Questions and Answers of Corporate Finance 8th Canadian

Your brother has offered to give you either $60,000 today or $100,000 in 12 years. If the interest rate is 6% per year, which option is preferable?
Consider the following alternatives: i. $140 received in one year ii. $230 received in five years iii.$320 received in ten yearsa. Rank the alternatives from most valuable to least valuable if the
Suppose you invest $800 in an account paying 2% interest per year.a. What is the balance in the account after three years? How much of this balance corresponds to “interest on interest”?b. What
Your daughter is currently twelve years old. You anticipate that she will be going to college in six years. You would like to have $127,000 in a savings account to fund her education at that time. If
You are thinking of retiring. Your retirement plan will pay you either $100,000 immediately on retirement or $140,000 five years after the date of your retirement. Which alternative should you choose
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 $4200 in
Suppose you receive $100 at the end of each year for the next three years.a. If the interest rate is 7%, what is the present value of these cash flows?b. What is the future value in three years of
You have just received a windfall from an investment you made in a friend’s business. He will be paying you $32,049 at the end of this year, $64,098 at the end of the following year, and $96,147 at
You have a loan outstanding. It requires making five annual payments at the end of the next five years of $4000 each. Your bank has offered to restructure the loan so that instead of making five
You have been offered a unique investment opportunity. If you invest $20,000 today, you will receive $1000 one year from now, $3000 two years from now, and $20,000 ten years from now.a. What is the
Marian Plunket owns her own business and is considering an investment. If she undertakes the investment, it will pay $40,000 at the end of each of the next three years. The opportunity requires an
The British government has a consol bond outstanding paying £200 per year forever. Assume the current interest rate is 12% per year.a. What is the value of the bond immediately after a payment is
What is the present value of $4000 paid at the end of each of the next 73 years if the interest rate is 3% per year?
When you purchased your house, you took out a 30-year annual-payment mortgage with an interest rate of 9% per year. The annual payment on the mortgage is $9422. You have just made a payment and have
You are 23 years old and decide to start saving for your retirement. You plan to save $5500 at the end of each year (so the first deposit will be one year from now), and will make the last deposit
Your grandmother has been putting $2000 into a savings account on every birthday since your first (that is, when you turned one). The account pays an interest rate of 4%. How much money will be in
A rich relative has bequeathed you a growing perpetuity. The first payment will occur in one year and will be $2000. Each year after that, on the anniversary of the last payment you will receive a
You are thinking of building a new machine that will save you $4000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 4% per year forever. What is
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 $4 million in its first year and that this
Your oldest daughter is about to start kindergarten at a private school. Tuition is $30,000 per year, payable at the beginning of the school year. You expect to keep your daughter in private school
A rich aunt has promised you $2000 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 7% larger than the last
You are running a hot Internet company. Analysts predict that its earnings will grow at 40% per year for the next five years. After that, as competition increases, earnings growth is expected to slow
Suppose you currently have $4800 in your savings account, and your bank pays interest at a rate of 0.5% per month. If you make no further deposits or withdrawals, how much will you have in the
Your firm spends $4,700 every month on printing and mailing costs, sending statements to customers. If the interest rate is 0.48% per month, what is the present value of eliminating this cost by
You have just entered an MBA program and have decided to pay for your living expenses using a credit card that has no minimum monthly payment. You intend to charge $1090 per month on the card for the
You have decided to buy a perpetuity. The bond makes one payment at the end of every year forever and has an interest rate of 4%. If you initially put $5000 into the bond, what is the payment every
You are thinking of purchasing a house. The house costs $250,000. You have $36,000 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 have just made an offer on a new home and are seeking a mortgage. You need to borrow $600,000.a. The bank offers a 30-year mortgage with fixed monthly payments and an interest rate of 0.5% per
You are saving for retirement. To live comfortably, you decide you will need to save $1 million by the time you are 65. Today is your 23rd birthday, and you decide, starting today and continuing on
You have an investment opportunity that requires an initial investment of $9500 today and will pay $10,500 in one year. What is the IRR of this opportunity?
Suppose you invest $3500 today and receive $9500 in five years. a. What is the IRR of this opportunity? b. Suppose another investment opportunity also requires $3500 upfront, but pays an equal amount
You are shopping for a car and read the following advertisement in the newspaper: “Own a new Spitfire! No money down. Four annual payments of just $18,000.” You have shopped around and know that
You are shopping for a car and read the following advertisement in the newspaper: “Own a new Spitfire! No money down. Four annual payments of just $18,000.” You have shopped around and know that
You are considering purchasing a warehouse. The cost to purchase the warehouse is $492,000. Renting the equivalent space costs $19,700 per year. If the annual interest rate is 5.6%, at what rate must
Your bank is offering you an account that will pay 13% 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.
Which do you prefer: a bank account that pays 6% per year (EAR) for three years ora. An account that pays 3% every six months for three years?b. An account that pays 9% every 18 months for three
Many academic institutions offer a sabbatical policy. Every seven years a professor is given a year free of teaching and other administrative responsibilities at full pay. For a professor earning
Suppose the interest rate is 6.8% APR with monthly compounding. What is the present value of an annuity that pays $108 every six months for six years?
You can earn $38 in interest on a $1000 deposit for eight months. If the EAR is the same regardless of the length of the investment, determine how much interest will you earn on a $1000 deposit fora.
Suppose you invest $101 in a bank account, and five years later it has grown to $136.14.a. What APR did you receive if the interest was compounded semiannually?b. What APR did you receive if the
Your son has been accepted into college. This college guarantees that your son’s tuition will not increase for the four years he attends college. The first $8500 tuition payment is due in six
You make monthly payments on your mortgage. It has a quoted APR of 10% (monthly compounding). What percentage of the outstanding principal do you pay in interest each month?
Capital One is advertising a 60-month, 6.61% APR motorcycle loan. If you need to borrow $11,000 to purchase your dream Harley Davidson, what will your monthly payment be?
Oppenheimer Bank is offering a 30-year mortgage with an EAR of 5.5%. If you plan to borrow $170,000, what will your monthly payment be?
You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $1991 and you have made every payment on time. The
You have just sold your house for $1,100,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $750,000. The mortgage is currently exactly 18.5
You have just purchased a home and taken out a $460,000 mortgage. The mortgage has a 30-year term with monthly payments and an APR of 6.08%.a. How much will you pay in interest, and how much will you
Your mortgage has 26 years left, and has an APR of 7.449% with monthly payments of $1449.a. What is the outstanding balance?b. Suppose you cannot make the mortgage payment and you are in danger of
You have an outstanding student loan with required payments of $600 per month for the next four years. The interest rate on the loan is 10% APR (monthly). You are considering making an extra payment
Consider again the setting of Problem 18.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
Your friend tells you he has a very simple trick for shortening the time it takes to repay your mortgage by one-third: Use your holiday 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 $1390, 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 $30,000 that has an APR (monthly compounding) of 16%. Each month you pay the minimum monthly payment only. You are required to pay only the outstanding interest. You have
Can the nominal interest rate available to an investor be significantly negative? Consider the interest rate earned from saving cash “under the mattress.” Can the real interest rate be negative?
Consider a project that requires an initial investment of $102,000 and will produce a single cash flow of $153,000 in five years.a. What is the NPV of this project if the five-year interest rate is
Suppose the term structure of risk-free interest rates is as shown below:a. Calculate the present value of an investment that pays $1000 in two years and $4000 in five years for certain.b. Calculate
Your best taxable investment opportunity has an EAR of 6.4%. Your best tax-free investment opportunity has an EAR of 2.8%. If your tax rate is 32%, which opportunity provides the higher after-tax
In the summer of 2008, at Heathrow airport in London, Bestofthebest (BB), a private company, offered a lottery to win a Ferrari or 100,000 British pounds, equivalent at the time to about $200,000.
Your firm is considering the purchase of a new office phone system. You can either pay $32,500 now, or $1100 per month for 34 months.a. Suppose your firm currently borrows at a rate of 5% per year
A five-year bond with a face value of $1000 has a coupon rate of 6.5%, with semiannual payments.a. What is the coupon payment for this bond?b. Draw the cash flows for the bond on a timeline.
Suppose the current zero-coupon yield curve for risk-free bonds is as follows:a. What is the price per $100 face value of a three-year, zero-coupon, risk-free bond?b. What is the price per $100 face
In the Global Financial Crisis box in Section 6.1, www.Bloomberg.com reported that the threemonth Treasury bill sold for a price of $100.002556 per $100 face value. What is the yield to maturity of
Suppose a 10-year, $1000 bond with a 10% coupon rate and semiannual coupons is trading for a price of $912.47.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 $990 and a yield to maturity of 6%. What is the bond’s coupon rate?
Suppose a seven-year, $1000 bond with a 10.46% coupon rate and semiannual coupons is trading with a yield to maturity of 8.78%.a. Is this bond currently trading at a discount, at par, or at a
Suppose that Ally Financial Inc. issued a bond with 10 years until maturity, a face value of $1000, and a coupon rate of 11% (annual payments). The yield to maturity on this bond when it was issued
Suppose you purchase a 10-year bond with 11% 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 9.94%
Consider the following bonds:a. What is the percentage change in the price of each bond if its yield to maturity falls from 7%to 6%?b. Which of the bonds A–D is most sensitive to a 1% drop in
Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 4%. You hold the bond for five years before selling it.a. If the bond’s yield to maturity is 4% when you sell it, what
Suppose you purchase a 30-year Treasury bond with a 6% annual coupon, initially trading at par. In 10 years’ time, the bond’s yield to maturity has risen to 7% (EAR).a. If you sell the bond now,
Suppose the current yield on a one-year, zero-coupon bond is 4%, while the yield on a five-year, zero-coupon bond is 5%. Neither bond has any risk of default. Suppose you plan to invest for one year.
What is the price of a three-year, default-free security with a face value of $1000 and an annual coupon rate of 6%? What is the yield to maturity for this bond? Maturity (years) Zero-coupon YTM 1
What is the maturity of a default-free security with annual coupon payments and a yield to maturity of 4.6%? Why? Maturity (years) Zero-coupon YTM 1 4.6% 2 5.0% 3 5.4% 4 5.8% 5 6.1%
Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 6.87% (annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from Standard and
HMK Enterprises would like to raise $12 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 5.1%(annual payments).
A BBB-rated corporate bond has a yield to maturity of 9%. A U.S. Treasury security has a yield to maturity of 7.5%. These yields are quoted as APRs with semiannual compounding. Both bonds pay
Your brother wants to borrow $10,750 from you. He has offered to pay you back $12,750 in a year. If the cost of capital of this investment opportunity is 12%, what is its NPV? Should you undertake
You are considering investing in a start-up company. The founder asked you for $290,000 today and you expect to get $1,070,000 in eight years. Given the riskiness of the investment opportunity, your
You are considering opening a new plant. The plant will cost $95.8 million upfront. After that, it is expected to produce profits of $31.5 million at the end of every year. The cash flows are
Your firm is considering the launch of a new product, the XJ5. The upfront development cost is $12 million, and you expect to earn a cash flow of $3.1 million per year for the next five years. Plot
Bill Clinton reportedly was paid $15 million to write his book My Life. Suppose the book took three years to write. In the time he spent writing, Clinton could have been paid to make speeches. Given
FastTrack Bikes, Inc. is thinking of developing a new composite road bike. Development will take six years and the cost is $185,000 per year. Once in production, the bike is expected to make $259,000
OpenSeas, Inc. is evaluating the purchase of a new cruise ship. The ship would cost $497 million, and would operate for 20 years. OpenSeas expects annual cash flows from operating the ship to be
You are considering an investment in a clothes distributor. The company needs $109,000 today and expects to repay you $127,000 in a year from now. What is the IRR of this investment opportunity?
You have been offered a very long term investment opportunity to increase your money one hundredfold. You can invest $900 today and expect to receive $90,000 in 40 years. Your cost of capital for
Professor Wendy Smith has been offered the following deal: A law firm would like to retain her for an upfront payment of $52,000. In return, for the next year the firm would have access to 8 hours of
Innovation Company is thinking about marketing a new software product. Upfront costs to market and develop the product are $5,100,000. The product is expected to generate profits of $1,000,000 per
You own a coal mining company and are considering opening a new mine. The mine itself will cost $118 million to open. If this money is spent immediately, the mine will generate $22 million for the
Your firm spends $407,000 per year in regular maintenance of its equipment. Due to the economic downturn, the firm considers forgoing these maintenance expenses for the next three years. If it does
You are considering investing in a new gold mine in South Africa. Gold in South Africa is buried very deep, so the mine will require an initial investment of $290 million. Once this investment is
Your firm has been hired to develop new software for the university’s class registration system. Under the contract, you will receive $507,000 as an upfront payment. You expect the development
You are considering constructing a new plant in a remote wilderness area to process the ore from a planned mining operation. You anticipate that the plant will take a year to build and cost $99
You are considering making a movie. The movie is expected to cost $8.8 million upfront and take a year to make. After that, it is expected to make $4.3 million in the first year it is released and
Consider two investment projects, both of which require an upfront investment of $12 million and pay a constant positive amount each year for the next 10 years. Under what conditions can you rank
You are considering a safe investment opportunity that requires a $780 investment today, and will pay $570 two years from now and another $580 five years from now.a. What is the IRR of this
Facebook is considering two proposals to overhaul its network infrastructure. They have received two bids. The first bid, from Huawei, will require a $17 million upfront investment and will generate
Natasha’s Flowers, a local florist, purchases fresh flowers each day at the local flower market. The buyer has a budget of $970 per day to spend. Different flowers have different profit margins,
Pisa Pizza, a seller of frozen pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new
Kokomochi is considering the launch of an advertising campaign for its latest dessert product, the Mini Mochi Munch. Kokomochi plans to spend $3.76 million on TV, radio, and print advertising this
Home Builder Supply, a retailer in the home improvement industry, currently operates seven retail outlets in Georgia and South Carolina. Management is contemplating building an eighth retail store

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