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fundamentals of corporate finance

Questions and Answers of Fundamentals Of Corporate Finance

A 15-year annuity pays $1,750 per month, and payments are made at the end of each month. If the APR is 9 percent compounded monthly for the first seven years, and APR of 6 percent compounded monthly
What is the value today of $5,100 per year, at a discount rate of 7.9 percent, if the first payment is received 6 years from today and the last payment is received 20 years from today?
Consider a firm with a contract to sell an asset for $175,000 four years from now. The asset costs $104,600 to produce today. Given a relevant discount rate of 11 percent per year, will the firm make
You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $2.6 million purchase price. The monthly payment on this loan
You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $450,000 per year. Thus, in one year, you receive $1.45 million. In two years, you get
The present value of the following cash flow stream is $8,200 when discounted at 9 percent annually. What is the value of the missing cash flow?Year .................... Cash Flow1
You need a 30-year, fixed-rate mortgage to buy a new home for $245,000. Your mortgage bank will lend you the money at an APR of 4.8 percent for this 360-month loan. However, you can afford monthly
You want to borrow $95,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,850, but no more. Assuming monthly compounding, what is the highest rate you can
You’re prepared to make monthly payments of $225, beginning at the end of this month, into an account that pays an APR of 6.5 percent compounded monthly. How many payments will you have made when
What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought an annuity with 13 annual payments of $10,000 per year at a discount rate of 10
Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $48,000 and you plan to spend all of it. However, you
You have just won the lottery and will receive $1.8 million in one year. You will receive payments for 30 years, and the payments will increase by 2.7 percent per year. If the appropriate discount
You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $90,000 per year for the next two years, or you can
an investment offers to triple your money in 12 months (don’t believe it). What rate of return per quarter are you being offered?
You want to be a millionaire when you retire in 40 years. How much do you have to save each month if you can earn an APR of 10.2 percent? How much do you have to save each month if you wait 10 years
You have an investment that will pay you .83 percent per month. How much will you have per dollar invested in one year? In two years?
You are planning to save for retirement over the next 30 years. To do this, you will invest $850 per month in a stock account and $250 per month in a bond account. The return of the stock account is
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 1.25 percent per year, compounded monthly for the first six months, increasing thereafter to
You are looking at an investment that has an effective annual rate of 14.3 percent. What is the effective semiannual return? The effective quarterly return? The effective monthly return?
If the appropriate discount rate for the following cash flows is 9.32 percent per year, what is the present value of the cash flows?Year ................ Cash Flow1 ...................... $2,4802
If the appropriate discount rate for the following cash flows is 8.5 percent compounded quarterly, what is the present value of the cash flows?Year ............ Cash Flow1 ............ $ 8152
Beginning three months from now, you want to be able to withdraw $3,000 each quarter from your bank account to cover college expenses over the next four years. If the account pays .57 percent
In the previous problem, suppose you make $5,700 annual deposits into the same retirement account. How large will your account balance be in 40 years?
You are planning to make monthly deposits of $475 into a retirement account that pays 10 percent interest compounded monthly. If your first deposit will be made one month from now, how large will
Live Forever Life Insurance Co. is selling a perpetuity contract that pays $1,500 monthly. The contract currently sells for $260,000. What is the monthly return on this investment vehicle? What is
Friendly’s Quick Loans, Inc., offers you “three for four or I knock on your door.” This means you get $3 today and repay $4 when you get your paycheck in one week (or else). What’s the
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $500 per month. You will charge 1.8 percent per month interest on the overdue
You want to buy a new sports coupe for $84,500, and the finance office at the dealership has quoted you an APR of 4.7 percent for a 60-month loan to buy the car. What will your monthly payments be?
Big Dom’s Pawn Shop charges an interest rate of 25.5 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. What rate should the shop report? What
An investment will pay you $95,000 in 10 years. If the appropriate discount rate is 9 percent compounded daily, what is the present value?
Spartan Credit Bank is offering 8.3 percent compounded daily on its savings accounts. If you deposit $7,500 today, how much will you have in the account in 5 years? In 10 years? In 20 years?
What is the future value of $5,500 in 17 years at an APR of 8.4 percent compounded semiannually?
Evergreen Credit Corp. wants to earn an effective annual return on its consumer loans of 18.2 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required
First National Bank charges 13.8 percent compounded monthly on its business loans. First United Bank charges 14.1 percent compounded semiannually. As a potential borrower, which bank would you go to
Find the APR, or stated rate, in each of the following cases: Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) Semiannually 14.2% Monthly 18.4 Weekly 11.1 Infinite 8.9
In the previous problem, suppose a sales associate told you the policy costs $525,000. At what interest rate would this be a fair deal?
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $30,000 per year forever. If the required return on this investment is5.6 percent, how
Pursell Bank offers you a five-year loan for $100,000 at an annual interest rate of 6.8 percent. What will your annual loan payment be?
You want to have $75,000 in your savings account 12 years from now, and you’re prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.4 percent
If you deposit $4,900 at the end of each of the next 20 years into an account paying 10.3 percent interest, how much money will you have in the account in 20 years? How much will you have if you make
Your company will generate $55,000 in annual revenue each year for the next seven years from a new information database. If the appropriate discount rate is 8.2 percent, what is the present value of
Investment X offers to pay you $5,300 per year for eight years, whereas Investment Y offers to pay you $7,300 per year for five years. Which of these cash flow streams has the higher present value if
Christie, Inc., has identified an investment project with the following cash flows. If the discount rate is 6 percent, what is the future value of these cash flows in Year 4? What is the future value
An investment offers $3,850 per year for 15 years, with the first payment occurring one year from now. If the required return is 6 percent, what is the value of the investment? What would the value
If you put up $45,000 today in exchange for a 6.4 percent, 15-year annuity, what will the annual cash flow be?
Suppose two athletes each sign 10-year contracts for $80 million. In one case, we’re told that the $80 million will be paid in 10 equal installments. In the other case, we’re told that the $80
Mendez 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 value at 18
You expect to receive $10,000 at graduation in two years. You plan on investing it at 11 percent until you have $60,000. How long will you wait from now?
You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for six more years at 6.8 percent per year. How much will you have in eight years?
Suppose you are still committed to owning a $275,000 Ferrari (see Problem 9). If you believe your mutual fund can achieve an annual rate of return of 11.2 percent and you want to buy the car in 9
Refer back to the Series EE savings bonds we discussed at the very beginning of the chapter.a. Assuming you purchased a $50 face value bond, what is the exact rate of return you would earn if you
The “Brasher doubloon,” which was featured in the plot of the Raymond Chandler novel, The High Window, was sold at auction in 2018 for a reported $5.5 million. The coin had a face value of $15
In 1895, the first U.S. Open Golf Championship was held. The winner’s prize money was $150. In 2019, the winner’s check was $2.25 million. What was the percentage increase per year in the
Imprudential, Inc., has an unfunded pension liability of $450 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back
You’re trying to save to buy a new $275,000 Ferrari. You have $50,000 today that can be invested at your bank. The bank pays 4.8 percent annual interest on its accounts. How long will it be before
According to the Census Bureau, in October 2019, the average house price in the United States was $368,600. In October 2000, the average price was $197,700. What was the annual increase in the price
At 4.3 percent interest, how long does it take to double your money? To quadruple it?
Assume the total cost of a college education will be $325,000 when your child enters college in 18 years. You presently have $85,000 to invest. What annual rate of interest must you earn on your
For each of the following, compute the present value: Present Value Years Interest Rate Future Value 17 9% $ 16,832 7 48,318 23 13 886,073 35 21 550,164
For each of the following, compute the future value: Present Value Years Interest Rate Future Value $ 2,597 11 13% 7,834 7 81,286 14 12 213,612 16 6
What is compounding? What is discounting?
Before the advent of financial calculators (and Excel), tables were often used in the calculation of present values and future values. Using a two-way data table, create a future value table and
First City Bank pays 7.5 percent simple interest on its savings account balances, whereas Second City Bank pays 7.5 percent interest compounded annually. If you made a deposit of $8,600 in each bank,
Tinsley, Inc., wishes to maintain a growth rate of 12 percent per year and a debt-equity ratio of .55. The profit margin is 6.2 percent, and the ratio of total assets to sales is constant at 1.05. Is
You’ve collected the following information about Caccamisse, Inc.:Sales = $255,000Net income = $19,200Dividends = $7,500Total debt = $67,000Total equity = $77,000What is the sustainable growth rate
In Problem 24, suppose the firm was operating at only 80 percent capacity in 2020. What is EFN now?Problem 24The most recent financial statements for Crosby, Inc., follow. Sales for 2021 are
The most recent financial statements for Crosby, Inc., follow. Sales for 2021 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout rate
Deprey, Inc., had equity of $153,000 at the beginning of the year. At the end of the year, the company had total assets of $215,000. During the year, the company sold no new equity. Net income for
Based on the following information, calculate the sustainable growth rate for Hendrix Guitars, Inc.:Profit margin = 5.9%Total asset
A firm wishes to maintain an internal growth rate of 6.4 percent and a dividend payout ratio of 25 percent. The current profit margin is 5.7 percent, and the firm uses no external financing sources.
For the company in Problem 16, suppose fixed assets are $590,000 and sales are projected to grow to $910,000. How much in new fixed assets are required to support this growth in sales? Assume the
Pinnacle Mfg., Inc., is currently operating at only 94 percent of fixed asset capacity. Current sales are $830,000. How fast can sales grow before any new fixed assets are needed?
Assuming the following ratios are constant, what is the sustainable growth rate?Total asset turnover = 3.20Profit margin = 5.2%Equity multiplier
Based on the following information, calculate the sustainable growth rate for Kayla’s Heavy Equipment:Profit margin = 7.3%Capital intensity ratio =
If Premier Corp. has an ROE of 14.1 percent and a payout ratio of 25 percent, what is its sustainable growth rate?
The balance sheet for the Heir Jordan Corporation follows. Based on this information and the income statement in the previous problem, supply the missing information using the percentage of sales
If Fairlane Co. has an ROA of 8.3 percent and a payout ratio of 35 percent, what is its internal growth rate?
From the previous two questions, prepare a pro forma balance sheet showing EFN, assuming an increase in sales of 15 percent, no new external debt or equity financing, and a constant payout ratio.
Consider the following income statement for the Heir Jordan Corporation:A 20 percent growth rate in sales is projected. Prepare a pro forma income statement assuming costs vary with sales and the
The most recent financial statements for Tran Co. are shown here:Assets and costs are proportional to sales. The company maintains a constant 40 percent dividend payout ratio and a constant
The most recent financial statements for Mixton, Inc., are shown here:Assets and costs are proportional to sales. Debt and equity are not. A dividend of $1,400 was paid, and the company wishes to
The most recent financial statements for Mandy Co. are shown here:Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 30 percent dividend payout
The most recent financial statements for Camryn, Inc., are shown here (assuming no income taxes):Assets and costs are proportional to sales. Debt and equity are not. No dividends are paid. Next
Consider the following simplified financial statements for the Wesney Corporation (assuming no income taxes):The company has predicted a sales increase of 15 percent. It has predicted that every item
After Chris completed the ratio analysis for S&S Air (see Chapter 3), Mark and Todd approached him about planning for next year’s sales. The company had historically used little planning for
What is Tobin’s Q for Smolira Golf? What assumptions are you making about the book value of debt and the market value of debt? What about the book value of assets and the market value of assets?
Smolira Golf Corp. has 15,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2021 was $79. What is the price-earnings ratio? What are the dividends per
Prepare the 2021 statement of cash flows for Smolira Golf Corp.Some recent financial statements for Smolira Golf Corp. follow. Use this information to work this problem. SMOLIRA GOLF CORP. 2020 and
Construct the DuPont identity for Smolira Golf Corp.Some recent financial statements for Smolira Golf Corp. follow. Use this information to work this problem. SMOLIRA GOLF CORP. 2020 and 2021 Balance
Prince Albert Canning PLC had a net loss of £26,382 on sales of £315,650. What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any
Cage Corp. has current liabilities of $415,000, a quick ratio of .86, inventory turnover of 10.3, and a current ratio of 1.34. What is the cost of goods sold for the company?
Whipporwill, Inc.’s, net income for the most recent year was $19,382. The tax rate was 21 percent. The firm paid $3,681 in total interest expense and deducted $4,738 in depreciation expense. What
Firm A and Firm B have debt-total asset ratios of 60 percent and 35 percent, respectively, and returns on total assets of 4.5 percent and 8 percent, respectively. Which firm has a greater return on
In early 2016, Doc and Lyn McGee formed the McGee Cake Company. The company produced a full line of cakes, and its specialties included chess cake,* lemon pound cake, and double-iced, double
Dahlia Corp. has a current accounts receivable balance of $513,260. Credit sales for the year just ended were $4,986,340. What is the receivables turnover? The days’ sales in receivables? How long
Bing, Inc., has current assets of $5,400, net fixed assets of $28,100, current liabilities of $4,100, and long-term debt of $10,600. What is the value of the shareholders’ equity account for this
Using Excel to find the marginal tax rate can be accomplished using the VLOOKUP function. However, calculating the total tax bill is a little more difficult. Below we have shown a copy of the IRS tax
Sunset Boards, Inc., is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his
Nataro, Inc., has sales of $742,000, costs of $316,000, depreciation expense of $39,000, interest expense of $34,000, and a tax rate of 21 percent. What is the net income for this firm?
Suppose the firm in Problem 2 paid out $125,000 in cash dividends. What is the addition to retained earnings?

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