Questions and Answers of Contemporary Financial Management

Gibson Company Stockholders Equity, December 31, 2010 ($000)Preferred Stock, $50 par value 1 million shares outstanding $ 50,000 Common Stock, $1 par value 20 million shares authorized 15 million
Over the past 5 years, the dividends of the Gamma Corporation have grown from$0.70 per share to the current level of $1.30 per share (D0). This growth rate (computed to 1=10 of 1 percent accuracy) is
Simtek currently pays a $2.50 dividend (D0) per share. Next year’s dividend is expected to be $3 per share. After next year, dividends are expected to increase at a 9 percent annual rate for 3
What is the current per-share value of JRM Corporation to an investor who requires a 16 percent annual rate of return, if JRM’s current per-share dividend is $2 and is expected to remain at $2 for
The Seneca Maintenance Company currently (that is, as of year 0) pays a common stock dividend of $1.50 per share. Dividends are expected to grow at a rate of 11 percent per year for the next 4 years
Ten years ago, Video Toys began manufacturing and selling coin-operated arcade games. Dividends are currently $1.50 per share, having grown at a 15 percent compound annual rate over the past 5 years.
The chairman of Heller Industries told a meeting of financial analysts that he expects the firm’s earnings and dividends to double over the next 6 years. The firm’s current (that is, as of year
Kruger Associates is considering a substantial investment in the stock of McIntyre Enterprises. McIntyre currently (time 0) pays a dividend of $1.50 per share. This dividend is expected to grow at 15
If Kruger requires a 12 percent rate of return on investments of this type, what value would Kruger place on the McIntyre stock? P=758
Piedmont Enterprises currently pays a dividend (D0) of $1 per share. This dividend is expected to grow at a 20 percent per year rate for the next 2 years, after which it is expected to grow at 6
Over the past 10 years, the dividends of Party Time, Inc. have grown at an annual rate of 15 percent. The current (D0) dividend is $3 per share. This dividend is expected to grow to $3.40 next year,
Canadian National Railway sold 10 million shares of stock to the public at $30 per share. The company received net proceeds from its underwriters of $287,506,114.What was the underwriting spread from
The stock of Carroll’s Bowling Equipment currently pays a dividend (D0) of $3. This dividend is expected to grow at an annual rate of 15 percent for the next 3 years.The dividend is expected to
The stock of Dravo Corporation currently pays a dividend (D) at the rate of $2 per share. This dividend is expected to increase at a 9 percent annual rate for the next 3 years, at a 7 percent annual
The Cremmins Coat Company has recently completed a period of extraordinary growth, due to the popularity of its yellow jackets. Earnings per share have grown at an average compound annual rate of 15
The VSE Corporation currently pays no dividend because of depressed earnings. A recent change in management promises a brighter future. Investors expect VSE to pay a dividend of $1 next year (the end
Sports Novelties, Inc., has experienced an explosion in demand for its feathered foot- ball novelties. The firm currently (time 0) pays a dividend of $0.25 per share. This dividend is expected to
The Blinkelman Corporation has just announced that it plans to introduce a new solar panel that will greatly reduce the cost of solar energy. As a result, analysts now expect the company's earnings,
Watkins, Inc., has experienced an explosion in demand for its ram football novelties. The firm currently (time 0) pays a dividend of $0.50 per share. This dividend is expected to increase to $1.00
Whitehurst Associates is considering a substantial investment in the stock of Ivanhoe Enterprises. Ivanhoe currently (time 0) pays a dividend of $3 per share. This dividend is expected to grow at 15
The Alpha Tool Corporation has never paid a dividend, but the new company president has announced that the firm would pay its first dividend exactly 2 years from now. That dividend is expected to be
The following stock quotations were recently reported in The Wall Street Journal:47.22 31.45 10.3 AT&T T 3.6 21 39.43 0.26 97.15 72.63 0.1 Boeing BA 1.6 31 88.91 –0.85 71.46 52.16 –8.7 JohnsJohns
Blue Moon Corporation has one million shares of common stock outstanding. In a typical annual election for the board of directors, shareholders representing 70 percent of the shares outstanding
The American Association of Individual Investors has put together a list of stockpicking techniques that “stand the test of time.” Given what you learned in the last chapter about valuation,
Konawalski’s Kustom Erdapfel Chips, Inc., is the maker of gourmet German-style potato chips. The company began business three years ago in rural North Carolina and grew quickly as the product
The concept of interest:a. Simple interest is paid on the principal sum only.b. Compound interest is paid both on the initial principal amount and on any interest earned but not withdrawn during
Future (compound) value calculations determine the value at some point in time in the future of a given amount invested today, earning some compound rate of interest, i, per period. L026
Present value calculations determine the value today (present value) of some amount to be received in the future. L026
An annuity is a series of equal periodic payments.a. Ordinary annuity payments are made at the end of each period.b. Annuity due payments are made at the beginning of each period. L026
Future value of an annuity calculations determine the future value of an annuity stream of payments. L026
Present value of an annuity calculations determine the present value of an annuity stream of payments. L026
The net present value rule is the primary decision-making rule used throughout the practice of financial management.a. The net present value of an investment is equal to the present value of the
Other important topics includea. Compounding frequencyb. Determining the present value of perpetuitiesc. Determining the present value of uneven cash flow streamsd. Determining the present value of
The meaning of interest and discount rates L026
The concept of future and present values and how to calculate these values L026
The meaning and implication of compounding and compounding frequency L026
How to calculate the future and present values of an annuity and the present value of a perpetuity L026
The meaning and calculation of effective interest rates? L026
The application of present and future value concepts to special situations such as growth rates and loan amortization? L026
An understanding of interest is crucial to sound financial management. Simple interest is interest earned or paid on the principal only. Compound interest is interest paid not only on the principal
An annuity is the payment or receipt of a series of equal cash flows per period for a specified number of periods. In an ordinary annuity, the cash flows occur at the end of each period. In an
Table 5.8 below summarizes the equations used to compute the future and present values of the various cash flow streams. L026
In solving financial mathematics problems, it is necessary to answer two questions:1, Do we need a future value or a present value?2, Are we dealing with a single payment or an annuity?Once these
Which would you rather receive: the proceeds from a 2-year investment paying 5 percent simple interest per year or from one paying 5 percent compound interest?Why?L026
Which is greater: the future value interest factor (FVIF) for 10 percent and two years or the present value interest factor (PVIF) for 10 percent and two years? L026
What happens to the present value of an annuity as the interest rate increases?What happens to the future value of an annuity as the interest rate increases?L026
Which would you prefer to invest in: a savings account paying 6 percent compounded annually or a savings account paying 6 percent compounded daily? Why?L026
What type of contract might require the use of annuity due computations? L026
What effect does more frequent compounding have on present values? L026
Why should each of the following be familiar with compounding and present value concepts?a. A marketing managerb. A personnel manager L026
Explain the Rule of 72. How can it be used in finance applications? (See footnote 3.) L026
What is the relationship between present value and future value? L026
What is the difference between an ordinary annuity and an annuity due? Give examples of each. L026
If the required rate of return increases, what is the impact on the following?a. A present value of an annuityb. A future value of an annuity L026
Explain how future value of an annuity interest factors can be used to solve a sinking fund problem. L026
Describe how to set up a loan amortization schedule. L026
A savings account advertises that “interest is compounded continuously and paid quarterly.” What does this mean? L026
Give an example of a perpetuity. How does a perpetuity differ from an annuity? L026
Explain how to determine the present value of an uneven cash flow stream. L026
Evaluate the following statement: “The development of powerful, inexpensive microcomputers has made the hand calculator as obsolete as the slide rule.” L026
Calculate the value in five years of $1,000 deposited in a savings account today if the account pays interest at a rate of:a. 8 percent per year, compounded annuallyb. 8 percent per year, compounded
A business is considering purchasing a machine that is projected to yield cash savings of $1,000 per year over a 10-year period. Using a 12 percent discount rate, calculate the present value of the
Simpson Peripherals earned $0.90 per share in 2005 and $1.52 in 2010. Calculate the annual growth rate in earnings per share over this period. L026
You own a small business that is for sale. You have been offered $2,000 per year for five years, with the first receipt at the end of four years. Calculate the present value of this offer, using a 14
Yolanda Williams is 35 years old today and is beginning to plan for her retirement. She wants to set aside an equal amount at the end of each of the next 25 years so that she can retire at age 60.She
First State Bank offers a certificate of deposit that pays a 4.75 percent annual rate compounded monthly. Determine the effective annual percentage interest rate on this CD. L026
How much will $1,000 deposited in a savings account earning a compound annual interest rate of 6 percent be worth at the end of the following number of years?a. 3 yearsb. 5 yearsc. 10 years L026
If you require a 9 percent return on your investments, which would you prefer?a. $5,000 todayb. $15,000 five years from todayc. $1,000 per year for 15 years? L026
The Lancer Leasing Company has agreed to lease a hydraulic trencher to the Chavez Excavation Company for $20,000 a year over the next 8 years. Lease payments are to be made at the beginning of each
Determine the present value, discounted at 6 percent per year of $50,000 to be received 5 years from today if the interest rate is compoundeda. Semiannuallyb. Quarterly? L026
What is the present value of $800 to be received at the end of eight years, assuming the following annual interest rate?a. 4 percent, discounted annuallyb. 8 percent, discounted annuallyc. 20
A firm purchases 100 acres of land for $200,000 and agrees to remit 20 equal annual end-of-year installments of $41,067 each. What is the true annual interest rate on this loan? L026
Susan Robinson is planning for her retirement. She is 30 years old today and would like to have $600,000 when she turns L026
She estimates that she will be able to earn a 9 percent rate of return on her retirement investments over time; she wants to set aside a constant amount of money every year (at the end of the year)
What would you be willing to pay for a $1,000 bond paying $70 interest at the end of each year and maturing in 25 years if you wanted the bond to yield the following rates of return?a. 5 percentb. 7
Construct a loan amortization schedule for a 3-year, 11 percent loan of $30,000. The loan requires three equal, end-of-year payments. L026
Mitchell Investments has offered you the following investment opportunity:■ $6,000 at the end of each year for the first 5 years, plus■ $3,000 at the end of each year from years 6 through 10,
You deposit $10,000 at the end of each of the next four years into an account that pays 12 percent annually. What is the account balance at the end of 10 years? L026
Determine the value at the end of three years of a $10,000 investment (today) in a bank certificate of deposit (CD) that pays a nominal annual interest rate of 8 percent, compoundeda. Semiannuallyb.
An investment of $100,000 is expected to generate cash inflows of $60,000 in one year and $79,350 in two years. Calculate the expected rate of return on this investment to the nearest whole percent.
An investment offers the following year-end cash flows:End of Year Cash Flow 1 $20,000 2 $30,000 3 $15,000 L026
How much must you deposit at the end of each quarter in an account that pays a nominal interest rate of 20 percent, compounded quarterly, if at the end of five years you want $10,000 in the account?
Suppose today is July 1, 2010, and you deposit $2,000 into an account today. Then you deposit $1,000 into the same account on each July 1, beginning in 2011 and continuing until the last $1,000
Bobbi Proctor does not want to "gamble" on Social Security taking care of her in retirement. Hence she wants to begin to plan now for retirement. She has enlisted the services of Hackney Financial
Determine the monthly rate of interest that will yield an effective annual rate of interest of 12 percent. L026
Determine your required inflation-adjusted annual (pretax) income at age 65.Assume that this annual amount remains constant from age 65 to age 80. L026
Determine the amount you must accumulate by age 65 to meet your retirement goal, assuming that you invest ina. Common stocksb. Corporate bondsc. Equally weighted portfolio (50 percent common stocks,
Determine the annual investment in common stocks required to accumulate the funds determined in question 2, assuming that the first payment is made at age L026a. 30b. 40c. 50
Determine the annual investment in corporate bonds required to accumulate the funds determined in question 2, assuming that the first payment is made at age L026a. 30b. 40c. 50
Determine the annual investment in an equally weighted portfolio (50 percent common stocks, 50 percent bonds) required to accumulate the funds determined in question 2, assuming that the first
What conclusions can be drawn from the answers to questions 3, 4, and 5?ST1. What is the future value of $1,000 invested for seven years at a nominal interest rate of 10 percent compounded
The characteristics of fixed-income (debt and preferred stock) securities are examined, including:a. Types of each form of securityb. Featuresc. Usersd. Advantages and disadvantages PO85
Reading and interpreting financial market data, including stock and bond price quotations, is an essential skill for an effective financial manager.: PO85
In the capitalization of cash flow method, the value of an asset is equal to the present value of the expected future cash flows discounted at the appropriate required rate of return. PO85
The required rate of return is a function of the risk or uncertainty associated with the cash flows from the asset, as well as the risk-free rate. PO85
The value of a bond with a finite maturity date is equal to the present value of the interest payments and principal payment (at maturity) discounted at the investor’s required rate of return.: PO85
The yield to maturity of a bond is equal to the rate of return that equates the price of the bond to the present value of the interest and principal payments.: PO85
The value of a perpetual bond, or perpetuity, is determined by dividing the fixed interest rate per period by the required rate of return, since no calculation for payback of principal is needed in
Preferred stocks are often treated as perpetuities with a value equal to the annual dividend divided by the required rate of return.
The market value or market price of an asset is the value placed on the asset by the marginally satisfied buyer and seller, who exchange assets in the marketplace. PO85

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