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business
fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

A proposed cost-saving device has an installed cost of \($480,000.\) The device will be used in a five-year project, but is classified as three-year MACRS property for tax purposes. The required
An investment project provides cash inflows of \($300\) per year for eight years. What is the project payback period if the initial cost is \($1,400?\) What if the initial cost is \($1,750?\) What if
An investment project costs \($5,000\) and has annual cash flows of \($1,100\) for six years. What is the discounted payback period if the discount rate is zero percent? What if the discount rate is
A project that provides annual cash flows of \($400\) for eight years costs \($1,500\) today. Is this a good project if the required return is 8 percent? What if it’s 24 percent? At what discount
Gasco Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:a. If the company requires a 10 percent return on its investments, should it accept this project?
The Multigig Computer Corporation is trying to choose between the following two mutually exclusive design projects:a. If the required return is 9 percent and Multigig Computer applies the
An investment has an installed cost of \($257,650.\) The cash flows over the four-year life of the investment are projected to be \($75,429,\) \($153,408,\) \($102,389,\) and \($50,000.\) If the
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is “looking up.” As a result, the cemetery project will provide a net cash
Favre, Inc., just paid a dividend of \($2\) per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year, indefinitely. If investors require a 12 percent return
The next dividend payment by SAF, Inc., will be \($3\) per share. The dividends are anticipated to maintain a 6 percent growth rate, forever. If SAF stock currently sells for \($48.00\) per share,
Madonna Corporation will pay a \($4.00\) per share dividend next year. The company pledges to increase its dividend by 3 percent per year, indefinitely. If you require a 14 percent return on your
Electrifying Co. is expected to maintain a constant 8 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 7.5 percent, what is the required return on the power
Jiggywitit Corp. pays a constant \($8\) dividend on its stock. The company will maintain this dividend for the next seven years and will then cease paying dividends forever. If the required return on
Dharma and Greg, Inc., has an odd dividend policy. The company has just paid a dividend of \($7\) per share and has announced that it will increase the dividend by \($1\) per share for each of the
Mega Growth Co. is growing quickly. Dividends are expected to grow at a 30 percent rate for the next three years, with the growth rate falling off to a constant 7 percent, thereafter. If the required
Tubby Corporation stock currently sells for $78 per share. The market requires a 16 percent return on the firm’s stock. If the company maintains a constant 7 percent growth rate in dividends, what
Comstock’s Banks just issued some new preferred stock. The issue will pay a \($12\) annual dividend in perpetuity, beginning four years from now. If the market requires a 12 percent return on this
Mummeball Co. just paid a dividend of \($3.50\) per share. The company will increase its dividend by 15 percent next year and will then reduce its dividend growth rate by 5 percentage points per year
CIR, Inc., has 6 percent coupon bonds on the market that have 12 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 8 percent, what is the current bond price?
Vasicek Co. has 10 percent coupon bonds on the market with eight years left to maturity. The bonds make annual payments. If the bond currently sells for \($1,114.93,\) what is its YTM?
Furst Co. issued 12-year bonds 2 years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 110 percent of par value, what is the YTM?
Joe Kernan Corporation has bonds on the market with 10.5 years to maturity, a YTM of 8 percent, and a current price of \($850.\) The bonds make semiannual payments. What must the coupon rate be on
Co. wants to issue new 10-year bonds for some muchneeded expansion projects. The company currently has 9 percent coupon bonds on the market that sell for \($1,165,\) make semiannual payments, and
The Back Street Girls Corporation has two different bonds currently outstanding. Bond M has a face value of \($20,000\) and matures in 20 years. The bond makes no payments for the first six years,
A Microgates Industries bond has a 10 percent coupon rate and a \($1,000\) face value. Interest is paid semiannually, and the bond has 20 years to maturity. If investors require a 12 percent yield,
A Macrohard Corp. bond carries an 8 percent coupon, paid semiannually. The par value is \($1,000,\) and the bond matures in six years. If the bond currently sells for \($911.37,\) what is its yield
Stellato Shaved Ice Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present
Investment X offers to pay you \($1,000\) per year for eight years, whereas Investment Y offers to pay you \($2,000\) per year for four years. Which of these cash flow streams has the higher present
Bottom Line, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash flows in Year 4? What is the future
Your company will generate \($55,000\) in annual revenue each year for the next eight years from a new information database. The computer system needed to set up the database costs \($250,000.\) If
If you deposit \($1,000\) at the end of each of the next 20 years into an account paying 8.5 percent interest, how much money will you have in the account in 20 years? How much will you have if you
Ernest’s Bank offers you a \($25,000,\) sevenyear term loan at 11 percent annual interest. What will your annual loan payment be?
Seinfeld’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs \($1,000\) per year forever. If the required return on this investment is 12 percent, how
First National Bank charges 7.5 percent compounded quarterly on its business loans. First United Bank charges 7.5 percent compounded semiannually. As a potential borrower, which bank would you go to
Cocolin Credit Corp. wants to earn an effective annual return on its consumer loans of 12 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by
Kingen Credit Bank is offering 4.5 percent compounded daily on its savings accounts. If you deposit \($5,000\) today, how much will you have in the account in 5 years? In 10 years? In 20 years?
An investment will pay you $27,000 in six years. If the appropriate discount rate is 12 percent compounded daily, what is the present value?
Al Lendu’s Pawn Shop charges an interest rate of 22 percent per month on loans to its customers. Like all lenders, Al Lendu must report an APR to consumers. What rate should the shop report? What
You want to buy a new sports coupe for \($43,950,\) and the finance office at the dealership has quoted you a 14.3 percent APR loan for 60 months to buy the car. What will your monthly payments be?
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of \($300\) per month. You will charge 1.5 percent per month interest on the
Maybepay Life Insurance Co. is selling a perpetual annuity contract that pays \($625\) monthly. The contract currently sells for \($50,000.\) What is the monthly return on this investment vehicle?
You are to make monthly deposits of \($75\) into a retirement account that pays 12 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your
If the appropriate discount rate for the following cash flows is 13.5 percent per year, what is the present value of the cash flows? Year Cash Flow 1 $1,500 234 0 7,200 300
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 5.90 percent per year, compounded monthly for the first six months, increasing thereafter to
You are saving to buy a \($100,000\) house. There are two competing banks in your area, both offering certificates of deposit yielding 5 percent. How long will it take your initial \($75,000\)
You have \($600\) today. You need \($750.\) If you earn 1 percent per month, how many months will you wait?
Peter Lynchpin wants to sell you an investment contract that pays equal \($10,000\) amounts at the end of each of the next 20 years. If you require an effective annual return of 14 percent on this
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

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