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fundamentals of financial management

Questions and Answers of Fundamentals Of Financial Management

EXCHANGE RATE If British pounds sell for $1 56 (U.S.) per pound, what should dollars sell for in pounds per dollar?AppendixLO1
CROSS RATE A currency trader observes that in the spot exchange market, 1 U.S. dollar can be exchanged for 3 63 Israeli shekels or for 96 Japanese yen. What is the cross-exchange rate between the yen
INTEREST RATE PARITY Six-month T-bills have a nominal rate of 4%, while default-free Japanese bonds that mature in 6 months have a nominal rate of 2 5%. In the spot exchange market, 1 yen equals $0
PURCHASING POWER PARITY A television costs $500 in the United States. The same television costs 312 5 euros. If purchasing power parity holds, what is the spot exchange rate between the euro and the
EXCHANGE RATES Table 17.1 lists foreign exchange rates for June 11, 2013. On that day, how many dollars would be required to purchase 1,000 units of each of the following: British pounds, Canadian
EXCHANGE RATES Use the foreign exchange section of a current issue of The Wall Street Journal to look up the six currencies in Problem 17-5.a. What is the current exchange rate for changing dollars
CURRENCY APPRECIATION Suppose that 1 Danish krone could be purchased in the foreign exchange market today for $0 18. If the krone appreciated 10% tomorrow against the dollar, how many krones would a
CROSS RATES Suppose the exchange rate between the U.S. dollar and the Swedish krona was 6 55 krona = $1 and the exchange rate between the dollar and the British pound was 1 $1 56. What was the
CROSS RATES Use the foreign exchange section of a current issue of The Wall Street Journal to look up the three currencies in Problem 17-8. What is the current exchange rate between Swedish kronas
INTEREST RATE PARITY Assume that interest rate parity holds. In both the spot market and the 90-day forward market, 1 Japanese yen = $0 0104. In Japan, 90-day risk-free securities yield 2%. What is
PURCHASING POWER PARITY In the spot market, 12 8 Mexican pesos can be exchanged for 1 U.S. dollar. A compact disc costs $10 in the United States. If purchasing power parity(PPP) holds, what should be
INTEREST RATE PARITY Assume that interest rate parity holds and that 90-day risk-free securities yield a nominal annual rate of 3% in the United States and a nominal annual rate of 3 5% in the United
SPOT AND FORWARD RATES Anderson Australian Imports has agreed to purchase 15,000 cases of Australian wine for 4 million Australian dollars at today’s spot rate. The firm’s financial manager,
EXCHANGE GAINS AND LOSSES You are the vice president of International InfoXchange, headquartered inChicago, Illinois. All shareholders of the firmlive in theUnited States. Earlier thismonth you
RESULTS OF EXCHANGE RATE CHANGES Early in June 1983, it took 245 Japanese yen to equal $1. In June 2013, that exchange rate had fallen to 96 yen to $1. Assume that the price of a
FOREIGN INVESTMENT ANALYSIS After all foreign and U.S. taxes, a U.S. corporation expects to receive 3 pounds of dividends per share from a British subsidiary this year.The exchange rate at the end of
FOREIGN CAPITAL BUDGETING Solitaire Machinery is a Swiss multinational manufacturing company. Currently, Solitaire’s financial planners are considering undertaking a 1-year project in the United
MULTINATIONAL FINANCIAL MANAGEMENT Yohe Telecommunications is a multinational corporation that produces and distributes telecommunications technology. Although its corporate headquarters are located
MULTINATIONAL FINANCIAL MANAGEMENT Citrus Products Inc. is a medium-sized producer of citrus juice drinks with groves in Indian River County, Florida. Until now, the company has confined its
Do time lines deal only with years, or can other time periods be used?AppendixLO1
Set up a time line to illustrate the following situation: You currently have $2,000 in a 3-year certificate of deposit (CD) that pays a guaranteed 4% annually.AppendixLO1
Explain why this statement is true: A dollar in hand today is worth more than a dollar to be received next year.AppendixLO1
What is compounding? What’s the difference between simple interest and compound interest? What would the future value of $100 be after 5 years at 10% compound interest? At 10% simple interest?
Suppose you currently have $2,000 and plan to purchase a 3-year certificate of deposit (CD) that pays 4% interest compounded annually. How much will you have when the CD matures? How would your
A company’s sales in 2014 were $100million. If sales grow at 8%, what will they be 10 years later, in 2024? ($215.89 million)AppendixLO1
How much would $1, growing at 5% per year, be worth after 100 years? What would the FV be if the growth rate was 10%?AppendixLO1
What is discounting, and how is it related to compounding? How is the future value equation (5.1) related to the present value equation (5.2)?AppendixLO1
How does the present value of a future payment change as the time to receipt is lengthened? As the interest rate increases?AppendixLO1
Suppose a U.S. government bond promises to pay $2,249.73 three years from now. If the going interest rate on three-year government bonds is 4%, how much is the bond worth today? How would your answer
How much would $1,000,000 due in 100 years be worth today if the discount rate was 5%? If the discount rate was 20%?AppendixLO1
The U.S. Treasury offers to sell you a bond for $585.43. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $1,000. What interest rate would you
Microsoft earned $0.94 per share in 2002. Ten years later in 2012 it earned $2.72.What was the growth rate in Microsoft’s earnings per share (EPS) over the 10-year period? If EPS in 2012 had been
How long would it take $1,000 to double if it was invested in a bank that paid 6% per year? How long would it take if the rate was 10%? (11.9 years;7.27 years)AppendixLO1
Microsoft’s 2012 earnings per share were $2.72, and its growth rate during the prior 10 years was 11.21% per year. If that growth rate was maintained, how long would it take for Microsoft’s EPS
What’s the difference between an ordinary annuity and an annuity due?AppendixLO1
Why would you prefer to receive an annuity due for $10,000 per year for 10 years than an otherwise similar ordinary annuity?AppendixLO1
For an ordinary annuity with five annual payments of $100 and a 10% interest rate, how many years will the first payment earn interest? What will this payment’s value be at the end? Answer this
Assume that you plan to buy a condo 5 years from now, and you estimate that you can save $2,500 per year. You plan to deposit the money in a bank that pays 4% interest, and you will make the first
Why does an annuity due always have a higher future value than an ordinary annuity?AppendixLO1
If you calculated the value of an ordinary annuity, how could you find the value of the corresponding annuity due?AppendixLO1
Assume that you plan to buy a condo 5 years from now and you need to save for a down payment. You plan to save $2,500 per year (with the first deposit made immediately), and you will deposit the
Why does an annuity due have a higher present value than a similar ordinary annuity?AppendixLO1
If you know the present value of an ordinary annuity, how can you find the PV of the corresponding annuity due?AppendixLO1
What is the PVA of an ordinary annuity with 10 payments of $100 if the appropriate interest rate is 10%? What would the PVA be if the interest rate was 4%? What if the interest rate was 0%? How would
Assume that you are offered an annuity that pays $100 at the end of each year for 10 years. You could earn 8% on your money in other investments with equal risk. What is the most you should pay for
Suppose you inherited $100,000 and invested it at 7% per year. What is the most you could withdraw at the end of each of the next 10 years and have a zero balance at Year 10? How would your answer
If you had $100,000 that was invested at 7% and you wanted to withdraw$10,000 at the end of each year, how long would your funds last? How long would they last if you earned 0%? How long would they
Your uncle named you beneficiary of his life insurance policy. The insurance company gives you a choice of $100,000 today or a 12-year annuity of $12,000 at the end of each year. What rate of return
Assume that you just inherited an annuity that will pay you $10,000 per year for 10 years, with the first payment being made today. A friend of your mother offers to give you $60,000 for the annuity.
What’s the present value of a perpetuity that pays $1,000 per year beginning one year from now if the appropriate interest rate is 5%? What would the value be if payments on the annuity began
How could you use Equation 5.2 to find the PV of an uneven stream of cash flows?AppendixLO1
What’s the present value of a 5-year ordinary annuity of $100 plus an additional$500 at the end of Year 5 if the interest rate is 6%? What is the PV if the $100 payments occur in Years 1 through 10
What’s the present value of the following uneven cash flowstream: $0 at Time 0,$100 in Year 1 (or at Time 1), $200 in Year 2, $0 in Year 3, and $400 in Year 4 if the interest rate is 8%?AppendixLO1
Would a typical common stock provide cash flows more like an annuity or more like an uneven cash flow stream? Explain.AppendixLO1
Why are we more likely to need to calculate the PV of cash flow streams than the FV of streams?AppendixLO1
What is the future value of this cash flow stream: $100 at the end of 1 year, $150 due after 2 years, and $300 due after 3 years if the appropriate interest rate is 15%?AppendixLO1
An investment costs $465 and is expected to produce cash flows of $100 at the end of each of the next 4 years, then an extra lump sum payment of $200 at the end of the fourth year. What is the
An investment costs $465 and is expected to produce cash flows of $100 at the end of Year 1, $200 at the end of Year 2, and $300 at the end of Year AppendixLO1
What is the expected rate of return on this investment ?AppendixLO1
Would you rather invest in an account that pays 7% with annual compounding or 7% with monthly compounding? Would you rather borrow at 7% and make annual or monthly payments? Why?AppendixLO1
What’s the future value of $100 after 3 years if the appropriate interest rate is 8%compounded annually? Compounded monthly? ($125.97; $127.02)AppendixLO1
What’s the present value of $100 due in three years if the appropriate interest rate is 8% compounded annually? Compounded monthly?AppendixLO1
Define the terms annual percentage rate (APR), effective annual rate (EFF%), and nominal interest rate (INOM).AppendixLO1
A bank pays 5% with daily compounding on its savings accounts. Should it advertise the nominal or effective rate if it is seeking to attract new deposits?AppendixLO1
By law, credit card issuers must print their annual percentage rate on their monthly statements. A common APR is 18% with interest paid monthly. What is the EFF% on such a loan? [EFF% = (1 +
Some years ago banks didn’t have to reveal the rates they charged on credit cards. Then Congress passed the Truth in Lending Act that required banks to publish their APRs. Is the APR really the
Suppose a company borrowed $1 million at a rate of 9%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would the firm have to pay in a
Suppose you deposited $1,000 in a credit union account that pays 7% with daily compounding and a 365-day year. What is the EFF%, and how much could you withdraw after seven months, assuming this is
Suppose you borrowed $30,000 on a student loan at a rate of 8% and must repay it in three equal installments at the end of each of the next 3 years. How large would your payments be, how much of the
KEY TERMS Define each of the following terms:a. Time lineb. FVN; PV; I; INT; N; FVAN; PMT; PVANc. Compounding; discountingd. Simple interest; compound intereste. Opportunity costf. Annuity; ordinary
FUTURE VALUE It is now January 1, 2014. Today you will deposit $1,000 into a savings account that pays 8%.a. If the bank compounds interest annually, how much will you have in your account on January
TIME VALUE OF MONEY It is now January 1, 2014; and you will need $1,000 on January 1, 2018, in 4 years. Your bank compounds interest at an 8% annual rate.a. How much must you deposit today to have a
EFFECTIVE ANNUAL RATES Bank A offers loans at an 8% nominal rate (its APR)but requires that interest be paid quarterly; that is, it uses quarterly compounding.Bank B wants to charge the same
What is an opportunity cost? How is this concept used in TVM analysis, and where is it shown on a time line? Is a single number used in all situations? Explain.AppendixLO1
Explain whether the following statement is true or false: $100 a year for 10 years is an annuity; but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an annuity.
If a firm’s earnings per share grew from $1 to $2 over a 10-year period, the total growth would be 100%, but the annual growth rate would be less than 10%. True or false? Explain.(Hint: If you
Would you rather have a savings account that pays 5% interest compounded semiannually or one that pays 5% interest compounded daily? Explain.AppendixLO1
To find the present value of an uneven series of cash flows, you must find the PVs of the individual cash flows and then sum them. Annuity procedures can never be of use, even when some of the cash
The present value of a perpetuity is equal to the payment on the annuity, PMT, divided by the interest rate, I PV PMT I. What is the future value of a perpetuity of PMT dollars per year? (Hint: The
Banks and other lenders are required to disclose a rate called the APR. What is this rate?Why did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were
What is a loan amortization schedule, and what are some ways these schedules are used?PROBLEMS AppendixLO1
FUTURE VALUE If you deposit $10,000 in a bank account that pays 10% interest annually, how much will be in your account after 5 years?AppendixLO1
PRESENT VALUE What is the present value of a security that will pay $5,000 in 20 years if securities of equal risk pay 7% annually?AppendixLO1
FINDING THE REQUIRED INTEREST RATE Your parents will retire in 18 years. They currently have $250,000 saved, and they think they will need $1,000,000 at retirement.What annual interest rate must they
TIME FOR A LUMP SUM TO DOUBLE If you deposit money today in an account that pays 6 5% annual interest, how long will it take to double your money?AppendixLO1
TIME TO REACH A FINANCIAL GOAL You have $42,180.53 in a brokerage account, and you plan to deposit an additional $5,000 at the end of every future year until your account totals$250,000. You expect
FUTURE VALUE: ANNUITY VERSUS ANNUITY DUE What’s the future value of a 7%, 5-year ordinary annuity that pays $300 each year? If this was an annuity due, what would its future value be?AppendixLO1
PRESENT AND FUTURE VALUES OF A CASH FLOW STREAM An investment will pay $100 at the end of each of the next 3 years, $200 at the end of Year 4, $300 at the end of Year 5, and $500 at the end of Year
If other investments of equal risk earn 8% annually, what is its present value? Its future value?5-8 LOAN AMORTIZATION AND EAR You want to buy a car, and a local bank will lend you$20,000. The loan
PRESENT AND FUTURE VALUES FOR DIFFERENT PERIODS Find the following values using the equations and then a financial calculator. Compounding/discounting occurs annually.a. An initial $500 compounded
PRESENT AND FUTURE VALUES FOR DIFFERENT INTEREST RATES Find the following values. Compounding/discounting occurs annually.a. An initial $500 compounded for 10 years at 6%b. An initial $500 compounded
GROWTH RATES Shalit Corporation’s 2013 sales were $12 million. Its 2008 sales were$6 million.a. At what rate have sales been growing?b. Suppose someone made this statement: “Sales doubled in 5
EFFECTIVE RATE OF INTEREST Find the interest rates earned on each of the following:a. You borrow $700 and promise to pay back $749 at the end of 1 year.b. You lend $700 and the borrower promises to
TIME FOR A LUMP SUM TO DOUBLE How long will it take $200 to double if it earns the following rates? Compounding occurs once a year.a. 7%b. 10%c. 18%d. 100%AppendixLO1
FUTURE VALUE OF AN ANNUITY Find the future values of these ordinary annuities. Compounding occurs once a year.a. $400 per year for 10 years at 10%b. $200 per year for 5 years at 5%c. $400 per year
PRESENT VALUE OF AN ANNUITY Find the present values of these ordinary annuities.Discounting occurs once a year.a. $400 per year for 10 years at 10%b. $200 per year for 5 years at 5%c. $400 per year
PRESENT VALUE OF A PERPETUITY What is the present value of a $100 perpetuity if the interest rate is 7%? If interest rates doubled to 14%, what would its present value be?AppendixLO1
EFFECTIVE INTEREST RATE You borrow $85,000; the annual loan payments are $8,273 59 for 30 years. What interest rate are you being charged?AppendixLO1
UNEVEN CASH FLOW STREAMa. Find the present values of the following cash flow streams at an 8% discount rate.b. What are the PVs of the streams at a 0% discount rate?AppendixLO1 0 1 2 3 4 5 + Stream A
FUTURE VALUE OF AN ANNUITY Your client is 40 years old. She wants to begin saving for retirement with the first payment to come one year from now. She can save $5,000 per year, and you advise her to

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