Questions and Answers of Foundations Financial Management

What is the value of a common share that has just paid a dividend of $2.25, is expecting an indefinite annual growth rate of 5 percent, and requires a return of 17 percent based on perceived market
Calculate the price of a bond originally issued six years ago that pays semiannual interest at the rate of 12 percent and matures in nine years at $1,000. The market currently requires an 8 percent
A bond just purchased pays annual interest of 10 percent. In seven years it matures at its face value of $25,000. What price was paid if current yields on a bond of this risk are 8.5 percent?
Burrito Bell issued a series of $1,000 bonds eight years ago with an annual coupon rate of $100. The bonds mature 12 years from now. If an investor requires a 6 percent return on this investment,
Current yields are 9 percent on a preferred share that pays a perpetual annual dividend of $6.00. What is the appropriate price of one preferred?
With an anticipated dividend of $1.20, continual annual growth of 8 percent, and a market expectation of a 19 percent yield, at what price would a common share sell?
You wish to invest $175,000 in a 12-year annuity. Current yields over the same time to maturity are 8 percent. What could you expect as an annual payment?
You have purchased a preferred share that promises a $3.00 dividend. If you expect a 14 percent yield, what price did you pay for the preferred?
Waterman Company has had a fantastic growth of 22 percent per year, but this growth rate is expected to fall to 6 percent in the near future and then continue at that rate for a long time.
Lou Spence bought a stock seven years ago for $15.00 a share. If it is now selling for $42.39 a share, what is the stock's compound annual growth rate? (No dividends were paid.)
You are interested in receiving a true yield on a government bond investment of 8 percent. Your broker suggests a 20-year issue with 12 years to maturity, an original coupon rate of 10 percent,
A national financial institution is currently offering $50,000 a year for life as a special promotion. Current inflation is percent a year, and the real rate of return is assumed to be 3
Thunderbay Ltd. has a 20-year bond outstanding that matures in 14 years. The annual coupon rate is 11 percent, paid semiannually. Current annual nominal yields for bonds of similar risk are 9
Royal Blue Bonds were purchased nine years ago at $1,000, with a 13 percent annual coupon. Today they are sold for $1,215. Assuming the coupons were reinvested at 9 percent, what was the annual yield
Tom Gilbert, founder and chair of the board of Gilbert Enterprises, could not believe his eyes as he read the quote about his firm in The Globe and Mail. The stock had closed at $35.25, down $3.75
Bonds issued by the Bullwinkle Corporation have a par value of $1,000, are selling for $1 ,100, and have 7 years to maturity. The annual interest payment is 9 percent, payable semiannually. Find
The Wild Rose Company has $1,000 par value (maturity value) bonds outstanding at 9 percent interest. The bonds will mature in 20 years with annual payments. Compute the current price of the bonds if
Bonds issued by the Peabody Corporation have a par value of $1,000, are selling for $890, and have 18 years to maturity. The annual interest payment is 8 percent. Find yield to maturity by combining
Dr. Sisters has been secretly depositing $10,500 in her savings account every December starting in 1994. Her account earns 6 percent compounded annually. How much did she have in December 2005?
At a growth (interest) rate of 8 percent annually, how long will it take for a sum to double? To triple? Select the year that is closest to the correct answer.
If you owe $30,000 at the end of seven years, how much should your creditor accept in payment immediately if she could earn 11 percent on her money?
Cousin Berta invested $100,000 ten years ago at 12 percent, compounded quarterly.a. How much has she accumulated?b. What is her effective annual interest rate (rate of return)?
Determine the amount of money in a savings account at the end of five years, given an initial deposit of $3,000 and an 8 percent annual interest rate when interest iscompounded(a) Annually, (b)
Joe Macro wishes to have accumulated $60,000 ten years from today by making an equal annual deposit into an account that pays 10 percent, compounded quarterly.a. What is the effective annual interest
Sally Gravita has received a settlement from an insurance company that will pay her $23,500 annually for 12 years. Current interest rates are 8 percent, compounded semiannually.a. What is the
Your grandfather has offered you a choice of one of the three following alternatives: $5,000 now; $1,000 a year for eight years; or $12,000 at the end of eight years. Assuming you could earn 11
You need $23,000 at the end of 7 years, and your only investment outlet is a 9 percent long-term certificate of deposit (compounded annually). With the certificate of deposit, you make an initial
Amy Hirt started a paper route on January 1, 2009. Every three months, she deposits $300 in her bank account, which earns 8 percent annually but is compounded quarterly. On December 31, 2012, she
On January 1, 2013, Charley Dow bought 1,000 shares of stock at $12 per share. On December 31, 2015, he sold the stock for $18 per share. What was his annual rate of return?
AI Counsel purchased 357 shares of Eco-Survival Tours on July 1, 2013 for $5.00 per share. Find his annual rate of return if he sold the stocka. On June 30, 2014, for $6.00 per share.b. On December
John Foresight has just invested $8,370 for his son (age one). The money will be used for his son's education 17 years from now. He calculates that he will need $90,000 for his son's education by the
Chris Seals has just given an insurance company $56,521. In return, she will receive an annuity of $7,500 for 12 years.a. At what rate of return must the insurance company invest this $56,521 to make
Mr. G. Day has approached his bank about a loan. He expects to receive $30,000 in three years and $85,000 nine years from now. These funds will be applied against the loan as they are received. The
Ms. R. Emm has purchased land for $90,000 in cash today and another $45,000 four years from today. Interest rates over a four-year period are currently 8 percent, compounded semiannually. Calculate
Count Crow wishes to have a large celebration eight years from today costing $150,000. Currently, he has an investment of $625,000 in a financial institution earning 7.5 percent interest annually.
Graham Bell has just retired after 30 years with the telephone company. His total pension funds have an accumulated value of $300,000, and his life expectancy is 16 more years. His pension fund
River Babylon, an archaeology professor, invests $65,000 in a parcel of land that is expected to increase in value by 8 percent per year for the next five years. He will take the proceeds and provide
Una Day is planning to retire in 20 years, at which time she hopes to have accumulated enough money to receive an annuity of $12,000 a year for 25 years of retirement. During her pre-retirement
You wish to retire after 30 years, at which time you want to have accumulated enough money to receive an annuity of $55,000 a year for 18 years of retirement.During the period before retirement, you
Your retirement planning suggests a goal of $57,000 a year in today's dollars for 30 years of retirement. Retirement will begin 35 years from today, at which time you will expect your first annuity
For your retirement you would like to receive $75,000 a year in today's dollars for a period of 25 years. A problem, of course, is that you expect inflation to average 2.5 percent a year for the next
How does a firm's price-earnings ratio relate to Ke? To g?
Darla White has just purchased an annuity to begin payment at the end of 2019 (that is the date of the first payment) . Assume it is now the beginning of 2016. The annuity is for $12,000 per year and
Emphatically Square and heirs will receive $1,000 a year forever with a long-term annual expected interest rate of 7 percent. What is the current worth of this annuity?
Forever College will provide a scholarship of $7,500 a year forever with a long-term annual expected interest rate of 6 percent. What is the current worth of this annuity?
On second thought, Emphatically Square and heirs will receive $1,000 a year forever that will grow by 3 percent annually. The long-term annual expected interest rate is 7 percent. What is the current
On second thought, Forever College will provide a scholarship of $7,500 a year forever, growing in value by 2 percent per year. The long-term annual expected interest rate is 6 percent. What is the
These valuation models are based on investors' required rates of return and their reflection in the prices of the assets. Does the change in price always occur according to the model?
On third thought, Emphatically Square and heirs will receive $1,000 a year for only 25 years, but it will grow by 3 percent annually. The long-term annual expected interest rate is 7 percent. What is
On third thought, Forever College will provide a scholarship of $7,500 a year for only 30 years, growing in value by 2 percent per year. The long-term annual expected interest rate is 6 percent. What
For your retirement you would like to receive the equivalent of $90,000 a year in today's dollars for a period of 30 years. You expect inflation to average 3 percent a year for the next 70 years.
If you borrow $9,725 and are required to pay back the loan in five equal annual installments of $2,500, what is the interest rate associated with the loan?
Sarah Adia owes $15,000 now. A lender will carry the debt for three more years at 8 percent interest. That is, in this particular case, the amount owed will go up by 8 percent per year for three
If your uncle borrows $50,000 from the bank at 10 percent interest over the eight year life of the loan, what equal annual payments must be made to discharge the loan, plus pay the bank its required
Peter Piper has applied for a mortgage of $120,000. Interest is computed at 8.5 percent compounded semiannually. The mortgage will be paid off over 20 years.a. Calculate Peter's monthly payment.b.
Ocean Spray has applied for a mortgage of $200,000. Interest is computed at 4.5 percent compounded semiannually. The mortgage will be paid off over 25 years.a. Calculate Ocean's monthly payment.b.
Bing and Monica Cherrie require a mortgage of $145,000 and can afford monthly payments of $1,150 on the mortgage. Current interest rates are 4 percent compounded semiannually. How long should the
Deidre Hall can afford monthly payments of $690 on a mortgage. Current mortgage rates are 3.5 percent, compounded semiannually. The longest period over which a mortgage can be amortized is 25 years.
Your younger sister, Barbara, will start college in five years. She has just informed your parents that she wants to go to Eastern University, which will cost $15,000 per year for four years (assumed
Barbara (from previous problem) is now 18 years old (five years have passed), and she wants to get married instead of going to school. Your parents have accumulated the necessary funds for her
Mr. Rambo, President of Assault Weapons Inc. was pleased to hear that he had three offers from major defence companies for his latest missile firing automatic ejector. He will use a discount rate of
Larry Do by invests $50,000 in a mint condition 1952 "Rocket" Richard Topps hockey card. He expects the card to increase in value 8 percent per year for the next five years. How much will his card be
What is meant by real rate of return?
Dr. Painkiller is going to borrow $3,000 for one year at 8 percent interest. What is the annual rate of interest if the loan is discounted?
Your bank will lend you $3,000 for 50 days at a cost of $45 interest. What is your annual rate of interest? What is your effective annual rate?
Your bank will lend you $2,000 for 45 days at a cost of $25 interest. What is your annual rate of interest? What is your effective annual rate?
What is an asset-backed public offering?
Sampson Orange Juice Company normally takes 30 days to pay for its average daily credit purchases of $7,500. Its average daily sales are $9,000, and it collects its accounts in 34 days.a. What is its
McGriff Dog Food Company normally takes 20 days to pay for average daily credit purchases of $9,000. Its average daily sales are $10,000 and it collects accounts in 25 days.a. What is its net credit
The average price on 182-day Treasury bills was 98.097 with maturity value at 100. Calculate the T-hill's annualized yield.
The average price on 91-day Treasury bills at a recent Tuesday auction was 98.671 with maturity value 100. Calculate the T-bill's annualized yield.
Chris Angle can borrow from its bank at 8 percent to take a cash discount. The terms of the cash discount are 1/10 net 60. Should Chris borrow the funds?
Little Kimi Clothiers can borrow from its bank at 6 percent to take a cash discount. The terms of the cash discount are 2/15 net 90. Should the firm borrow the funds?
Mr. Paul Promptly is a very cautious businessman. His suppliers offer trade credit terms of 3/10, net 70. Mr. Promptly never takes the discount offered, but he pays his suppliers in 60 days rather
S. Pumpkins has an average inventory of $630,000, with an annual turnover rate of eight times. The average accounts receivable balance is $520,250, and customers pay on average in 30 days. S.
To finance additional inventory, Arbutus Ltd. is considering forgoing the cash discount on all of its purchases presently offered on terms of 2/10, net 45. No payments will be stretched. Annual
Joan Lucky won the $80 million lottery. She is to receive $1 million a year for the next 50 years plus an additional lump-sum payment of $30 million after 50 years. The discount rate is 12 percent.
The Epic Contest awards $10,000,000. It will be paid over the next 50 years at the rate of $250,000 per year with the first payment today. With a discount rate of 9 percent, what is the present
a. Using a current long-term interest rate, recommend a proposal to the Boone family. Justify your choice of discount rate.b. Now assume that a discount rate of 11 percent is used. Which of the
Marty Not is going to borrow $8,000 for 120 days and pay $215 in interest. What is the annual rate of interest if the loan is discounted?
George Penny will receive $32,250 for the next 10 years as a payment for a slogan he coined. Currently a 6 percent discount rate is appropriate.a. Should he be willing to sell his future rights now
Carrie Tune will receive $18,000 a year for the next 20 years as payment for a song she has just written. If a present 10 percent discount rate is applied,a. Should she be willing to sell out her
"Red" Herring will receive $11,000 a year for the next 18 years as a result of his patent. At present, 9 percent is an appropriate discount rate.a. Should he be willing to sell out his future rights
Delia has a choice between $30,000 in 50 years or $650 today. If long-term rates are 8 percent, what should be her choice?
You invest a single amount of $20,000 for 6 years at 7 percent. At the end of 6 years you take the proceeds and invest them for 8 years at 10 percent. How much will you have after 14 years?
Rework the previous problem, assuming that the $8,000 per period is received at the beginning of each year.Previous ProblemIf you invest $8,000 per period for the following number of periods, how
If you invest $8,000 per period for the following number of periods, how much would you have?a. 10 years at 5 percentb. 20 years at 9 percentc. 35 periods at 11 percent
How much would you have to invest today to receivea. $12,000 in 6 years at 12 percent?b. $15,000 in 15 years at 8 percent?c. $5,000 each year for 10 years at 8 percent?d. $5,000 each year, at the
If you invest $12,000 today, how much will you havea. in 6 years at 7 percent?b. in 15 years at 12 percent?c. in 25 years at 10 percent?d. in 25 years at 10 percent (compounded semiannually)?
What is the present value ofa. $8,000 in 10 years at 6 percent?b. $16,000 in 5 years at 12 percent?c. $25,000 in 15 years at 8 percent?d. $1,000 in 40 years at 20 percent?
Discuss why the compounding of interest within a tax sheltered plan is so effective, as opposed to paying taxes each year.
a. Using the data in the income statement and the balance sheet that follow, compute the company€™s average collection period (ACP) in days. Use a 365-day year when calculating sales per
Vroom Motorcycle Company is borrowing $30,000 from First Prairie Bank. The total interest charge is $9,000. The loan will be paid by making equal monthly payments for the next three years. What is
Talmud Book Company borrows $16,000 for 30 days at 9 percent interest. What is the dollar cost of the loan?
Dr. Ruth is going to borrow $5,000 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 6 percent and
Birthdaybook requires $125,000 to complete a project.a. With a compensating balance requirement of 10%, how much will the firm need to borrow?b. Given your answer to part a and a stated interest rate
Randall Corporation plans to borrow $200,000 for one year at 8 percent from the Dominion Trust Company. There is a 20 percent compensating balance requirement. Randall keeps minimum transaction
The treasurer of Brandon Blue Sox is seeking a $20,000 loan for 180 days from the Brandon Credit Union. The stated interest rate is 10 percent and there is a 15 percent compensating balance
Tucker Drilling Corp. plans to borrow $200,000. Northern Dominion Bank will lend the money at one-half of a percentage point over the prime rate of 8 percent and requires an administration fee of 2
Your company plans to borrow $5 million for 12 months, and your banker gives you a stated rate of 8 percent interest. You would like to know the annual rate of interest for the following types of

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