eighteenth birthday and they started saving on your first birthday. They saved the same amount each year on your birthday
When you purchased your car, you took out a five-year annual-payment loan with an interest rate of 6% per year. The annual payment on the car is $5000. You have just made a payment and have now
You figure that the total cost of college will be $100,000 per year 18 years from today. If your discount rate is 8% compounded annually, what is the present value today of 4 years of college costs
Assume that Social Security promises you $40,000 per year starting when you retire 45 years from today (the first $40,000 will come 45 years from now). If your discount rate is 7%, compounded
When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of attention for his "$252 million" contract (the total of the payments promised was $252 million). Assume the following
You are trying to decide how much to save for retirement. Assume you plan to save $5000 per year with the first investment made 1 year from now. You think you can earn 10% per year on your
A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $1000. Each year after that, you will receive a payment on the anniversary of the last
You are thinking of building a new machine that will save you $1000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 2% per year forever. What is
When Alfred Nobel died, he left the majority of his estate to fund five prizes, each to be awarded annually in perpetuity starting one year after he died (the sixth one, in economics, was added
You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug’s profits will be $2 million in its first year and that this
A rich aunt has promised you $5000 one year from today. In addition, each year after that, she has promised you a payment (on the anniversary of the last payment) that is 3% larger than the last
You are thinking about buying a savings bond. The bond costs $50 today and will mature in 10 years with a value of $100. What annual interest rate will the bond earn?
You have an investment account that started with $1000 ten years ago and which now has grown to $5000.a. What annual rate of return have you earned (you have made no additional contributions to the
You have an investment opportunity that requires an initial investment of $5000 today and will pay $6000 in one year. What is the rate of return of this opportunity?
You have decided to buy a perpetual bond. The bond makes one payment at the end of every year forever and has an interest rate of 5%. If the bond initially costs $1000, what is the payment every year?
You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The
You are thinking about buying a piece of art that costs $50,000. The art dealer is proposing the following deal: He will lend you the money, and you will repay the loan by making the same payment
You would like to buy the house and take the mortgage described in Problem 27. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow
You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your twenty-second birthday, and you decide, starting today and
You graduate and get a $10,000 check from your grandparents. You decide to save it toward a down payment on a house. You invest it earning 10% per year and you think you will need to have $20,000
A local bank is running the following advertisement in the newspaper: “For just $1000 we will pay you $100 forever!” The fine print in the ad says that for a $1000 deposit, the bank will pay $100
You are thinking of making an investment in a new plant. The plant will generate revenues of $1 million per year for as long as you maintain it. You expect that the maintenance costs will start at
You have just turned 22 years old, have just received your bachelor’s degree, and have accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works
Your bank is offering you an account that will pay 20% interest in total for a two-year deposit. Determine the equivalent discount rate for a period length ofa. six months.b. one year.c. one month.
You are considering two ways of financing a spring break vacation. You could put it on your credit card, at 15% APR, compounded monthly, or borrow the money from your parents, who want an 8% interest
Which do you prefer: a bank account that pays 5% per year (EAR) for three years ora. an account that pays 2.5% every six months for three years?b. an account that pays 7.5% every 18 months for three
You have been offered a job with an unusual bonus structure. As long as you stay with the firm, you will get an extra $70,000 every seven years, starting seven years from now. What is the present
You have found three investment choices for a one-year deposit: 10% APR compounded monthly, 10% APR compounded annually, and 9% APR compounded daily. Compute the EAR for each investment choice.
Your bank account pays interest with an EAR of 5%. What is the APR quote for this account based on semiannual compounding? What is the Annual percentage rate (APR) with monthly compounding?
Suppose the interest rate is 8% APR with monthly compounding. What is the present value of an annuity that pays $100 every six months for five years?
You have been accepted into college. The college guarantees that your tuition will not increase for the four years you attend college. The first $10,000 tuition payment is due in six months. After
You make monthly payments on your car loan. It has a quoted APR of 5% (monthly compounding). What percentage of the outstanding principal do you pay in interest each month?
Suppose Capital One is advertising a 60-month, 5.99% APR motorcycle loan. If you need to borrow $8000 to purchase your dream Harley-Davidson, what will your monthly payment be?
Suppose Oppenheimer Bank is offering a 30-year mortgage with an EAR of 6.80%. If you plan to borrow $150,000, what will your monthly payment be?
You have just taken out a $20,000 car loan with a 6% APR, compounded monthly. The loan is for five years. When you make your first payment in one month, how much of the payment will go toward the
You are buying a house and the mortgage company offers to let you pay a “point” (1% of the total amount of the loan) to reduce your APR from 6.5% to 6.25% on your $400,000, 30-year mortgage with
You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2356 and you have made every payment on time. The
You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000. The mortgage is currently exactly 18
You have just purchased a car and taken out a $50,000 loan. The loan has a five-year term with monthly payments and an APR of 6%.a. How much will you pay in interest, and how much will you pay in
You are thinking about leasing a car. The purchase price of the car is $30,000. The residual value (the amount you could pay to keep the car at the end of the lease) is $15,000 at the end of 36
You have some extra cash this month and you are considering putting it toward your car loan. Your interest rate is 7%, your loan payments are $600 per month, and you have 36 months left on your loan.
You have an outstanding student loan with required payments of $500 per month for the next four years. The interest rate on the loan is 9% APR (monthly). You are considering making an extra payment
Consider again the setting of Problem 19. Now that you realize your best investment is to prepay your student loan, you decide to prepay as much as you can each month. Looking at your budget, you can
If you decide to take the mortgage in Problem 11, Oppenheimer Bank will offer you the following deal: Instead of making the monthly payment you computed in that problem every month, you can make half
Your friend tells you he has a very simple trick for taking one-third off the time it takes to repay your mortgage: Use your Christmas bonus to make an extra payment on January 1 of each year (that
The mortgage on your house is five years old. It required monthly payments of $1402, had an original term of 30 years, and had an interest rate of 10% (APR). In the intervening five years, interest
You have credit card debt of $25,000 that has an APR (monthly compounding) of 15%. Each month you pay a minimum monthly payment only. You are required to pay only the outstanding interest. You have
Your firm has taken out a $500,000 loan with 9% APR (compounded monthly) for some commercial property. As is common in commercial real estate, the loan is a 5-year loan based on a 15-year
In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the United States. What was the real interest rate in 1975? How would the purchasing power of your savings have changed over
If the rate of inflation is 5%, what nominal interest rate is necessary for you to earn a 3% real interest rate on your investment?
Assume the inflation rate is 3% APR, compounded annually. Would you rather earn a nominal return of 5% APR, compounded semiannually, or a real return of 2% APR, compounded quarterly?
You are pleased to see that you have been given a 5% raise this year. However, you read on the Wall Street Journal Web site that inflation over the past year has been 2%. How much better off are you
What is the shape of the yield curve given in the following term structure? What expectations are investors likely to have about future interestrates?
You are thinking about investing $5000 in your friend’s landscaping business. Even though you know the investment is risky and you can’t be sure, you expect your investment to be worth $5750 next
Consider a ten-year bond with a face value of $1000 that has a coupon rate of 5.5%, with semiannual payments.a. What is the coupon payment for this bond?b. Draw the cash flows for the bond on a
Assume that a bond will make payments every six months as shown on the following timeline (using six-month periods):a. What is the maturity of the bond (in years)?b. What is the coupon rate (in
Your company wants to raise $10 million by issuing 20-year zero-coupon bonds. If the yield to maturity on the bonds will be 6% (annually compounded APR), what total principal amount of bonds must you
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value):a. Compute the yield to maturity for each bond.b. Plot the zero-coupon yield
What is the price per $100 face value of a two-year, zero-coupon, risk-free bond?
What is the price per $100 face value of a four-year, zero-coupon, risk-free bond?
For each of the following pairs of Treasury securities (each with $1000 par value), identify which will have the higher price:a. A three-year zero-coupon bond or a five-year zero coupon bond?b. A
The yield to maturity of a $1000 bond with a 7% coupon rate, semiannual coupons, and two years to maturity is 7.6% APR, compounded semiannually. What must its price be?
Assume the current Treasury yield curve shows that the spot rates for 6 months, 1 year, and 1 1/2 years are 1%, 1.1%, and 1.3%, all quoted as semiannually compounded APRs. What is the price of a
Suppose a ten-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of $1034.74.a. What is the bond’s yield to maturity (expressed as an APR with semiannual
Suppose a five-year, $1000 bond with annual coupons has a price of $900 and a yield to maturity of 6%. What is the bond’s coupon rate?
The prices of several bonds with face values of $1000 are summarized in the following table:For each bond, state whether it trades at a discount, at par, or at apremium.
You have purchased a 10% coupon bond for $1040. What will happen to the bond’s price if market interest rates rise?
Suppose a seven-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading with a yield to maturity of 6.75%.a. Is this bond currently trading at a discount, at par, or at a premium?
What was the price of this bond when it was issued?
Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?
Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?
Your company currently has $1000 par, 6% coupon bonds with ten years to maturity and a price of $1078. If you want to issue new ten-year coupon bonds at par, what coupon rate do you need to set?
Below is an option quote on IBM from the CBOE Web site.a. Which option contract had the most trades today?b. Which option contract is being held the most overall?c. Suppose you purchase one option
Suppose you purchase a ten-year bond with 6% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond's yield to maturity was 5% when
What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%?
Which of the bonds A–D is most sensitive to a 1% drop in interest rates from 6% to 5% and why? Which bond is least sensitive? Provide an intuition explanation for your answer.
Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%.You hold the bond for five years before selling it.a. If the bond’s yield to maturity is 6% when you sell it, what is
The following table summarizes the yields to maturity on several one-year, zero-coupon securities:Security Yield (%)Treasury 3.1AAA corporate 3.2BBB corporate 4.2B corporate 4.9a. What is the price
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from Standard &
HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 6.5% (annual payments).
A BBB-rated corporate bond has a yield to maturity of 8.2%. A U.S. Treasury security has a yield to maturity of 6.5%. These yields are quoted as APRs with semiannual compounding. Both bonds pay
You own 20% of the stock of a company that has ten directors on its board. How much representation can you get on the board if the company has cumulative voting? How much representation can you
Anzio, Inc., has two classes of shares. Class B has ten times the voting rights as Class A. If you own 10% of the class A shares and 20% of the Class B shares, what percentage of the total voting
Assume Evco, Inc., has a current stock price of $50 and will pay a $2 dividend in one year; its equity cost of capital is 15%. What price must you expect Evco stock to sell for immediately after
Anle Corporation has a current stock price of $20 and is expected to pay a dividend of $1 in one year. Its expected stock price right after paying that dividend is $22.a. What is Anle’s equity cost
Achi Corp. has preferred stock with an annual dividend of $3. If the required return on Achi’s preferred stock is 8%, what is its price?
Suppose Acap Corporation will pay a dividend of $2.80 per share at the end of this year and a dividend of $3 per share next year. You expect Acap’s stock price to be $52 in two years. Assume that

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