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fundamentals of corporate finance
Questions and Answers of
Fundamentals Of Corporate Finance
You’re trying to choose between two different investments, both of which have up-front costs of \($40,000.Investment\) G returns \($75,000\) in six years. Investment H returns \($105,000\) in 11
You’re prepared to make monthly payments of \($75.21,\) beginning at the end of this month, into an account that pays 12 percent interest compounded monthly. How many payments will you have made
You want to borrow \($30,000\) from your local bank to buy a new sailboat. You can afford to make monthly payments of \($650,\) but no more. Assuming monthly compounding, what is the highest rate you
You need a 30-year, fixed-rate mortgage to buy a new home for \($200,000.\) Your mortgage bank will lend you the money at a 6.5 percent APR for this 360-month loan. However, you can only afford
You’ve just won the U.S. Lottery. Lottery officials offer you the choice of two alternative payouts: either \($1\) million today, or \($3\) million ten years from now. Which payout will you choose
Congratulations! You’ve just won the \($20\) million first prize in the Subscriptions R Us Sweepstakes. Unfortunately, the sweepstakes will actually give you the \($20\) million in \($500,000\)
What is the present value of \($500\) per year, at a discount rate of 12 percent, if the first payment is received 5 years from now and the last payment is received 20 years from now?
Given an interest rate of 8.5 percent per year, what is the value at date t 9 of a perpetual stream of \($300\) payments that begin at date t = 14?
A local finance company quotes a 12 percent interest rate on one-year loans. So, if you borrow \($20,000,\) the interest for the year will be \($2,400.\) Because you must repay a total of \($22,400\)
A 5-year annuity of ten \($5,000\) semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 16 percent compounded monthly, what is
What is the value of an investment that pays \($6,500\) every other year forever, if the first payment occurs one year from today and the discount rate is 16 percent compounded daily? What is the
Obviously, the package is not worth \($25\) million because the payments are spread out over three years. The bonus is paid today, so it’s worth \($2\) million. The present values for the three
We will calculate the future values for each of the cash flows separately and then add them up. Notice that we treat the withdrawals as negative cash flows:This value includes a small rounding
The most you would be willing to pay is the present value of \($12,000\) per year for 10 years at a 15 percent discount rate. The cash flows here are in ordinary annuity form, so the relevant present
A rate of 8 percent APR with monthly payments is actually 8%/12 .67% per month. The EAR is thus: EAR [1+(.08/12)112 - 1 = 8.30%
We first need to calculate the annual payment. With a present value of\($10,000,\) an interest rate of 14 percent, and a term of five years, the payment can be determined from:Therefore, the payment
The cash flows on the car loan are in annuity form, so we only need to find the payment. The interest rate is 15%/12 = 1.25% per month, and there are 72 months. The first thing we need is the annuity
First Rajan Bank pays 4 percent simple interest on its savings account balances, whereas First Mullineaux Bank pays 4 percent interest compounded annually. If you made a \($5,000\) deposit in each
A 1949 Vincent Black Shadow Series B vintage motorcycle (of which only 80 were made) sold for about \($45,000\) in 1996. If you were fortunate enough to have purchased one new for \($630\) in 1949,
Hot Wheels cars were sold at auction in 1995 by Christie’s International PLC for \($100\) each. At the time, it was estimated that this represented a 27.7 percent annual rate of return. For this to
You are scheduled to receive \($22,000\) in two years. When you receive it, you will invest it for six more years at 6 percent per year. How much will you have in eight years?
A first-round draft choice quarterback has been signed to a three-year, \($25\) million contract. The details provide for an immediate cash bonus of \($2\) million. The player is to receive \($5\)
You plan to make a series of deposits in an individual retirement account. You will deposit \($1,000\) today,\($2,000\) in two years, and \($2,000\) in five years. If you withdraw \($1,500\) in three
You are looking into an investment that will pay you\($12,000\) per year for the next 10 years. If you require a 15 percent return, what is the most you would pay for this investment?
The going rate on student loans is quoted as 8 percent APR. The terms of the loans call for monthly payments. What is the effective annual rate (EAR) on such a student loan?
Suppose you borrow \($10,000.\) You are going to repay the loan by making equal annual payments for five years. The interest rate on the loan is 14 percent per year. Prepare an amortization schedule
You’ve recently finished your MBA at the Darnit School. Naturally, you must purchase a new BMW immediately. The car costs about \($21,000.\) The bank quotes an interest rate of 15 percent APR for a
If the Ally McVeal Co. has a 23 percent ROE and a 70 percent payout ratio, what is its sustainable growth rate?
Paula Jones Mfg., Inc., is currently operating at only 70 percent of fixed asset capacity. Current sales are \($245,000.\) How fast can sales grow before any new fixed assets are needed?
For the company in the previous problem, suppose fixed assets are \($190,000\) and sales are projected to grow to \($330,000.\) How much in new fixed assets are required to support this growth in
Cash Cow Co. wishes to maintain a growth rate of 6 percent a year, a debt-equity ratio of .35, and a dividend payout ratio of 60 percent. The ratio of total assets to sales is constant at 1.40. What
Smolira’s Smoked Salmon, Inc., wishes to maintain a growth rate of 10 percent per year and a debt-equity ratio of .30.Profit margin is 5 percent, and the ratio of total assets to sales is constant
Assume you deposit \($10,000\) today in an account that pays 6 percent interest. How much will you have in five years?
Suppose you have just celebrated your 19th birthday. A rich uncle has set up a trust fund for you that will pay you \($150,000\) when you turn 30. If the relevant discount rate is 9 percent, how much
You’ve been offered an investment that will double your money in 10 years. What rate of return are you being offered?
You’ve been offered an investment that will pay you 9 percent per year. If you invest \($15,000,\) how long until you have \($30,000?\) How long until you have \($45,000\)?
As you increase the length of time involved, what happens to future values?What happens to present values?
Based on the following information for the Skandia Mining Company, what is EFN if sales are predicted to grow by 10 percent?Use the percentage of sales approach and assume the company is operating at
Consider the following balance sheets for the Philippe Corporation. Calculate the changes in the various accounts and, where applicable, identify the change as a source or use of cash. What were the
Below is the most recent income statement for Philippe. Prepare a common-size income statement based on this information.How do you interpret the standardized net income? What percentage of sales
Based on the balance sheets and income statement in the previous two problems, calculate the following ratios for 1999: Current ratio Quick ratio Cash ratio Inventory turnover Receivables turnover
Calculate the 1999 ROE for the Philippe Corporation and then break down your answer into its component parts using the Du Pont identity.
Randy’s Moss Co. has sales of \($26\) million, total assets of \($36\) million, and total debt of \($7\) million. If the profit margin is 6 percent, what is net income? What is ROA? What is ROE?
Sosa Lumber Yard has a current accounts receivable balance of \($425,467.\) Credit sales for the year just ended were \($2,510,255.\) What is the receivables turnover? The days’sales in
Lewinsky Corporation has ending inventory of \($352,600,\) and cost of goods sold for the year just ended was \($1,586,700.\) What is the inventory turnover? The days’sales in inventory?How long on
Meadville Co. had additions to retained earnings for the year just ended of \($150,000.\) The firm paid out \($100,000\) in cash dividends, and it has ending total equity of \($5\) million. If
For 1999, BDJ, Inc., had a cost of goods sold of \($8,328.\) At the end of the year, the accounts payable balance was \($1,200.\) How long on average did it take the company to pay off its suppliers
For the year just ended, Fusselman Frozen Yogurt shows an increase in its net fixed assets account of \($370.\) The company took \($120\) in depreciation expense for the year. How much did Fusselman
The Jordan Company has net income of \($75,500.\) There are currently 14.20 days’ sales in receivables. Total assets are \($560,000,\) total receivables are \($86,600,\) and the debt-equity ratio
For the most recent year, Back Alley Boys, Inc., had sales of \($250,000,\) cost of goods sold of \($80,000,\) depreciation expense of \($27,000,\) and additions to retained earnings of \($33,360.\)
McGwire Bat Factory, Inc., has current assets of \($2,000,\) net fixed assets of \($6,000,\) current liabilities of \($800,\) and longterm debt of \($4,000.\) What is the value of the shareholders’
Yo Quiero Taco, Inc., has sales of \($275,000,\) costs of \($175,000,\) depreciation expense of \($15,000,\) interest expense of \($6,000,\) and a tax rate of 35 percent. What is the net income for
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for \($3\) million. The machinery can be sold to the Romulans today for \($2\) million. Klingon’s current balance sheet shows
Starr M. Peaches, Inc., has sales of \($6,750,\) costs of \($4,750,\) depreciation expense of \($1,000,\) and interest expense of \($180.\) If the tax rate is 35 percent, what is the operating cash
The December 31, 1998, balance sheet of Venus’s Tennis Shop, Inc., showed current assets of \($700\) and current liabilities of \($425.\) The December 31, 1999, balance sheet showed current assets
The December 31, 1998, balance sheet of Pearl Jelly, Inc., showed long-term debt of \($2\) million, and the December 31, 1999, balance sheet showed long-term debt of \($2.9\) million. The 1999 income
The December 31, 1998, balance sheet of Pearl Jelly, Inc., showed \($500,000\) in the common stock account and \($6.6\) million in the additional paid-in surplus account. The December 31, 1999,
Prepare a balance sheet for Tim’s Couch Corp. as of December 31, 1999, based on the following information: cash \($200,000;\) patents and copyrights \($525,000;\) accounts payable \($500,000;\)
Evander Ear Repair, Inc., is obligated to pay its creditors $2,200 during the year.a. What is the value of the shareholders’ equity if assets equal $2,400?b. What if assets equal $1,800?
In preparing the balance sheets, remember that shareholders’ equity is the residual. With this in mind, Mara’s balance sheets are as follows:Notice that we’ve used an average 35 percent tax
Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company’s geologist, has just finished his analysis of the mine site. He has estimated
Suppose the company in the previous problem uses a discount rate of 11 percent and a reinvestment rate of 8 percent on all of its projects. Calculate the MIRR of the project using all three methods
Consider the following two mutually exclusive projects:Sketch the NPV profiles for X and Y over a range of discount rates from zero to 25 percent. What is the crossover rate for these two projects?
Garage, Inc., has identified the following two mutually exclusive projects:a. What is the IRR for each of these projects? Using the IRR decision rule, which project should the company accept? Is this
For the cash flows in the previous problem, what is the NPV at a discount rate of zero percent? What if the discount rate is 10 percent? If itis 20 percent? If it is 30 percent?Data From Previous
Suppose a project has conventional cash flows and a positive NPV. What do you know about its payback? Its discounted payback? Its profitability index? Its IRR? Explain.
Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan,
This one’s a little harder. Suppose the current share price for the firm in the previous problem is $44.50 and all the dividend information remains the same. What required return must investors be
You have found the following historical information for the Daniela Company over the past four years:Earnings are expected to grow at 11 percent for the next year. Using the company’s historical
You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What was the closing price for this stock that appeared in yesterday’s paper? If
After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only person
Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $3.25 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company’s
Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2015. What is
Both Bond Sam and Bond Dave have 6.5 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 3 years to maturity, whereas Bond Dave has 20 years to maturity. If interest
Bond X is a premium bond making semiannual payments. The bond pays a coupon rate of 8.5 percent, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making semiannual
Locate the Treasury bond in Figure 7.4 maturing in August 2039. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid–ask spread in
An investment offers a total return of 11.5 percent over the coming year. Janice Yellen thinks the total real return on this investment will be only 9 percent. What does Janice believe the inflation
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 issues a bond with a par
This is a classic retirement problem. A friend is celebrating her birthday and wants to start saving for her anticipated retirement. She has the following years to retirement and retirement spending
What is the value of an investment that pays $25,000every other year forever, if the first payment occurs one year from today and thediscount rate is 8 percent compounded daily? What is the value
The interest rate on a one-year loan is quotedas 12 percent plus 3 points (see the previous problem). What is the EAR? Is youranswer affected by the loan amount?Data From Previous Problem:You are
This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulouslender. You want to borrow $25,000 for one year. The interest rate is 13.4
Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $13,500 every yearinstead of equal annual payments.Data From Problem 55:Prepare an amortization schedule for a
You have just purchased a new warehouse. To financethe purchase, you've arranged for a 30-year mortgage loan for 80 percent of the$2,700,000 purchase price. The monthly payment on this loan will be
What is the relationship between thevalue of an annuity and the level of interest rates? Suppose you just bought a 13-yearannuity of $7,500 per year at the current interest rate of 10 percent per
You want to be a millionaire when youretire in 40 years. How much do you have to save each month if you can earn anannual return of 10.5 percent? How much do you have to save each month if you wait10
You are looking at an investment that has an effectiveannual rate of 12.5 percent. What is the effective semiannual return? The effectivequarterly return? The effective monthly return?
You are looking at an investment that has an effectiveannual rate of 12.5 percent. What is the effective semiannual return? The effectivequarterly return? The effective monthly return?
If the appropriate discount rate for the following cash flows is 6.18 percent per year, what is the present value of the cash flows?
If the appropriate discount rate for thefollowing cash flows is 9 percent compounded quarterly, what is the present value ofthe cash flows?
If the appropriate discount rate for thefollowing cash flows is 9 percent compounded quarterly, what is the present value ofthe cash flows?
Find the APR, or stated rate, in each of the following cases:
Find the ear in each of the following case:
Find the ear in each of the following case:
The Maybe Pay Life Insurance Co. is tryingto sell you an investment policy that will pay you and your heirs $40,000 per yearforever. If the required return on this investment is 5.1 percent, how much
You expect to receive $15,000 at graduation in two years. You plan on investing it at 9 percent until you have $75,000. Howlong will you wait from now?
You have just made your first $5,000 contribu-tion to your retirement account. Assuming you earn a return of 10 percent per yearand make no additional contributions, what will your account be worth
Refer back to the Series EE savings bonds wediscussed at the very beginning of the chapter.a. Assuming you purchased a $50 face value bond, what is the exact rate of returnyou would earn if you held
Refer back to the Series EE savings bonds wediscussed at the very beginning of the chapter.a. Assuming you purchased a $50 face value bond, what is the exact rate of returnyou would earn if you held
In 1895, the first U.S. Open Golf Championship was held. The winner's prize money was $150. In 2014, the winner's check was $1,260,000. What was the percentage increase per year in the winner's check
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