Questions and Answers of Foundations Financial Management

Zebra Fashions is evaluating a capital budgeting project that should generate $104,400 per year for four years.(a) If its required rate of return is 16 percent, what is the value of the project to
Wandering RV is evaluating a capital budgeting project that is expected to generate $36,950 per year during its six-year life. If its required rate of return is 10 percent, what is the value of the
High Energy (HE) Company recently paid a $2 per share dividend, which is expected to grow at a constant rate forever. HE’s stock, which has a beta coefficient equal to 1.1, is selling for $37.50
Suppose the risk-free rate of return is 3.5 percent and the market risk premium is 7 percent. Stock U, which has a beta coefficient equal to 0.9, is currently selling for $28 per share. The company
Recently, Kellie determined that the required rate of return for Stock Q is 11 percent. In her analysis, she determined that the risk-free rate of return, rRF, is 4 percent and that the required
Stock V has a beta coefficient of 2.0, and Stock W has a beta of 0.5. The expected rate of return on an average stock is 11 percent, and the risk-free rate of return is 5 percent. By how much does
ZR Corporation’s stock has a beta coefficient equal to 0.8 and a required rate of return equal to 11 percent. If the expected return on the market is 12.5 percent, what is the risk-free rate of
Suppose the risk-free rate of return, rRF, is 4 percent, and the market return, rM, is expected to be 12 percent. What is the required rate of return for a stock with a beta coefficient, b, equal to
The current risk-free rate of return, rRF, is 3 percent and the market risk premium, RPM, is 6 percent. If the beta coefficient associated with a firm’s stock is 1.5, what should be the stock’s
Sharon’s portfolio, which is valued at $200,000, contains six stocks and has a beta coefficient equal to 1.5. Later today, Sharon is going to sell one of the stocks in her portfolio for $40,000.
Willis currently has $120,000 invested in a four-stock portfolio with a beta coefficient equal to 0.8. Willis plans to sell one of the stocks in his portfolio for $48,000, which will increase the
Pete’s investment portfolio contains five stocks that have a total value equal to $40,000. The beta coefficient of this portfolio is 1.2. Pete wants to invest an additional $10,000 in a stock that
Of the $60,000 invested in a two-stock portfolio, 40 percent is invested in Stock S and 60 percent is invested in Stock X. If Stock S has a beta coefficient equal to 1.5 and the beta of the
Compute the? (a) Expected return? (b) Standard deviation of the following investments: (c) Suppose you form a portfolio that consists of 60 percent Investment ABC and 40 percent Investment RST.
Currently, the risk-free return is 3 percent, and the expected market rate of return is 9 percent. What is the expected return of the following three-stock portfolio?Amount
What is the expected return of the following portfolio of investments, r?p: Amount Invested Investment 4% DEF $30,000 25,000 45,000 JKL TUV 24 14
Rebecca invested $9,000 in a stock that has an expected return equal to 18 percent and $21,000 in a stock with an 8 percent expected return. What is the portfolio’s expected return?
Which of the following investments has the greater relative risk? Investment Expected Return, î Standard Deviation, o 16.0% 7.0% 27.0 13.0
Suppose you are an average risk-averse investor who can purchase only one of the following stocks. Which should you purchase? Explain your reasoning. Investment Expected Return, f Standard
Compute the? (a) Expected return,? (b) Standard deviation,? (c) Coefficient of variation for investments with the following probability distributions: Probability 30.0% 0.3 5.0% 15.0 0.2 10.0 0.5
Calculate the (a) Expected return, (b) Standard deviation, (c) Coefficient of variation for an investment with the following probability distribution:Probability
What are the (a) Expected return, (b) Standard deviation, (c) Coefficient of variation for an investment with the following probability distribution?Probability
Backhaus Beer Brewers (BBB) just announced that the current fiscal year’s net income was $1.2 million. BBB’s marginal tax rate is 40 percent, its interest expense for the year was $1.5 million,
RJS generated $65,000 net income this year. The firm’s financial statements also show that its interest expense was $40,000, its marginal tax rate was 35 percent, and its invested capital was
For the past 15 years, the P/E ratio of North/South Travel has been between 28 and 30. If North/South’s earnings per share equal $4, in what price range would you estimate its stock should be
Sparkle Jewelers expects to pay dividends (per share) of $0.60, $0.90, $2.40, and $3.50 during the next four years. Beginning in the fifth year, the dividend is expected to grow at a rate of 4
Georgetown Motorcars’ (GM) common stock normally sells for 19 times its earnings; that is, its P/E ratio equals 19. If GM’s earnings per share are $3.70, what should be its stock price under
Xtinct Artifacts has not paid a dividend during the past 10 years. However, at the end of this year, the company plans to pay a $1.50 dividend and a $2 dividend the following year (Year 2). Starting
Forral Company has never paid a dividend. But, the company plans to start paying dividends in two years—that is, at the end of Year 2. The first dividend is expected to equal $2 per share. The
Since it has been in business, FreeFin has paid a $1 per share annual dividend. The company plans to pay a $1 dividend for the next two years. Beginning in three years, however, FreeFin plans to
Minimight Company has never paid a dividend, and there are no plans to pay dividends during the next three years. But, in four years—that is, at the end of Year 4—the company expects to start
Since it has been in business, FoolsGold Jewelry has never paid a dividend. The company will not pay a dividend at the end of this year. However, two years from today—at the end of Year
Ocala Company’s stock is currently selling for $19.50 per share. At the end of the year, the company plans to pay a dividend equal to $2.34 per share. For the remainder of the company’s life,
Since it started business 10 years ago, Alphafem Company has paid a constant $1.20 per share dividend to its common stockholders. Next year and every year thereafter, the company plans to increase
Alpine Ski Resort has grown at a constant rate, which equals 4 percent, for as long as it has been in business. This growth rate is expected to continue long into the future. A couple of days ago,
Express Surgery Center’s (ESC) preferred stock, which has a par value equal to $110 per share, pays an annual dividend equal to 9 percent of the par value. If investors require a 15 percent
Last year, Julie Johnson bought one share of common stock for $950. During the year, Julie received a $47.50 dividend. Earlier today, she sold the stock for $988. (a) What rate of return did
One year ago, James Sirlank bought Dell Computer common stock for $20 per share. Today the stock is selling for $19 per share. During the year, James received four dividend payments, each in the
Many years ago, Topnotch Knives issued a zero coupon bond with a $1,000 face value. The bond matures in three years. If the current market rate on similar bonds is 11 percent, (a) What is the
Eight years ago, Over-the-Top Trampolines issued a 15-year bond with a $1,000 par value and a 6 percent coupon rate (interest is paid annually). Today the going rate of interest on similar bonds is
One year ago, Henderson Honey issued a 10-year bond for $1,000. The bond’s coupon rate of interest is 4 percent, and interest is paid annually. If the current value of the bond is $929, what
Gabby’s Garage issued a bond with a 10-year maturity, a $1,000 par value, a 10 percent coupon rate, and semiannual interest payments. Two years after the bond was issued, the going rate of interest
Dynamic Systems has an outstanding bond that has a $1,000 par value and a 7 percent coupon rate. Interest is paid semiannually. The bond has 11 years remaining until it matures. Today the going
Quiver Archery’s bond currently is selling for $1,006; its value one year ago was $996. The bond has a $1,000 maturity value and a coupon rate equal to 7 percent, and it matures in eight years.
Three years ago, Jack’s Automotive Jacks issued a 20-year callable bond with a $1,000 maturity value and an 8.5 percent coupon rate of interest. Interest is paid semiannually. The bond is currently
Four years ago Messy House Painting issued a 20-year bond with a $1,000 maturity value and a 4 percent coupon rate of interest. Interest is paid semiannually. The bond is currently selling for
Décor Interiors has an outstanding bond that was issued 20 years ago. The bond has a $1,000 maturity value and a 5.5 percent coupon rate of interest. Interest is paid semiannually. The bond, which
Severn Company’s bond has four years remaining to maturity. Interest is paid semiannually, the bonds have a $1,000 par value, and the coupon interest rate is 9 percent. Compute the yield to
Filkins Farm Equipment’s five-year zero coupon bond is currently selling for $621. The bond’s maturity value is $1,000. What is the bond’s yield to maturity (YTM)?
Buner Corp.’s outstanding bond, which has a coupon rate equal to 8 percent and a $1,000 face value, matures in six years. If investors require a rate of return equal to 12 percent on similar bonds
Tracer Manufacturers issued a 10-year bond six years ago. The bond’s maturity value is $1,000, and its coupon interest rate is 6 percent. Interest is paid semiannually. The bond matures in four
Fine Fishing Lures (FFL) has an outstanding bond with a $1,000 face value and a 9 percent coupon rate of interest (paid semiannually). The bond, which was issued 22 years ago, matures in eight
Eleven years ago, Elite Elements issued a 15-year bond with a $1,000 face value and a 5 percent coupon rate of interest (paid semiannually). If investors require a return equal to 7 percent to
Lightning Electric’s outstanding bond has a $1,000 maturity value and a 4.5 percent coupon rate of interest (paid semiannually). The bond, which was issued five years ago, matures in 10 years. If
Suppose you own a convertible bond that has a conversion ratio equal to 50. Each convertible bond has a face value equal to $1,000. The current market value of the company’s common stock is $19,
Many years ago, Winding Road Maps issued a convertible bond with a conversion ratio equal to 40. The bond’s face value is $1,000. (a) For how many shares of stock can a bondholder convert
Swift Bicycles plans to issue convertible bonds to finance its future growth. Each convertible bond has a face value equal to $1,000 and can be converted into 25 shares of common stock. What is the
Economists expect that the nominal risk-free rate of return, rRF, on one-year Treasury bonds will be 2.4 percent long into the future. General Machinery’s (GM) one-year bond has a yield equal to
Suppose economists expect that the nominal riskfree rate of return, rRF, which is also the rate on a one-year Treasury note, will be 3.2 percent long into the future. You are evaluating two corporate
Currently, a six-month Treasury bill is yielding 3.2 percent. Company F’s three-year bond has a yield equal to 5.0 percent, and its seven-year bond has a yield equal to 5.8 percent. Although none
The Wall Street Journal reports that the yield on a nine-month Treasury bond is 2.3 percent, the yield on a three-year Treasury bond is 2.9 percent, and the yield on a 10-year Treasury bond is 4.3
Suppose today is January 2, 2017, and investors expect the annual risk-free interest rates in 2021 and 2022 to be:Year
Suppose today is January 2, 2017, and investors expect the annual inflation rates in 2017 through 2019 to be:Year
Today is January 2, 2017, and investors expect the annual risk-free interest rates in 2017 through 2019 to be:Year
Economists expect the inflation rate to be 1.5 percent for the coming year and the following year, and then after Year 2 inflation will settle at a constant rate greater than 1.5 percent. The yield
The rate of inflation for the next 12 months (Year 1) is expected to be 1.4 percent; it is expected to be 1.8 percent the following year (Year 2); and it is expected to be 2.0 percent every year
The interest rate on two-year Treasury bonds is 1.2 percent, the rate on three-year T-bonds is 1.4 percent, and the rate on four-year T-bonds is 1.9 percent. Using the expectations theory, compute
The interest rate on five-year Treasury bonds is 3.1 percent, the rate on six-year T-bonds is 2.9 percent, and the rate on seven-year T-bonds is 2.6 percent. Using the expectations theory, compute
The interest rate on one-year Treasury bonds is 0.4 percent, the rate on two-year T-bonds is 0.8 percent, and the rate on three-year T-bonds is 1.1 percent. Using the expectations theory, compute the
The interest rate on one-year Treasury bonds is 1.0 percent, the rate on two-year T-bonds is 0.9 percent, and the rate on three-year T-bonds is 0.8 percent. Using the expectations theory, compute the
Suppose the yield on a two-year Treasury bond is 5 percent and the yield on a one-year Treasury bond is 4 percent. If the maturity risk premium (MRP) on these bonds is zero (0), what is the expected
Earlier today, Stuart sold 200 shares of stock he owned. He purchased the stock three years ago for $28 per share. Following is a table that shows the market value of the stock at the end of each
Yesterday Sandi sold 1,000 shares of stock that she owned for $45 per share. When she purchased the stock two years ago, Sandi paid $50 per share. Every three months during the time that she held the
Wilma just sold all the shares of International Inns stock that she owned for $156 per share. She purchased the stock one year ago for $150 per share. If Wilma did not receive any dividend payments
One year ago, Regina purchased $1,050 worth of Elite Electrician’s common stock for $42 per share. During the year, Regina received two dividend payments, each equal to $0.05 per share. The
One year ago, Richard purchased 40 shares of common stock for $10 per share. During the year, he received one dividend payment in the amount of $0.50 per share. If the stock currently is worth $9
Yesterday Travis sold 1,000 shares of stock that he owned for $29 per share. Travis purchased the stock one year ago for $28 per share. During the year, Travis received a quarterly dividend equal to
Nona purchased a new car earlier today for $32,000. She financed the entire amount using a five-year loan with a 3 percent interest rate (compounded monthly). (a) Compute the monthly payments
When Sarah Jean purchased her house 12 years ago, she took out a 30-year mortgage for $220,000. The mortgage has a fixed interest rate of 6 percent compounded monthly. (a) Compute Sarah Jean’s
William recently graduated from NFA University. While at NFA, William took out a $50,000 student loan. His loan requires him to make monthly payments for a 10-year period. (a) If the simple
Yolanda’s bank advertises a savings investment that pays 6 percent compounded monthly. What is the investment’s (a) Annual percentage rate (APR) (b) Effective annual rate (rEAR)?
CanAm Financial offers investments that pay 12 percent interest compounded monthly, whereas UniMex Financial offers investments that pay 12.25 percent interest compounded semiannually. Which
Mario wants to take a trip that costs $4,750, but currently he only has $2,260 saved. If Mario invests this money at 7 percent compounded annually, how long will it take for his investment to grow to
Tina owes $12,000 on her automobile loan, which has an interest rate equal to 4.8 percent compounded monthly. If Tina pays $526 at the end of each month, how long will it take her to repay the loan?
Ten years ago, Bruce invested $1,250. Today, the investment is worth $3,550. If interest is compounded annually, what annual rate of return did Bruce earn on his investment?
Compute the present value (PV) of an annuity that pays $320 forever if the opportunity cost rate is (a) 4 percent, (b) 8 percent, (c) 10 percent. Why does the PV decrease as the
Suppose Jennifer deposits $500 in an account at the end of this year, $400 at the end of the next year, and $300 at the end of the following year. If her opportunity cost rate is 7.5 percent, how
If the opportunity cost rate is 7.5 percent, what is the present value of an investment that pays $500 at the end of this year, $400 at the end of the next year, and $300 at the end of the following
Rebecca would like to set up an account to supplement her parents’ retirement income for the next 15 years. (a) If the account earns 7.2 percent compounded monthly, how much will Rebecca have
Kym plans to deposit $100 in an account at the end of each month for the next five years so that she can take a trip. (a) If Kym’s opportunity cost rate is 6 percent compounded monthly, how
Compute the amount Amanda must deposit in an account today so that she can pay herself $450 per month for the next nine years if her opportunity cost rate is 8.4 percent compounded monthly. How much
Suppose your opportunity cost rate is 11 percent compounded annually.(a) How much must you deposit in an account today if you want to pay yourself $230 at the end of each of the next 15
At the end of each of the past 14 years, Vanessa deposited $450 in an account that earned 8 percent compounded annually. (a) How much is in the account today? (b) How much would be in the
Suppose you invest $385 at the end of each of the next eight years. (a) If your opportunity cost rate is 7 percent compounded annually, how much will your investment be worth after the last
If Quincy can invest at an opportunity cost rate equal to 12 percent compounded monthly, what lumpsum amount should he invest today so that he has $22,000 to buy a new car in three years?
What is the present value (PV) of an investment that will pay $2,500 in five years if the opportunity cost rate is 9 percent compounded (a) Annually, (b) Quarterly,(c)
Matt is considering the purchase of an investment that will pay him $12,500 in 12 years. If Matt wants to earn a return equal to 7 percent per year (annual compounding), what is the maximum amount he
What is the present value of $1,500 due in 14 years at a (a) 5 percent interest rate (b) 10 percent rate. Explain why the present value is lower when the interest rate is higher.
Staci invested $950 five years ago. Her investment paid 7.2 percent interest compounded monthly. Staci’s twin sister Shelli invested $900 at the same time. But Shelli’s investment earned 8
Fiona plans to invest $500 later today. She wants to know to what amount her investment will grow in 20 years if she earns 12 percent interest compounded (a) Annually, (b)

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