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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

Amortizing Loan. Consider a 4-year amortizing loan. You borrow $1,000 initially, and repay it in four equal annual year-end payments.a. If the interest rate is 10 percent, show that the annual
Annuity Value. You’ve borrowed $4,248.68 and agreed to pay back the loan with monthly payments of $200. If the interest rate is 12 percent stated as an APR, how long will it take you to pay back
Annuity Value. The $40 million lottery payment that you just won actually pays $2 million per year for 20 years. If the discount rate is 10 percent, and the first payment comes in 1 year, what is the
Real Annuities. A retiree wants level consumption in real terms over a 30-year retirement.If the inflation rate equals the interest rate she earns on her $450,000 of savings, how much can she spend
EAR versus APR. You invest $1,000 at a 6 percent annual interest rate, stated as an APR.Interest is compounded monthly. How much will you have in 1 year? In 1.5 years?
Annuity Value. You just borrowed $100,000 to buy a condo. You will repay the loan in equal monthly payments of $804.62 over the next 30 years. What monthly interest rate are you paying on the loan?
EAR. If a bank pays 10 percent interest with continuous compounding, what is the effective annual rate?
Annuity Values. You can buy a car that is advertised for $12,000 on the following terms: (a)pay $12,000 and receive a $1,000 rebate from the manufacturer; (b) pay $250 a month for 4 years for total
Continuous Compounding. How much will $100 grow to if invested at a continuously compounded interest rate of 10 percent for 6 years? What if it is invested for 10 years at 6 percent?
Future Values. I now have $20,000 in the bank earning interest of .5 percent per month. I need $30,000 to make a down payment on a house. I can save an additional $100 per month.How long will it take
Perpetuities. 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
Perpetuities. A local bank will pay you $100 a year for your lifetime if you deposit $2,500 in the bank today. If you plan to live forever, what interest rate is the bank paying?
Perpetuities. A property will provide $10,000 a year forever. If its value is $125,000, what must be the discount rate?
Applying Time Value. You can buy property today for $3 million and sell it in 5 years for$4 million. (You earn no rental income on the property.)a. If the interest rate is 8 percent, what is the
Applying Time Value. A factory costs $400,000. You forecast that it will produce cash inflows of $120,000 in Year 1, $180,000 in Year 2, and $300,000 in Year 3. The discount rate is 12 percent. Is
Applying Time Value. You invest $1,000 today and expect to sell your investment for $2,000 in 10 years.a. Is this a good deal if the discount rate is 5 percent?b. What if the discount rate is 10
Calculating Interest Rate. A store will give you a 3 percent discount on the cost of your purchase if you pay cash today. Otherwise, you will be billed the full price with payment due in 1 month.
Quoting Rates. Banks sometimes quote interest rates in the form of “add-on interest.” In this case, if a 1-year loan is quoted with a 20 percent interest rate and you borrow $1,000, then you pay
Compound Interest. Suppose you take out a $1,000, 3-year loan using add-on interest with a quoted interest rate of 20 percent per year. What will your monthly payments be? (Total payments are $1,000
Calculating Interest Rate. What is the effective annual rate on a one-year loan with an interest rate quoted on a discount basis (see problem 25) of 20 percent?
Effective Rates. First National Bank pays 6.2 percent interest compounded semiannually.Second National Bank pays 6 percent interest, compounded monthly. Which bank offers the higher effective annual
Calculating Interest Rate. You borrow $1,000 from the bank and agree to repay the loan over the next year in 12 equal monthly payments of $90. However, the bank also charges you a loan-initiation fee
Retirement Savings. You believe you will need to have saved $500,000 by the time you retire in 40 years in order to live comfortably. If the interest rate is 5 percent per year, how much must you
Retirement Savings. How much would you need in the previous problem if you believe that you will inherit $100,000 in 10 years?
Retirement Savings. You believe you will spend $40,000 a year for 20 years once you retire in 40 years. If the interest rate is 5 percent per year, how much must you save each year until retirement
Retirement Planning. A couple thinking about retirement decide to put aside $3,000 each year in a savings plan that earns 8 percent interest. In 5 years they will receive a gift of$10,000 that also
Retirement Planning. 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
Real versus Nominal Dollars. An engineer in 1950 was earning $6,000 a year. Today she earns $60,000 a year. However, on average, goods today cost 6 times what they did in 1950.What is her real income
Real versus Nominal Rates. If investors are to earn a 4 percent real interest rate, what nominal interest rate must they earn if the inflation rate is:a. zerob. 4 percentc. 6 percent
Real Rates. If investors receive an 8 percent interest rate on their bank deposits, what real interest rate will they earn if the inflation rate over the year is:a. zerob. 3 percentc. 6 percent
Real versus Nominal Rates. You will receive $100 from a savings bond in 3 years. The nominal interest rate is 8 percent.a. What is the present value of the proceeds from the bond?b. If the inflation
Real versus Nominal Dollars. 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
Real versus Nominal Annuities. Good news: you will almost certainly be a millionaire by the time you retire in 50 years. Bad news: the inflation rate over your lifetime will average about 3
Rule of 72. Using the Rule of 72, if the interest rate is 8 percent per year, how long will it take for your money to quadruple in value?
Inflation. Inflation in Brazil in 1992 averaged about 23 percent per month. What was the annual inflation rate?
Perpetuities. British government 4 percent perpetuities pay £4 interest each year forever.Another bond, 21⁄2 percent perpetuities, pays £2.50 a year forever. What is the value of 4 percent
Real versus Nominal Annuities.a. You plan to retire in 30 years and want to accumulate enough by then to provide yourself with $30,000 a year for 15 years. If the interest rate is 10 percent, how
Retirement and Inflation. Redo part (a) of problem 63, but now assume that the inflation rate over the next 50 years will average 4 percent.a. What is the real annual savings the couple must set
Annuity Value. What is the value of a perpetuity that pays $100 every 3 months forever?The discount rate quoted on an APR basis is 12 percent.
Changing Interest Rates. If the interest rate this year is 8 percent and the interest rate next year will be 10 percent, what is the future value of $1 after 2 years? What is the present value of a
Changing Interest Rates. Your wealthy uncle established a $1,000 bank account for you when you were born. For the first 8 years of your life, the interest rate earned on the account was 8 percent.
Financial Planning. True or false? Explain.a. Financial planning should attempt to minimize risk.b. The primary aim of financial planning is to obtain better forecasts of future cash flows and
Financial Models. What are the dangers and disadvantages of using a financial model? Discuss.
Using Financial Plans. Corporate financial plans are often used as a basis for judging subsequent performance. What can be learned from such comparisons? What problems might arise and how might you
Growth Rates. Find the sustainable and internal growth rates for a firm with the following ratios: asset turnover = 1.40; profit margin = 5 percent; payout ratio = 25 percent; equity/assets= .60.
Percentage of Sales Models. Percentage of sales models usually assume that costs, fixed assets, and working capital all increase at the same rate as sales. When do you think that these assumptions do
Relationships among Variables. Comebaq Computers is aiming to increase its market share by slashing the price of its new range of personal computers. Are costs and assets likely to increase or
Balancing Items. What are the possible choices of balancing items when using a financial planning model? Discuss whether some are generally preferable to others.
Financial Targets. Managers sometimes state a target growth rate for sales or earnings per share. Do you think that either makes sense as a corporate goal? If not, why do you think that managers
Percentage of Sales Models. Here are the abbreviated financial statements for Planners Peanuts:If sales increase by 20 percent in 2001, and the company uses a strict percentage of sales planning
Required External Financing. If the dividend payout ratio in problem 9 is fixed at 50 percent, calculate the required total external financing for growth rates in 2001 of 15 percent, 20 percent, and
Feasible Growth Rates. What is the maximum possible growth rate for Planners Peanuts(see problem 9) if the payout ratio remains at 50 percent anda. no external debt or equity is to be issuedb. the
Using Percentage of Sales. Eagle Sports Supply has the following financial statements. Assume that Eagle’s assets are proportional to its sales.a. Find Eagle’s required external funds if it
Feasible Growth Rates.a. What is the internal growth rate of Eagle Sports (see problem 12) if the dividend payout ratio is fixed at 60 percent and the equity-to-asset ratio is fixed at 2⁄3?b. What
Building Financial Models. How would Executive Fruit’s financial model change if the dividend payout ratio were cut to 1⁄3? Use the revised model to generate a new financial plan for 2000
Required External Financing. Executive Fruit’s financial manager believes that sales in 2000 could rise by as much as 20 percent or by as little as 5 percent.a. Recalculate the first-stage pro
Building Financial Models. The following tables contain financial statements for Dynastatics Corporation. Although the company has not been growing, it now plans to expand and will increase net fixed
Sustainable Growth. Plank’s Plants had net income of $2,000 on sales of $40,000 last year.The firm paid a dividend of $500. Total assets were $100,000, of which $40,000 was financed by debt.a. What
Sustainable Growth. A firm has decided that its optimal capital structure is 100 percent equity financed. It perceives its optimal dividend policy to be a 40 percent payout ratio. Asset turnover is
Internal Growth. Go Go Industries is growing at 30 percent per year. It is all-equity financed and has total assets of $1 million. Its return on equity is 20 percent. Its plowback ratio is 40
Sustainable Growth. A firm’s profit margin is 10 percent and its asset turnover ratio is .5.It has no debt, has net income of $10 per share, and pays dividends of $4 per share. What is the
Internal Growth. An all-equity–financed firm plans to grow at an annual rate of at least 10 percent. Its return on equity is 15 percent. What is the maximum possible dividend payout rate the firm
Internal Growth. Suppose the firm in the previous question has a debt-equity ratio of 1⁄3.What is the maximum dividend payout ratio it can maintain without resorting to any external financing?
Internal Growth. A firm has an asset turnover ratio of 2.0. Its plowback ratio is 50 percent, and it is all-equity financed. What must its profit margin be if it wishes to finance 8 percent growth
Internal Growth. If the profit margin of the firm in the previous problem is 6 percent, what is the maximum payout ratio that will allow it to grow at 8 percent without resorting to external
Internal Growth. If the profit margin of the firm in problem 23 is 6 percent, what is the maximum possible growth rate that can be sustained without external financing?
Using Percentage of Sales. The 2000 financial statements for Growth Industries are presented below. Sales and costs in 2001 are projected to be 20 percent higher than in 2000.Both current assets and
Capacity Use and External Financing. Now suppose that the fixed assets of Growth Industries(from the previous problem) are operating at only 75 percent of capacity. What is required external
Capacity Use and External Financing. If Growth Industries from problem 26 is operating at only 75 percent of capacity, how much can sales grow before the firm will need to raise any external funds?
Internal Growth. For many firms, cash and inventory needs may grow less than proportionally with sales. When we recognize this fact, will the firm’s internal growth rate be higher or lower than the
Spreadsheet Problem. Use a spreadsheet like that in Figure 1.17 to answer the following questions about Executive Fruit:a. What would be required external financing if the growth rate is 15 percent
Balance Sheet. Construct a balance sheet for Sophie’s Sofas given the following data. What is shareholders’ equity? Cash balances $10,000 Inventory of sofas = $200,000 Store and property =
Financial Statements. Earlier, we characterized the balance sheet as providing a snapshot of the firm at one point in time and the income statement as providing a video. What did we mean by this? Is
Income versus Cash Flow. Explain why accounting revenue generally will differ from a firm’s cash inflows.
Working Capital. QuickGrow is in an expanding market, and its sales are increasing by 25 percent per year. Would you expect its net working capital to be increasing or decreasing?
Tax Rates. Using Table 2.6, calculate the marginal and average tax rates for a single taxpayer with the following incomes: a. $20,000 b. $50,000 c. $300,000 d. $3,000,000
Tax Rates. What would be the marginal and average tax rates for a corporation with an income level of $100,000?
Taxes. A married couple earned $95,000 in 1999. How much did they pay in taxes? What were their marginal and average tax brackets?
Cash Flows. What impact will the following actions have on the firm’s cash balance?a. The firm sells some goods from inventory.b. The firm sells some machinery to a bank and leases it back for a
Balance Sheet/Income Statement. The year-end 1999 balance sheet of Brandex Inc. lists common stock and other paid-in capital at $1,100,000 and retained earnings at $3,400,000.The next year, retained
Taxes. You have set up your tax preparation firm as an incorporated business. You took$70,000 from the firm as your salary. The firm’s taxable income for the year (net of your salary) was $30,000.
Market versus Book Values. The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology. He then formed a corporation and invested$200,000 in
Income Statement. Sheryl’s Shingles had sales of $10,000 in 2000. The cost of goods sold was $6,500, general and administrative expenses were $1,000, interest expenses were $500, and depreciation
Cash Flow. Can cash flow from operations be positive if net income is negative? Can operating cash flow be negative if net income is positive? Give examples.
Cash Flows. Ponzi Products produced 100 chain letter kits this quarter, resulting in a total cash outlay of $10 per unit. It will sell 50 of the kits next quarter at a price of $11, and the other 50
Profits versus Cash Flow. During the last year of operations, accounts receivable increased by $10,000, accounts payable increased by $5,000, and inventories decreased by $2,000.What is the total
Income Statement. A firm’s income statement included the following data. The firm’s average tax rate was 20 percent. Cost of goods sold $8,000 Income taxes paid 2,000 Administrative expenses
Profits versus Cash Flow. Butterfly Tractors had $14 million in sales last year. Cost of goods sold was $8 million, depreciation expense was $2 million, interest payment on outstanding debt was $1
Cash Flow. Candy Canes, Inc., spends $100,000 to buy sugar and peppermint in April. It produces its candy and sells it to distributors in May for $150,000, but it does not receive payment until June.
Financial Statements. Here are the 1999 and 2000 (incomplete) balance sheets for Nobel Oil Corp.a. What was owners’ equity at the end of 1999 and 2000?b. If Nobel paid dividends of $100 in 2000,
Financial Statements. 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
Balance Sheet. Construct a balance sheet for Fincorp for 1999 and 2000. What is shareholders’equity?
Working Capital. What happened to net working capital during the year?
Income Statement. Construct an income statement for Fincorp for 1999 and 2000. What were retained earnings for 2000? How does that compare with the increase in shareholders’equity between the two
Earnings per Share. Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share?
Taxes. What was the firm’s average tax bracket for each year? Do you have enough information to determine the marginal tax bracket?
Balance Sheet. Examine the values for depreciation in 2000 and net fixed assets in 1999 and 2000. What was Fincorp’s gross investment in plant and equipment during 2000?
Cash Flows. Construct a statement of cash flows for Fincorp for 2000.
Book versus Market Value. Now suppose that the market value (in thousands of dollars) of Fincorp’s fixed assets in 2000 is $6,000, and that the value of its long-term debt is only $2,400. In
Taxes. Reconsider the data in problem 10 which imply that you have $100,000 of total pretax income to allocate between your salary and your firm’s profits. What allocation will minimize the total

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