Questions and Answers of Corporate Finance Core Principles and Applications

Suppose the real rate is 2.3 percent and the inflation rate is 3.5 percent. What rate would you expect to see on a Treasury bill?
If Treasury bills are currently paying 5.1 percent and the inflation rate is 2.9 percent, what is the approximate real rate of interest? The exact real rate?
A Japanese company has a bond outstanding that sells for 95.4 percent of its ¥100,000 par value. The bond has a coupon rate of 4.9 percent paid annually and matures in 18 years. What is the yield to
Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company has a bond outstanding with
Lei Corporation has bonds on the market with 12.5 years to maturity, a YTM of 7.2 percent, a par value of $1,000, and a current price of $1,030. The bonds make semiannual payments. What must the
Qin Corp. issued 15-year bonds two years ago at a coupon rate of 5.1 percent. The bonds make semiannual payments. If these bonds currently sell for 96 percent of par value, what is the YTM?
Microhard has issued a bond with the following characteristics:Par: $1,000Time to maturity: 18 yearsCoupon rate: 7 percentSemiannual paymentsCalculate the price of this bond if the YTM is:a. 7
What is the dollar price of a zero coupon bond with 21 years to maturity, semiannual compounding, and a par value of $1,000, if the YTM is:a. 4 percentb. 10 percentc. 14 percent
A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 4.9 percent interest per week.a. What APR must the store report to its
You have just won the Life’s Downhill After 30 lottery. The lottery payments will be made for the next 30 years. The payments are slightly unusual in that you will be paid $500,000 every 6 months
What is the value of an investment that pays $45,000 every other year forever, if the first payment occurs one year from today and the discount rate is an APR of 11 percent compounded daily? What is
Your financial planner offers you two different investment plans. Plan X is a perpetuity with $15,000 annual payments. Plan Y is an annuity with 10 annual payments of $31,000. Both plans will make
A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $20,000 each, with the first payment occurring today, your child’s 12th
You have just won the lottery. You will receive $5 million today, and then receive 40 payments of $1.95 million. These payments will start one year from now and will be paid every six months. A
You have successfully started and operated a company for the past 10 years. You have decided that it is time to sell your company and spend time on the beaches of Hawaii. A potential buyer is
This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this:
There are two banks in the area that offer 30-year, $250,000 mortgages at 5.2 percent compounded monthly and charge a $3,100 loan application fee. However, the application fee charged by Insecurity
The interest rate on a one-year loan is quoted as 10.2 percent plus three points (see the previous problem). What is the EAR? Is your answer affected by the loan amount?Data from Previous ProblemYou
You are looking at a one-year loan of $10,000. The interest rate is quoted as 13.4 percent plus two points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to
You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 12.9
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure:Time ....................Salary0 ..................$10,000,0001
After deciding to get a new car, you can either lease the car or purchase it with a three-year loan. The car you wish to buy costs $39,000. The dealer has a special leasing arrangement where you pay
Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $24,000 per month for 20 years, with the first
On September 1, 2017, Susan Chao bought a motorcycle for $43,000. She paid $2,000 down and financed the balance with a five-year loan at an APR of 5.8 percent compounded monthly. She started the
You have 30 years left until retirement and want to retire with $2.5 million. Your salary is paid annually and you will receive $85,000 at the end of the current year. Your salary will increase at 3
Tom Adams has received a job offer from a large investment bank as a clerk to an associate banker. His base salary will be $75,000. He will receive his first annual salary payment one year from the
You are saving for the college education of your two children. They are 2 years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate
You want to lease a set of golf clubs from PGX Ltd. The lease contract is in the form of 24 equal monthly payments at an APR of 8.6 percent, compounded monthly. Because the clubs cost $4,600 retail,
Rework Problem 51 assuming that the loan agreement calls for a principal reduction of $19,000 every year instead of equal annual payments.Data from Problem 51Prepare an amortization schedule for a
Prepare an amortization schedule for a three-year loan of $57,000. The interest rate is 9 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year?
You want to buy a new sports car from Muscle Motors for $76,000. The contract is in the form of a 60-month annuity due at an APR of 4.98 percent, compounded monthly. What will your monthly payment be?
Suppose you are going to receive $16,000 per year for five years. The appropriate discount rate is 7.2 percent.a. What is the present value of the payments if they are in the form of an ordinary
A five-year annuity of 10 $5,700 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 9 percent compounded monthly, what is the
A local finance company quotes an interest rate of 15.9 percent on one-year loans. So, if you borrow $27,000, the interest for the year will be $4,293. Because you must repay a total of $31,293 in
Given an interest rate of 7.6 percent per year, what is the value at t = 7 of a perpetual stream of $3,550 annual payments that begin at t = 15?
You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,050 payments and has an interest rate of 6.05 percent compounded monthly. Investment B
What is the value today of $4,100 per year, at a discount rate of 6.9 percent, if the first payment is received 7 years from now and the last payment is received 30 years from now?
Consider a firm with a contract to sell an asset for $125,000 three years from now. The asset costs $87,000 to produce today. Given a relevant discount rate of 11 percent per year, will the firm make
You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $3.3 million purchase price. The monthly payment on this loan
You have just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $195,000 per year. Thus, in one year you receive $1.195 million. In two years,
You need a 30-year, fixed-rate mortgage to buy a new home for $245,000. Your mortgage bank will lend you the money at an APR of 5.1 percent. However, you can only afford monthly payments of $950, so
You want to borrow $135,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $2,650, but no more. Assuming monthly compounding, what is the highest APR you can
You’re prepared to make monthly payments of $245, beginning at the end of this month, into an account that pays an APR of 8.75 percent interest, compounded monthly. How many payments will you have
What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $6,350 per year at the current interest rate of 10 percent per
Your job pays you only once a year, for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $85,000 and you plan to spend all of it. However, you
Southern California Publishing Company is trying to decide whether or not to revise its popular textbook Financial Psychoanalysis Made Simple. It has estimated that the revision will cost $155,000.
King Pharmaceuticals is considering a drug project that costs $1.8 million today and is expected to generate end-of-year annual cash flows of $235,000 forever. At what discount rate would the company
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 1.8 percent per year, compounded monthly for the first six months, increasing thereafter to 15
Mike Bayles has just arranged to purchase an $875,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has an APR of 5.8 percent, compounded monthly, and calls for equal
What is the value today of a 15-year annuity that pays $950 a year? The annuity’s first payment occurs six years from today. The annual interest rate is 9 percent for Years 1 through 5, and 12
What is the value today of an annuity of $7,200 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 7.4 percent.
A prestigious investment bank designed a new security that pays a quarterly dividend of $1.45 in perpetuity. The first dividend occurs one quarter from today. What is the price of the security if the
Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be
You’re trying to choose between two different investments, both of which have up-front costs of $45,000. Investment G returns $89,000 in five years. Investment H returns $210,000 in 11 years. Which
You are planning to save for retirement over the next 30 years. To do this, you will invest $950 per month in a stock account and $375 per month in a bond account. The return of the stock account is
First Simple Bank pays 6.8 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to
What is the future value in six years of $2,900 invested in an account with an annual percentage rate of 6.3 percent:a. Compounded annually?b. Compounded semiannually?c. Compounded monthly?d.
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $350 per month. You will charge 1.3 percent per month interest on the overdue
First National Bank charges 14.8 percent compounded monthly on its business loans. First United Bank charges 15.1 percent compounded semiannually. As a potential borrower, which bank would you go to
Find the APR in each of the following cases: APR Number of Times Compounded EAR Semiannually 9.9% Monthly 11.4 Weekly 15.5 Infinite 16.3
Find the APR in each of the following cases: APR Number of Times Compounded EAR 8.4% Quarterly 18.6 Monthly 9.4 Daily 7.8 Infinite
The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $15,000 per year forever. If the required return on this investment is 4.3 percent, how
An investment offers $7,500 per year for 15 years, with the first payment occurring one year from now. If the required return is 6.8 percent, what is the value of the investment? What would the value
Investment X offers to pay you $3,720 per year for nine years, whereas Investment Y offers to pay you $5,740 per year for five years. Which of these cash flow streams has the higher present value if
Machine Co. has identified an investment project with the following cash flows. If the discount rate is 5 percent, what is the present value of these cash flows? What is the present value at 13
Compute the future value of $2,430 continuously compounded for:a. Five years at an annual percentage rate of 14 percent.b. Three years at an annual percentage rate of 6 percent.c. Ten years at an
The TMCC security is bought and sold on the New York Stock Exchange. If you looked at the price today, do you think the price would exceed the $24,099 original price? Why? If you looked in the year
Imprudential, Inc., has an unfunded pension liability of $450 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back
At 4.83 percent interest, how long does it take to double your money? To quadruple it?
Solve for the unknown number of years in each of the following: Present Value Years Interest Rate Future Value $ 625 7% $ 1,284 810 10 4,341 18,400 8 234,162 21,500 13 215,000
Solve for the unknown interest rate in each of the following: Present Value Years Interest Rate Future Value $ 217 $ $ 284 432 10 1,250 41,000 16 173,864 54,382 19 425,600
For each of the following, compute the present value: Present Value Years Interest Rate Future Value 9 7% $ 10,971 13 9 43,862 16 14 754,500 11 480,127 24
Compute the future value of $4,375 compounded annually for:a. 10 years at 6 percent.b. 10 years at 8 percent.c. 20 years at 6 percent.d. Why is the interest earned in part (c) not twice the amount
First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 7 percent interest compounded annually. If you made a $5,600 deposit in each bank, how
Snell, Inc., wishes to maintain a growth rate of 10 percent per year and a debt-equity ratio of .35. The profit margin is 6.5 percent and the ratio of total assets to sales is constant at 2.1. Is
In the previous problem, suppose the firm was operating at only 85 percent capacity in 2020. What is EFN now?Data from Previous ProblemThe most recent financial statements for Retro Machine, Inc.,
The most recent financial statements for Retro Machine, Inc., follow. Sales for 2021 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout
For the company in the previous problem, suppose fixed assets are currently $935,000 and sales are projected to grow to $925,000. How much in new fixed assets is required to support this growth in
Allen Mfg., Inc., is currently operating at only 94 percent of fixed asset capacity. Current sales are $850,000. How fast can sales grow before any new fixed assets are needed?
In addition to common-size financial statements, common-base-year financial statements are often used. Common-base-year financial statements are constructed by dividing the current-year account value
Walker Corp. has current liabilities of $305,000, a quick ratio of .85, inventory turnover of 14.85, and a current ratio of 1.45. What is the cost of goods sold for the company?
FVA Inc.’s net income for the most recent year was $32,145. The tax rate was 21 percent. The firm paid $8,640 in total interest expense and deducted $9,730 in depreciation expense. What was the
The Lawrence Company has a ratio of long-term debt to long-term debt plus equity of .45 and a current ratio of 1.35. Current liabilities are $1,380, sales are $10,530, profit margin is 7.5 percent,
A company has net income of $284,000, a profit margin of 8.1 percent, and an accounts receivable balance of $189,600. Assuming 80 percent of sales are on credit, what is the company’s days’ sales
The Optical Scam Company has forecast a sales growth rate of 18 percent for next year. The current financial statements are shown below. Current assets, fixed assets, and short-term debt are
Prince Albert Canning PLC had a net loss of £21,435 on sales of £168,327. What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any
Firm A and Firm B have debt/total asset ratios of 45 percent and 40 percent and returns on total assets of 7 percent and 8 percent, respectively. Which firm has a greater return on equity?
The Cornelius Company has an ROE of 12.15 percent and a payout ratio of 30 percent.a. What is the company’s sustainable growth rate?b. Can the company’s actual growth rate be different from its
Cheryl Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 15 percent to $179.4 million. Current assets,
The most recent financial statements for Incredible Edibles, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales; debt and equity are not. No dividends are
Assuming the following ratios are constant, what is the sustainable growth rate?Total asset turnover ..........= 3.35Profit margin ......................= 7.6%Equity multiplier ...............=
If the SGS Corp. has an ROE of 13.8 percent and a payout ratio of 20 percent, what is its sustainable growth rate?
The most recent financial statements for Beckett Co. are shown here:Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant
The most recent financial statements for Locke, Inc., are shown here:Assets and costs are proportional to sales; debt and equity are not. A dividend of $2,200 was paid, and the company wishes to
Y3K, Inc., has sales of $5,930, total assets of $3,020, and a debt-equity ratio of .55. If its return on equity is 14 percent, what is its net income?
Bello Company has a debt-equity ratio of .90. Return on assets is 7.7 percent, and total equity is $880,000. What is the equity multiplier? Return on equity? Net income?
1. East Coast Yachts uses a small percentage of preferred stock as a source of financing. In calculating the ratios for the company, should preferred stock be included as part of the company’s
If Hailey, Inc., has an equity multiplier of .85, total asset turnover of 2.10, and a profit margin of 5.97 percent, what is its ROE?
For 2020, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders.Use the following information for Ingersoll, Inc., (assume the tax rate is 25 percent): 2019 2020

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