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Questions and Answers of Finance

Ronen Consulting has just realized an accounting error that has resulted in an unfunded liability of $398,930 due in 28 years. In other words, the company will need $398,930 in 28 years. Toni
Seven years ago, Lance Murdock purchased a wooden statue of a Conquistador for $7,600 to put in his home office. Lance has recently married, and his home office is being converted into a sewing room.
If you were offered $1,079.50 ten years from now in return for an investment of $500 currently, what annual rate of interest would you earn if you took the offer?
An insurance agent just offered you a new insurance product that will provide you with $2,376.50 ten years from now if you invest $700 today. What annual rate of interest would you earn if you
You lend a friend $10,000, for which your friend will repay you $27,027 at the end of five years. What interest rate are you charging your “friend”?
You’ve run out of money for college, and your college roommate has an idea for you. He offers to lend you $15,000, for which you will repay him $37,313 at the end of five years. If you took this
You are offered $100,000 today or $300,000 in 13 years. Assuming that you can earn 11 percent on your money, which should you choose?
After examining the various personal loan rates available to you, you find that you can borrow funds from a finance company at 12 percent compounded monthly or from a bank at 13 percent compounded
You have a choice of borrowing money from a finance company at 24 percent compounded monthly or borrowing money from a bank at 26 percent compounded annually. Which alternative is the most attractive?
Based on effective interest rates, would you prefer to deposit your money into Springfield National Bank, which pays 8.0 percent interest compounded annually, or into Burns National Bank, which pays
What is the future value of each of the following streams of payments?a. $500 a year for 10 years compounded annually at 5 percentb. $100 a year for 5 years compounded annually at 10 percentc. $35 a
What is the present value of the following annuities?a. $2,500 a year for 10 years discounted back to the present at 7 percentb. $70 a year for 3 years discounted back to the present at 3 percentc.
You are graduating from college at the end of this semester and after reading. The Business of Life box in this chapter, you have decided to invest $5,000 at the end of each year into a Roth IRA for
Nicki Johnson, a sophomore mechanical engineering student, received a call from an insurance agent who believes that Nicki is an older woman who is ready to retire from teaching. He talks to her
Mr. Bill S. Preston, Esq., purchased a new house for $80,000. He paid $20,000 up front on the down payment and agreed to pay the rest over the next 25 years in 25 equal annual payments that include
Emily Morrison purchased a new house for $150,000. She paid $30,000 up front and agreed to pay the rest over the next 25 years in 25 equal annual payments that include principal payments plus 10
To pay for your education, you’ve taken out $25,000 in student loans. If you make monthly payments over 15 years at 7 percent compounded monthly, how much are your monthly student loan payments?
To pay for your child’s education, you wish to have accumulated $15,000 at the end of 15 years. To do this, you plan to deposit an equal amount into the bank at the end of each year. If the bank is
You plan to retire in 10 years and buy a house in Oviedo, Florida. The house you are looking at currently costs $100,000 and is expected to increase in value each year at a rate of 5 percent.
The Aggarwal Corporation needs to save $10 million to retire a $10 million mortgage that matures in 10 years. To retire this mortgage, the company plans to put a fixed amount into an account at the
The Knutson Corporation needs to save $15 million to retire a $15 million mortgage that matures in 10 years. To retire this mortgage, the company plans to put a fixed amount into an account at the
Upon graduating from college 35 years ago, Dr. Nick Riviera was already planning for his retirement. Since then, he has made deposits into a retirement fund on a quarterly basis in the amount of
How long will it take to pay off a loan of $50,000 at an annual rate of 10 percent compounded monthly if you make monthly payments of $600?
Alex Karev has taken out a $200,000 loan with an annual rate of 8 percent compounded monthly to pay off hospital bills from his wife Izzy’s illness. If the most Alex can afford to pay is $1,500 per
What is the present value of a 10-year annuity that pays $1,000 annually, given a 10 percent discount rate?
Your folks just called and would like some advice from you. An insurance agent just called them and offered them the opportunity to purchase an annuity for $21,074.25 that will pay them $3,000 per
On December 31, Beth Klemkosky bought a yacht for $50,000. She paid $10,000 down and agreed to pay the balance in 10 equal annual installments that include both the principal and 10 percent
You’ve been offered a loan of $30,000, which you will have to repay in five equal annual payments of $10,000, with the first payment to be received one year from now. What interest rate would you
A firm borrows $25,000 from the bank at 12 percent compounded annually to purchase some new machinery. This loan is to be repaid in equal annual installments at the end of each year over the next
You plan to buy some property in Florida five years from today. To do this, you estimate that you will need $20,000 at that time. You would like to accumulate these funds by making equal annual
You’ve just bought a new flat-screen TV for $3,000 and the store you bought it from offers to let you finance the entire purchase at an annual rate of 14 percent compounded monthly. If you take the
You would like to have $75,000 in 15 years. To accumulate this amount, you plan to deposit an equal sum in the bank each year that will earn 8 percent interest compounded annually. Your first payment
You plan to buy property in Florida five years from today. To do this, you estimate that you will need $30,000 at that time for the purchase. You would like to accumulate these funds by making equal
You are trying to plan for retirement in 10 years and currently you have $150,000 in a savings account and $250,000 in stocks. In addition, you plan to deposit $8,000 per year into your savings
On December 31, Son-Nan Chen borrowed $100,000, agreeing to repay this sum in 20 equal annual installments that include both principal and 15 percent interest on the declining balance. How large will
To buy a new house, you must borrow $150,000. To do this, you take out a $150,000, 30-year, 10 percent mortgage. Your mortgage payments, which are made at the end of each year (one payment each
You’ve just taken on a 20-year, $150,000 mortgage with a quoted interest rate of 6 percent calling for payments semiannually. How much of your first year’s loan payments (the initial two
The state lottery’s million-dollar payout provides for $1 million to be paid over the course of 19 years in amounts of $50,000. The first $50,000 payment is made immediately, and the 19 remaining
Find the future value at the end of Year 10 of an annuity that pays $1,000 per year for 10 years compounded annually at 10 percent. What would be the future value of this annuity if it were
Determine the present value of an annuity due of $1,000 per year for 10 years discounted back to the present at an annual rate of 10 percent. What would be the present value of this annuity due if it
Determine the present value of an ordinary annuity of $1,000 per year for 10 years, assuming it earns 10 percent. Assume that the first cash flow from the annuity comes at the end of Year 8 and the
You take out a 25-year mortgage for $300,000 to buy a new house. What will your monthly payments be if the interest rate on your mortgage is 8 percent? Use a spreadsheet to calculate your answer.
Over the past few years, Microsoft founder Bill Gates’s net worth has fluctuated between $20 and $130 billion. In early 2006, it was about $26 billion—after he reduced his stake in Microsoft from
Lisa Simpson wants to have $1,000,000 in 45 years by making equal annual end-of-the-year deposits into a tax-deferred account paying 8.75 percent annually. What must Lisa’s annual deposit be?
Imagine that Homer Simpson actually invested the $100,000 he earned providing Mr. Burns entertainment five years ago at 7.5 percent annual interest and that he starts investing an additional $1,500 a
Prof. Finance is thinking about trading cars. She estimates she will still have to borrow $25,000 to pay for her new car. How large will Prof. Finance’s monthly car loan payment be if she can get
Ford Motor Company’s current incentives include 4.9 percent APR financing for 60 months or $1,000 cash back on a Mustang. Let’s assume Suzie Student wants to buy the premium Mustang convertible,
Five years ago you took out a $300,000, 25-year mortgage with an annual interest rate of 7 percent and monthly payments of $2,120.34. What is the outstanding balance on your current loan if you just
Calvin Johnson has a $5,000 debt balance on his Visa card that charges 12.9 percent APR compounded monthly. In 2005, Calvin’s minimum monthly payment is 3 percent of his debt balance, which is
Let’s say you deposited $160,000 in a 529 plan (a tax-advantaged college savings plan) hoping to have $420,000 available 12 years later when your first child starts college. However, you didn’t
Selma and Patty Bouvier are twins and both work at the Springfield DMV. Selma and Patty Bouvier decide to save for retirement, which is 35 years away. They’ll both receive an 8 percent annual
What is the present value of the following?a. A $300 perpetuity discounted back to the present at 8 percentb. A $1,000 perpetuity discounted back to the present at 12 percentc. A $100 perpetuity
At a discount rate of 8.5 percent, find the present value of a perpetual payment of $1,000 per year. If the discount rate were lowered to half the size (4.25 percent), what would be the value of
What is the present value of a perpetuity stream of cash flows that pays $1,000 at the end of Year 1, and the annual cash flows grow at a rate of 4 percent per year indefinitely, if the appropriate
What is the present value of a perpetuity stream of cash flows that pays $50,000 at the end of Year 1 and then grows at a rate of 6 percent per year indefinitely? The rate of interest used to
You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:Assuming a 20 percent discount rate, find the present value of eachinvestment.
You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:Assuming a 20 percent interest rate, find the present value of eachinvestment.
You are given three investment alternatives to analyze. The cash flows from these three investments are as follows:What is the present value of each of these three investments if the appropriate
You have an opportunity to make an investment that will pay $100 at the end of the first year, $400 at the end of the second year, $400 at the end of the third year, $400 at the end of the fourth
How much do you have to deposit today so that beginning 11 years from now you can withdraw $10,000 a year for the next five years (Periods 11 through 15) plus an additional amount of $20,000 in the
You would like to have $50,000 in 15 years. To accumulate this amount, you plan to deposit an equal sum in the bank each year that will earn 7 percent interest compounded annually. Your first payment
Milhouse, 22, is about to begin his career as a rocket scientist for a NASA contractor. Being a rocket scientist, Milhouse knows that he should begin saving for retirement immediately. Part of his
Having just inherited a large sum of money, you are trying to determine how much you should save for retirement and how much you can spend now. For retirement, you will deposit today (January 1,
Springfield mogul Montgomery Burns, age 80, wants to retire at age 100 so he can steal candy from babies full time. Once Mr. Burns retires, he wants to withdraw $1 billion at the beginning of each
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.
Don Draper has signed a contract that will pay him $80,000 at the end of each year for the next six years, plus an additional $100,000 at the end of Year 6. If 8 percent is the appropriate discount
Don Draper has signed a contract that will pay him $80,000 at the beginning of each year for the next six years, plus an additional $100,000 at the end of Year 6. If 8 percent is the appropriate
Roger Sterling has decided to buy an ad agency and is going to finance the purchase with seller financing—that is, a loan from the current owners of the agency. The loan will be for $2,000,000
As a result of winning the Gates Energy Innovation Award, you are awarded a growing perpetuity. The first payment will occur in a year and will be for $20,000. You will continue receiving monetary
Your firm has taken on cost-saving measures that will provide a benefit of $10,000 in the first year. These cost savings will decrease each year at a rate of 3 percent forever. If the appropriate
On December 24, 2007, the common stock of Google Inc. (GOOG) was trading for $700.73. One year later the shares sold for only $298.02. Google has never paid a common stock dividend. What
The S&P stock index represents a portfolio comprised of 500 large publicly traded companies. On December 24, 2007, the index had a value of 1,410 and on December 23, 2008, the index was
The common stock of Placo Enterprises had a market price of $12 on the day you purchased it just one year ago. During the past year the stock had paid a $1 dividend and closed at a price of $14. What
Blaxo Balloons manufactures and distributes birthday balloons. At the beginning of the year Blaxo’s common stock was selling for $20 but by year end it was only $18. If the firm paid a total cash
From the following price data, compute the annual rates of return for Asman and Salinas.How would you interpret the meaning of the annual rates ofreturn?
B. J. Gautney Enterprises is evaluating a security. One-year Treasury bills are currently paying 2.9 percent. Calculate the following investment’s expected return and its standard deviation.
Syntex, Inc. is considering an investment in one of two common stocks. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) andreturn?
Caswell Enterprises had the following end-of-year stock prices over the last five years and paid no cash dividends:Time Caswell1 ........$102 ........ 153 ........ 124 ........ 95 ........ 10a.
The common stock of the Brangus Cattle Company had the following end-of-year stock prices over the last five years and paid no cash dividends:TimeBrangus Cattle Company1 ............$152 ............
Use the following end-of-year price data to answer the following questions for the Barris and Carson Companies.a. Compute the annual rates of return for each time period and for both firms.b.
James Fromholtz is considering whether to invest in a newly formed investment fund. The fundâ€™s investment objective is to acquire home mortgage securities at what it hopes will be bargain
Calculate the standard deviation in the anticipated returns found in Problem8â€“1.
Mary Guilott recently graduated from college and is evaluating an investment in two companiesâ€™ common stock. She has collected the following information about the common stock of Firm A and
Answer the following questions using the information provided in Problem 8â€“3:In Problem 8â€“3, Mary Guilott recently graduated from college and is evaluating an investment in two
Penny Francis inherited a $100,000 portfolio of investments from her grandparents when she turned 21 years of age. The portfolio is comprised of the following three investments:a. Based on the
Barry Swifter is 60 years of age and considering retirement. Barryâ€™s retirement portfolio currently is valued at $750,000 and is allocated in Treasury bills, an S&P 500 index fund, and an
Kelly B. Stites, Inc., is considering an investment in one of two portfolios. Given the information that follows, which investment is better, based on risk (as measured by the standard deviation) and
Table 8.1 contains beta coefficient estimates for six firms and from two different sources. Calculate the expected increase in the value of each firm’s shares if the market portfolio were to
Consider the following stock returns for B&A Trucking, Inc. and the market index:Use the visual method described in figure to estimate the beta for B&A. Is the firm more or less risky than the market
a. Given the following holding-period returns, compute the average returns and the standard deviations for the Sugita Corporation and for the market.b. If Sugitaâ€™s beta is 1.18 and the
a. Given the following holding-period returns, compute the average returns and the standard deviations for the Zemin Corporation and for the market.b. If Zeminâ€™s beta is 1.54 and the risk-free
James Fromholtz from Problem is evaluating the investment posed in that problem and wants to apply his recently acquired understanding of the security market line concept to his analysis.a. If the
a. Compute the expected rate of return for Intel common stock, which has a 1.2 beta. The risk-free rate is 3.5 percent and the market portfolio (composed of New York Stock Exchange stocks) has an
a. Compute the expected rate of return for Acer common stock, which has a 1.5 beta. The risk-free rate is 4.5 percent and the market portfolio (composed of New York Stock Exchange stocks) has an
Johnson Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 4 percent, and the expected return for the market is 10 percent. What should be the the
Bobbi Manufacturing, Inc., is considering several investments. The rate on Treasury bills is currently 3.75 percent, and the expected return for the market is 10 percent. What should be the expected
Breckenridge, Inc., has a beta of .85. If the expected market return is 10.5 percent and the risk-free rate is 3.5 percent, what is the appropriate expected return of Breckenridge (using the CAPM)?
CSB, Inc. has a beta of .765. If the expected market return is 10.5 percent and the risk-free rate is 3.5 percent, what is the appropriate expected rate of return of CSB (using the CAPM)?
The expected return for the general market is 10.3 percent, and the risk premium in the market is 5.3 percent. Tasaco, LBM, and Exxos have betas of .864, .693, and .575, respectively. What are
You own a portfolio consisting of the following stocks:The risk-free rate is 3 percent. Also, the expected return on the market portfolio is 10.5 percent.a. Calculate the expected return of your

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