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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

2 OJ Limited is a supplier of leather goods to retailers in the UK and other Western European countries. The company is considering entering into a joint venture with a manufacturer in South America.
South Sea Baubles has the following (incomplete) balance sheet and income statement.a. What is shareholders’ equity in 1999 and 2000?b. What is net working capital in 1999 and 2000?c. What is
Your consulting firm will produce cash flows of $100,000 this year, and you expect cash flow to keep pace with any increase in the general level of prices. The interest rate currently is 8 percent,
A couple will retire in 50 years; they plan to spend about $30,000 a year in retirement, which should last about 25 years. They believe that they can earn 10 percent interest on retirement savings.a.
A local bank advertises the following deal: “Pay us $100 a year for 10 years and then we will pay you (or your beneficiaries) $100 a year forever.” Is this a good deal if the interest rate
29. HMK Enterprises would like to raise $10 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 6.5% (annual
26. The following table summarizes the yields to maturity on several one-year, zerocoupon securities:a. What is the price (expressed as a percentage of the face value) of a one-year, zerocoupon
15. The prices of several bonds with face values of $1000 are summarized in the following table:For each bond, state whether it trades at a discount, at par, or at a premium. Bond A B C D Price
4. The following table summarizes prices of various default-free zero-coupon bonds(expressed as a percentage of face value):a. Compute the yield to maturity for each bond.b. Plot the zero-coupon
2. Assume that a bond will make payments every six months as shown on the following timeline (using six-month periods):a. What is the maturity of the bond (in years)?b. What is the coupon rate (in
39. See the Treasury Yield Curve from June 2013 below. At the time, some were concerned about whether the Federal Reserve’s stimulus activities would lead to high inflation.Based on the Yield
38. What is the shape of the yield curve given in the following term structure? What expectations are investors likely to have about future interest rates? Term (in years) 1 2 3 5 7 10 20 Rate (EAR,
*24. When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of attention for his “$252 million” contract (the total of the payments promised was $252 million).He later moved to
4. You have a balance of $5000 on your credit card, which charges an interest rate of 1.5% per month. Looking at your budget, you figure you can make the following payments.Will they be enough to pay
3. You want to borrow $10,000. You figure that you can make the following payments.If the interest rate on the loan is 8.5% per year, will your payments be enough to pay off the $10,000 loan? Year 2
2. What is the present value of the following set of cash flows, discounted at 15%per year? Year 1 2 3 4 CF 100 -100 200 -200
1.a. What is the present value of the following set of cash flows, discounted at 10%per year?b. What is the present value of the following set of cash flows, discounted at 10%per year? Year CF 1 10
37. Some balance sheet information is shown here (all values in millions of dollars) (see for the data in Excel format):a. What change in the book value of the company’s equity took place at the
32. For 2015, Walmart and Target had the following information (all values are in millions of dollars):a. What is each company’s accounts receivable days?b. What is each company’s inventory
31. You are analyzing the leverage of two firms and you note the following (all values in millions of dollars):a. What is the market debt-to-equity ratio of each firm?b. What is the book
21. In early-2016, the following information was true about Abercrombie and Fitch (ANF)and The Gap (GPS), both clothing retailers. Values (except price per share) are in millions of dollars.a. What
16. See the cash flow statement below (all values in thousands of dollars) (see for the data in Excel format):a. What were the company’s cumulative earnings over these four quarters? What were its
8. Find online the annual 10-K report for Costco Wholesale Corporation (COST) for fiscal year 2015 (filed in October 2015). Answer the following questions from the income statement:a. What were
21. The following quote on Yahoo! stock appeared on April 11, 2016, on Yahoo! Finance:If you wanted to buy Yahoo!, what price would you pay per share? How much would you receive per share if you
6 Palmerston Plc operates in both the UK and Germany. In attempting to assess its economic exposure, it compiles the following data:■ UK sales are influenced by the euro’s value as it faces
7 A professional accountancy institute in the UK is evaluating an investment project overseas in Eastasia, a politically stable country. The project involves the establishment of a training school to
discuss different ways of entering foreign markets.
44. Future values and continuous compounding (S2.4) Here are two useful rules of thumb.The “rule of 72” says that with discrete compounding the time it takes for an investment to double in value
43. Declining perpetuities and annuities (S2.3) You own an oil pipeline that will generate a $2 million cash return over the coming year. The pipeline’s operating costs are negligible, and it is
42. Annuities (S2.2) Use Excel to construct your own set of annuity tables showing the annuity factor for a selection of interest rates and years.
41. Continuous compounding (S2.4) The continuously compounded interest rate is 12%.a. You invest $1,000 at this rate. What is the investment worth after five years?b. What is the PV of $5 million to
40. Continuous compounding (S2.4) How much will you have at the end of 20 years if you invest $100 today at 15% annually compounded? How much will you have if you invest at 15% continuously
39. Perpetuities and continuous compounding (S2.4) If the interest rate is 7% compounded annually, what is the value of the following three investments?a. An investment that offers you $100 a year in
38. Compounding intervals (S2.4) You are quoted an interest rate of 6% on an investment of$10 million.What is the value of your investment after four years if interest is compounded:a. Annually?b.
37. Compounding intervals (S2.4) Which would you prefer?a. An investment paying interest of 12% compounded annually.b. An investment paying interest of 11.7% compounded semiannually.c. An investment
36. Compounding intervals (S2.4) A leasing contract calls for an immediate payment of$100,000 and nine subsequent $100,000 semiannual payments at six-month intervals. What is the PV of these payments
35. Growing perpetuities and annuities (S2.3) Your firm’s geologists have discovered a small oil field in New York’s Westchester County. The field is forecasted to produce a cash flow of C1 = $2
34. Growing perpetuities and annuities (S2.3) As winner of a breakfast cereal competition, you can choose one of the following prizes:a. $100,000 now.b. $180,000 at the end of five years.c. $11,400 a
33. Growing annuities (S2.3) You are contemplating membership in the St. Swithin’s and Ancient Golf Club. The annual membership fee for the coming year is $5,000, but you can make a single payment
32. Growing annuities (S2.3) You estimate that by the time you retire in 35 years, you will have accumulated savings of $2 million. If the interest rate is 8% and you live 15 years after retirement,
31. Growing perpetuities (S2.3) A common stock will pay a cash dividend of $4 next year.After that, the dividends are expected to increase indefinitely at 4% per year. If the discount rate is 14%,
c. You have invested $60,476 at 8%. After paying the above school fees, how much would remain at the end of the six years?Chapter 2 How to Calculate Present Values 49
b. You have to pay $12,000 a year in school fees at the end of each of the next six years. If the interest rate is 8%, how much do you need to set aside today to cover these bills?
30. Future values and annuities (S2.2)a. The cost of a new automobile is $10,000. If the interest rate is 5%, how much would you have to set aside now to provide this sum in five years?
c. What fraction of your initial loan payment is interest? What about the last payment? What fraction of the loan has been paid off after 10 years? Why is the fraction less than half?
b. Construct a mortgage amortization table in Excel similar to Table 2.1, showing the interest payment, the amortization of the loan, and the loan balance for each year.
29. Amortizing loans (S2.2) Suppose that you take out a $200,000, 20-year mortgage loan to buy a condo. The interest rate on the loan is 6%, and payments on the loan are made annually at the end of
b. For each year, calculate the loan balance that remains outstanding, the interest payment on the loan, and the reduction in the loan balance.
28. Amortizing loans (S2.2) A bank loan requires you to pay $70,000 at the end of each of the next eight years. The interest rate is 8%.a. What is the present value of these payments?
b. How will your answer change if the four payments on the installments do not start until the end of the year?
a. Which is the better deal if the interest rate is 5%?
27. Annuities due (S2.2) A store offers two payment plans. Under the installment plan, you pay 25% down and 25% of the purchase price in each of the next three years. If you pay the entire bill
b. What is the present value if the first payment comes immediately?
26. Annuities due (S2.2) The $40 million lottery prize that you have just won actually pays out$2 million a year for 20 years. The interest rate is 8%.a. If the first payment comes after 1 year, what
d. $1 billion a year spread evenly over 20 years.
c. $1 billion at the end of each year for 20 years.
25. Perpetuities and annuities (S2.2, S2.3) If the rate of interest is 8% rather than 10%, how much would you need to set aside to provide each of the following?a. $1 billion at the end of each year
24. Annuities (S2.2)Dear Financial Adviser, My spouse and I are each 62 and hope to retire in three years. After retirement we will receive $7,500 per month after taxes from our employers’ pension
b. The first payment arrives in six months. Following payments arrive at one-year intervals(i.e., at 18 months, 30 months, etc.).
23. Annuities (S2.2) The annually compounded discount rate is 5.5%. You are asked to calculate the present value of a 12-year annuity with payments of $50,000 per year. Calculate PV for each of the
b. Enhance Reinsurance Company was reported to have offered $4.2 million. Use Excel to find the return that the company was looking for.
22. Annuities (S2.2) Several years ago, The Wall Street Journal reported that the winner of the Massachusetts State Lottery prize had the misfortune to be both bankrupt and in prison for fraud. The
21. Annuities (S2.2) Siegfried Basset is 65 years of age and has a life expectancy of 12 more years. He wishes to invest $20,000 in an annuity that will make a level payment at the end of each year
20. Annuities (S2.2) David and Helen Zhang are saving to buy a boat at the end of five years. If the boat costs $20,000 and they can earn 10% a year on their savings, how much do they need to put
d. If the PV of $10 a year for three years is $24.65, what is the three-year annuity factor?e. From your answers to parts (c) and (d), calculate the three-year discount factor.
c. Given these one- and two-year discount factors, calculate the two-year annuity factor.
b. If the two-year interest rate is 10.5%, what is the two-year discount factor?
a. If the one-year discount factor is 0.905, what is the one-year interest rate?
19. Discount factors and annuity factors (S2.2)
d. A piece of land produces an income that grows by 5% per annum. If the first year’s income is $10,000, what is the value of the land?
c. What is the approximate PV of an asset that pays $1 a year for each of the next seven years?
b. The value of an asset that appreciates at 10% per annum approximately doubles in seven years. What is the approximate PV of an asset that pays $1 a year in perpetuity beginning in year 8?
18. Perpetuities and annuities (S2.2) The interest rate is 10%.a. What is the PV of an asset that pays $1 a year in perpetuity?
17. Perpetuities (S2.2) You have just read an advertisement stating, “Pay us $100 a year for 10 years and we will pay you $100 a year thereafter in perpetuity.” If this is a fair deal, what is
16. Perpetuities (S2.2) An investment costs $1,548 and pays $138 in perpetuity. If the interest rate is 9%, what is the NPV?
b. Halcyon could finance the ship by borrowing the entire investment at an interest rate of 4.5%. How does this borrowing opportunity affect your calculation of NPV?
a. What is the NPV if the opportunity cost of capital is 8%?
15. Present values and opportunity cost of capital (S2.1) Halcyon Lines is considering the purchase of a new bulk carrier for $8 million. The forecasted revenues are $5 million a year and operating
14. Present values (S2.1) Recalculate the NPV of the office building venture in Example 2.3 at interest rates of 5, 10, and 15%. Plot the points on a graph with NPV on the vertical axis and the
13. Present values (S2.1) A factory costs $800,000. You estimate that it will produce an inflow after operating costs of $170,000 a year for 10 years. If the opportunity cost of capital is 14%, what
12. Present values (S2.1) Lofting Snodbury is considering investing in a new boring machine. It costs $380,000 and is expected to produce the following cash flows:Year 1 2 3 4 5 6 7 8 9 10 Cash flow
11. Present values (2.1) What is the PV of $100 received in:a. Year 10 (at a discount rate of 1%)?b. Year 10 (at a discount rate of 13%)?c. Year 15 (at a discount rate of 25%)?d. Each of years 1
10. Present values (2.1) A project produces a cash flow of $432 in year 1, $137 in year 2, and$797 in year 3. If the cost of capital is 15%, what is the project’s PV? If the project requires an
9. Present values (S2.1) If the cost of capital is 9%, what is the PV of $374 paid in year 9?
8. Discount factors (S2.1)a. If the present value of $139 is $125, what is the discount factor?b. If that $139 is received in year 5, what is the interest rate?
7. Future values (S2.1) Compute the future value of a $100 investment for the following combinations of rates and times.a. r = 6%, t = 10 years.b. r = 6%, t = 20 years.c. r = 4%, t = 10 years.d. r =
6. Future values (S2.1) If you invest $100 at an interest rate of 15%, how much will you have at the end of eight years?
5. Compound interest (S2.1) In 2017, Leonardo da Vinci’s painting Salvator Mundi sold for a record $450.3 million. In 1958, it sold for $125, equivalent in purchasing power to about$1,060 at 2017
4. Compound interest (S2.1) New Savings Bank pays 4% interest on deposits. If you deposit$1,000 in the bank and leave it there, will it take more or less than 25 years for your investment to double?
3. Compound interest (S2.1) In 1973, Gordon Moore, one of Intel’s founders, predicted that the number of transistors that could be placed on a single silicon chip would double every 18 months,
2. Compound interest (S2.1) Old Time Savings Bank pays 4% interest on its savings account.If you deposit $1,000 in the bank and leave it there:a. How much interest will you earn in the first year?b.
1. Opportunity cost of capital (S2.1) Which of the following statements are true? The opportunity cost of capital:a. Equals the interest rate at which the company can borrow.b. Depends on the risk of
8. (NOMINAL) What monthly compounded interest rate would Second National Bank need to pay on savings deposits to provide an effective rate of 6.2%?
7. (EFFECT) First National Bank pays 6.2% interest compounded annually. Second National Bank pays 6% interest compounded monthly. Which bank offers the higher effective annual interest rate?
6. (PMT) You need to take out a home mortgage for$200,000. If payments are made annually over 30 years and the interest rate is 8%, what is the amount of the annual payment?
5. (NPER) An investment adviser has promised to double your money. If the interest rate is 7% a year, how many years will she take to do so?
4. (RATE) Ford Motor stock was one of the victims of the coronavirus pandemic. At the end of June 2020, Ford stock price stood at$6.08. Six months later it was $8.79. What was the annual rate of
3. (PV) Your company can lease a truck for $10,000 a year (paid at the end of the year) for six years, or it can buy the truck today for $50,000. At the end of the six years, the truck will be
2. (PV) Your adviser has produced revised figures for your office building. It is forecasted to produce a cash flow of $40,000 in year 1 but only $850,000 in year 2, when you come to sell it. If the
1. (FV) In 1459 the Medici Bank in Florence lent the Duke of Milan 218,000 Milanese pounds at an interest rate of 15.4%. Suppose that the loan was for three years. What would have been the value of

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