Questions and Answers of Fundamentals Of Financial Management 10th

The McMillan Corporation paid a dividend of $2.40 per share of stock over the last 12 months. The dividend is expected to grow at a rate of 25 percent over the next three years (supernormal growth).
Bonds issued by the Peabody Corporation have a par value of $1,000, are selling for $890, and have 18 years to maturity. The annual interest payment is 8 percent.Find yield to maturity by combining
Scroll down and click on “Analysts Opinion.” What is the Mean Target, the High Target, and the Low Target? How many brokers follow the firm?
What is its 52-week range?
Allie Reynolds, the Chief Financial Officer of Healthy Products, Inc., has been asked The Capital Budgeting Process Compute the price of the stock at the end of the fourth year (P4).dell);del ees:(D;
Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to Common stock grow at a constant rate of 6 percent over the next four years. The required rate of value based on return
A firm pays a $1.50 dividend at the end of year one (D,), has a stock price of Common stock$60 (Po), and a constant growth rate (g) of 8 percent. required rate ofa. Compute the required rate of
Hunter Petroleum Corporation paid a $2 dividend last year. The dividend is Common stock expected to grow at a constant rate of 5 percent over the next three years. The value based on PV required rate
A firm pays a $3.80 dividend at the end of year one (D,), has a stock price of$50, and a constant growth rate (g) of 4 percent. Compute the required rate of return (K,).
Justin Cement Company has had the following pattern of earnings per share over the last five years:The earnings per share have grown at a constant rate (on a rounded basis)and will continue to do so
Sterling Corp. paid a dividend of $.80 last year. Over the next 12 months, the dividend is expected to grow at a rate of 10 percent, which is the constant growth rate for the firm (g). The new
Ecology Labs, Inc., will pay a dividend of $3 per share in the next 12 months(D,). The required rate of return (K,) is 10 percent and the constant growth rate is 5 percent.a. Compute Po.(For partsb,
Laser Optics will pay a common stock dividend of $1.60 at the end of the year(D,). The required rate of return on common stock (K,) is 13 percent. The firm has a constant growth rate (g) of 7
Stagnant Iron and Steel currently pays a $4.20 annual cash dividend (Do). They plan to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the
Grant Hillside Homes, Inc., has preferred stock outstanding that pays an annual Preferred stock rate dividend of $9.80. Its price is $110. What is the required rate of return (yield) of return on the
X-Tech Company issued preferred stock many years ago. It carries a fixed divi- Preferred stock dend of $5.00 per share. With the passage of time, yields have soared from the value original 5 percent
Bedford Mattress Company issued preferred stock many years ago. It carries a Preferred stock fixed dividend of $8 per share. With the passage of time, yields have gone down value from the original 8
The preferred stock of Denver Savings and Loan pays an annual dividend of Preferred stock$5.60. It has a required rate of return of 8 percent. Compute the price of the value preferred stock.
You are called in as a financial analyst to appraise the bonds of Olsen’s Bond value—Clothing Stores. The $1,000 par value bonds have a quoted annual interest rate semiannual analysis of 13
Heather Smith is considering a bond investment in Locklear Airlines. The Bond value—$1,000 par value bonds have a quoted annual interest rate of 9 percent and inter- semiannual analysis est is paid
Optional—for Problem 17, use the techniques in Appendix 10A to combine More exact yield a trial-and-error approach with interpolation to find a more exact answer. You to maturity may choose to use
Bonds issued by the Tyler Food Corporation have a par value of $1,000, are Approximate yield selling for $1,080, and have 20 years remaining to maturity. The annual interest —_t o maturity payment
Bonds issued by the Coleman Manufacturing Company have a par value of Approximate yield$1,000, which, of course, is also the amount of principal to be paid at maturity. to maturity The bonds are
Lance Whittingham IV specializes in buying deep discount bonds. These repbonds resent bonds that are trading at well below part value. He has his eye on a bond issued by the Leisure Time Corporation.
Wilson Oil Company issued bonds five years ago at $1,000 per bond. These maturity on bond bonds had a 25-year life when issued and the annual interest payment was then price 8 percent. This return
Media Bias, Inc. issued bonds 10 years ago at $1,000 per bond. These bonds maturity on bond had a 35-year life when issued and the annual interest payment was then price 10 percent. This return was
Further analysis of Problem 11.price changesa. Find the present value of 2 percent X $1,000 (or $20) for 20 years at 10 percent. The $20 is assumed to be an annual payment.b. Add this value to
Tom Cruise Lines, Inc., issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 12 percent. This return was in line with
Using Table 10-2 on page 289:a. Assume the interest rate in the market (yield to maturity) goes down to 8 percent for the 10 percent bonds. Using column 2, indicate what the bond price will be with a
Go to Table 10—1 on page 288 which is based on bonds paying 10 percent interest for 20 years. Assume interest rates in the market (yield to maturity) go from 12 percent to 9 percent:a. What is the
For Problem 6 graph the relationship in a manner similar to the bottom half of Figure 10-2 on page 290. Also explain why the pattern of price change takes place.
The Hartford Telephone Company has a $1,000 par value bond outstanding that pays 11 percent annual interest. The current yield to maturity on such bonds in the market is 14 percent. Compute the price
Essex Biochemical Co. has a $1,000 par value bond outstanding that pays 10 percent annual interest. The current yield to maturity on such bonds in the market is 7 percent. Compute the price of the
Referring back to Problem 3, partb, what percent of the total bond value does the repayment of principal represent?
Barry’s Steroids Company has $1,000 par value bonds outstanding at 12 percent interest. The bonds will mature in 50 years. Compute the current price of the bonds if the percent yield to maturity
Applied Software has $1,000 par value bonds outstanding at 12 percent interest.The bonds will mature in 25 years. Compute the current price of the bonds if the present yield to maturity is:del
The Lone Star Company has $1,000 par value bonds outstanding at 9 percent interest. The bonds will mature in 20 years. Compute the current price of the bonds if the present yield to maturity is:a. 6
12. How is the supernormal growth pattern likely to vary from the normal, constant growth pattern?
11. What factors might influence a firm’s price-earnings ratio?
What two conditions must be met to go from Formula 10-8 to Formula 10-9 in using the dividend valuation model? Po = == Di Ke-g (10-9)
Why might investors demand a lower rate of return for an investment in ExxonMobil as compared to United Airlines?
Mr. Rambo, President of Assault Weapons, Inc., was pleased to hear that he had three offers from major defense companies for his latest missile firing automatic ejector. He will use a discount rate
Jennifer (from problem 42) is now 18 years old (five years have passed), and she wants to get married instead of going to college. Your parents have accumulated the necessary funds for her
Your younger sister, Jennifer, will start college in five years. She has just consideration informed your parents that she wants to go to Eastern State U., which will cost$18,000 per year for four
You are chairperson of the investment fund for the Continental Soccer League.changing interest You are asked to set up a fund of semiannual payments to be compounded semirates annually to accumulate
Jim Thomas borrows $70,000 toward the purchase of a home at 12 percent interest. His mortgage is for 30 years.a. How much will his annual payments be? (Although home payments are usually on a monthly
Kay Mart has purchased an annuity to begin payment at the end of 2009 (the date of the first payment). Assume it is now the beginning of 2007. The annuity is for $12,000 per year and is designed to
Kelly Greene has a contract in which she will receive the following payments for the next five years: $3,000, $4,000, $5,000, $6,000 and $7,000. She will then receive an annuity of $9,000 a year from
You wish to retire in 20 years, at which time you want to have accumulated enough money to receive an annual annuity of $12,000 for 25 years after retirement.During the period before retirement you
Frank Bell has just retired from the telephone company. His total pension funds have an accumulated value of $200,000, and his life expectancy is 16 more years. His pension fund manager assumes he
C. D. Rom has just given an insurance company $30,000. In return, he will receive an annuity of $3,200 for 20 years.At what rate of return must the insurance company invest this $30,000 in order to
On January 1, 2005, Mr. Dow bought 100 shares of stock at $12 per share. On December 31, 2008, he sold the stock for $18 per share. What is his annual rate of return? Interpolate to find the answer.
Tom Phillips has just invested $8,760 for his son (age one). This money will be used for his son’s education 17 years from now. He calculates that he will need$60,000 by the time the boy goes to
Beverly Hills started a paper route on January 1, 2001. Every three months, she deposits $300 in her bank account, which earns 8 percent annually but is compounded quarterly. On December 31, 2004,
Your grandfather has offered you a choice of one of the three following alternatives:$5,000 now; $1,000 a year for eight years; or $12,000 at the end of eight years. Assuming you could earn 11
As stated in the chapter, annuity payments are assumed to come at the end of each payment period (termed an ordinary annuity). However, an exception occurs when the annuity payments come at the
Determine the amount of money in a savings account at the end of five years, given an initial deposit of $3,000 and an 8 percent annual interest rate when interest is compounded (a) annually, (b)
At a growth (interest) rate of 8 percent annually, how long will it take for a sum to double? To triple? Select the year that is closest to the correct answer.If you owe $30,000 payable at the end of
Martha Reed has been depositing $1,500 in her savings account every December since 1998. Her account earns 6 percent compounded annually. How much will she have in December of 2007? (Assume that a
Rita Gonzales won the $60 million lottery. She is to receive $1 million a year for the next 50 years plus an additional lump sum payment of $10 million after 50 years. The discount rate is 10
General Mills will receive $27,500 per year for the next 10 years as a payment for a weapon he invented. If a 12 percent rate is applied, should he be willing to sell out his future rights now for
Carrie Tune will receive $19,500 a year for the next 20 years as a result of the new song she has written. If a 10 percent rate is applied, should she be willing to sell out her future rights now for
Mrs. Crawford will receive $6,500 a year for the next 14 years from her trust.If an 8 percent interest rate is applied, what is the current value of the future payments?
If you invest $8,000 per period for the following number of periods, how much would you have?a. 7 years at 9 percent.b. 40 years at 11 percent.
How much would you have to invest today to receive:a. $12,000 in 6 years at 12 percent?b. $15,000 in 15 years at 8 percent?c. $5,000 each year for 10 years at 8 percent?d. $40,000 each year for 40
Your aunt offers you a choice of $20,000 in 50 years or $45 today. If money is discounted at 13 percent, which should you choose?
You will receive $4,000, three years from now. The discount rate is 10 percent.a. What is the value of your investment two years from now? Multiply$4,000 X .909 (one year’s discount rate at 10
What is the present value of:a. $8,000 in 10 years at 6 percent?b. $16,000 in 5 years at 12 percent?c. $25,000 in 15 years at 8 percent?d. $1,000 in 40 periods at 20 percent?
You invest $2,500 a year for three years at 8 percent.a. What is the value of your investment after one year? Multiply $2,500 < 1.08.b. What is the value of your investment after two years? Multiply
a. How much must Katie Wilson set aside each year to accumulate $80,000 after Solving for an 15 years? The interest rate is 10 percent. annuityb. How much must Josh Thompson repay each year for five
a. You invest $12,000 today at 9 percent per year. How much will you have Problems and after 15 years? Solutionsb. What is the current value of $100,000 after 10 years if the discount rate is Future
Adjust the annual formula for a future value of a single amount at 12 percent for 10 years to a semiannual compounding formula. What are the interest factors(F Vp) before and after? Why are they
The treasurer for Pittsburgh Iron Works wishes to use financial futures to risk hedge her interest rate exposure. She will sell five Treasury futures contracts at $107,000 per contract. It is July
Charmin Paper Company sells to the 12 accounts listed below.Capital Financial Corporation will lend 90 percent against account balances that have averaged 30 days or less; 80 percent for account
Summit Record Company is negotiating with two banks for a $100,000 loan. Competing terms Fidelity Bank requires a 20 percent compensating balance, discounts the loan, from banks and wants to be paid
Harper Engine Company needs $600,000 to take a cash discount of 1.5/10, net 60. A banker will loan the money for 50 days at an interest cost of $12,100. cash discounta. What is the effective rate on
Neveready Flashlights, Inc., needs $300,000 to take a cash discount of 2/10, net 70. A banker will loan the money for 60 days at an interest cost of $5,500.a. What is the effective rate on the bank
In Problem 21, if the compensating balance requirement were 10 percent instead of 20 percent, would you change your answer? Do the appropriate calculation.
The Reynolds Corporation buys from its suppliers on terms of 2/10, net 55.Reynolds has not been utilizing the discounts offered and has been taking 55 days to pay its bills.Mr. Duke, Reynolds
Mr. Hugh Warner is a very cautious businessman. His supplier offers trade credit terms of 3/10, net 80. Mr. Warner never takes the discount offered, but he pays his suppliers in 70 days rather than
Lewis and Clark Camping Supplies Inc. is borrowing $45,000 from Western State Bank. The total interest is $12,000. The loan will be paid by making equal monthly payments for the next three years.
Zerox Copying Company plans to borrow $150,000. New Jersey National Bank willlend the money at one-half percentage point over the prime rate at the time of 8 1/2 percent (9 percent total) and
If you borrow $4,000 at $500 interest for one year, what is your effective interest rate for the following payment plans?a. Annual payment.b. Semiannual payments.c. Quarterly payments.d. Monthly
Your company plans to borrow $5 million for 12 months, and your banker gives you a Stated rate of 14 percent interest. You would like to know the effective rate of interest for the following types of
The treasurer for the Macon Blue Sox baseball team is seeking a $20,000 loan for one year from the 4th National Bank of Macon. The stated interest rate is 10 percent, and there is a 15 percent
Randall Corporation plans to borrow $200,000 for one year at 12 percent from the Waco State Bank. There is a 20 percent compensating balance requirement.Randall Corporation keeps minimum transaction
The Dade Company is borrowing $300,000 for one year and paying $27,000 in interest to Miami National Bank. The bank requires a 20 percent compensating balance. What is the effective rate of interest?
Logan Drilling Corp. plans to borrow $200,000 for one year. Northern National Bank will lend the money at 10 percent interest and require a compensating balance of 20 percent. What is the effective
McGriff Dog Food Company normally takes 20 days to pay for average daily credit purchases of $9,000. Its average daily sales are $10,000, and it collects accounts in 25 days. a. What is its net
Dr. Ruth is going to borrow $5,000 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 6 percent and
Mary Ott is going to borrow $5,000 for 90 days and pay $140 interest. What is the effective rate of interest if the loan is discounted?
Your bank will lend you $2,000 for 45 days at a cost of $25 interest. What is your effective rate of interest?
Compute the cost of not taking the following cash discounts.a. 2/10, net 50.b. 2/15, net 40.c. 3/10, net 45.d. 3/10, net 180.
Accompany plans to borrow $2 million for a year. The stated interest rate is 12 percent. Compute the effective interest rate under each of these assumptions.Each part stands alone.a. The interest is
13. What is meant by hedging in the financial futures market to offset interest rate risks?
12. Briefly discuss three types of lender control used in inventory financing.
11. What is an asset-backed public offering?
10. What is the difference between pledging accounts receivable and factoring accounts receivable?
9. What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?
8. Commercial paper may show up on corporate balance sheets as either a current asset or a current liability. Explain this statement.

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