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business
principles managerial finance

Questions and Answers of Principles Managerial Finance

9–12 Why is the cost of financing a project with retained earnings less than the cost of financing it with a new issue of common stock?
9–11 How do the constant-growth valuation model and capital asset pricing model methods for finding the cost of common stock differ?
9–10 What premise about share value underlies the constant-growth valuation(Gordon growth) model that is used to measure the cost of common stock equity, rs?
9-9 How would you calculate the cost of preferred stock?
9-8 The interest expense on debt provides a tax deduction for the issuer so any calculation of a firm’s net cost of debt should reflect this benefit.
9-7 How is the before-tax cost of debt converted into the after-tax cost?
9-6 What methods can be used to find the before-tax cost of debt?
9-5 What are the net proceeds from the sale of a bond? What are flotation costs, and how do they affect a bond’s net proceeds?
9–4 What are the typical sources of long-term capital available to the firm?
9–3 What does the firm’s capital structure represent?
9–2 What role does the cost of capital play in the firm’s long-term investment decisions? How does it relate to the firm’s ability to maximize shareholder wealth?
9–1 What is the cost of capital?
LG 6 Calculate the weighted average cost of capital(WACC), and discuss alternative weighting schemes.
LG 5 Calculate the cost of common stock equity, and convert it into the cost of retained earnings and the cost of new issues of common stock.
LG 4 Determine the cost of preferred stock.
LG 3 Determine the cost of long-term debt, and explain why the after-tax cost of debt is the relevant cost of debt.
LG 2 Explain what is meant by the marginal cost of capital.
LG 1 Understand the basic concept and sources of capital associated with the cost of capital.
P5–62 ETHICS PROBLEM A manager at a “Check Into Cash” business defends his business practice as simply “charging what the market will bear.” “After all,” says the manager,“we don’t
P5–61 Time to repay installment loan Mia Salto wishes to determine how long it will take to repay a loan with initial proceeds of $14,000 where annual end-of-year installment payments of $2,450 are
P5–59 Time to accumulate a given sum Manuel Rios wishes to determine how long it will take an initial deposit of $10,000 to double.a. If Manuel earns 10% annual interest on the deposit, how long
P5–56 Interest rate for an annuity Anna Waldheim was seriously injured in an industrial accident. She sued the responsible parties and was awarded a judgment of$2,000,000. Today, she and her
P5–54 Rate of return: Annuity What is the rate of return on an investment of $10,606 if the company will receive $2,000 each year for the next 10 years?
P5–50 Monthly loan payments Tim Smith is shopping for a used car. He has found one priced at $4,500. The dealer has told Tim that if he can come up with a down payment of $500, the dealer will
P5–49 Loan interest deductions Liz Rogers just closed a $10,000 business loan that is to be repaid in three equal, annual, end-of-year payments. The interest rate on the loan is 13%. As part of her
P5–48 Loan amortization schedule Joan Messineo borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments.a.
P5–46 Inflation, time value, and annual deposits While vacationing in Florida, John Kelley saw the vacation home of his dreams. It was listed with a sale price of$200,000. The only catch is that
P5–45 Deposits to create a perpetuity You have decided to endow your favorite university with a scholarship. It is expected to cost $6,000 per year to attend the university into perpetuity. You
P5–44 Accumulating a growing future sum A retirement home at Deer Trail Estates now costs $185,000. Inflation is expected to cause this price to increase at 6%per year over the 20 years before C.
P5–43 Creating a retirement fund To supplement your planned retirement in exactly 42 years, you estimate that you need to accumulate $220,000 by the end of 42 years from today. You plan to make
P5–41 Annuities and compounding Janet Boyle intends to deposit $300 per year in a credit union for the next 10 years, and the credit union pays an annual interest rate of 8%.a. Determine the future
P5–40 Comparing compounding periods René Levin wishes to determine the future value at the end of 2 years of a $15,000 deposit made today into an account paying a nominal annual rate of 12%.a.
P5–39 Compounding frequency and time value You plan to invest $2,000 in an individual retirement arrangement (IRA) today at a nominal annual rate of 8%, which is expected to apply to all future
P5–36 Changing compounding frequency Using annual, semiannual, and quarterly compounding periods for each of the following, (1) calculate the future value if $5,000 is deposited initially, and (2)
P5–32 Value of a mixed stream Harte Systems, Inc., a maker of electronic surveillance equipment, is considering selling to a well-known hardware chain the rights to market its home security system.
P5–27 Creating an endowment On completion of her introductory finance course, Marla Lee was so pleased with the amount of useful and interesting knowledge she gained that she convinced her parents,
P5–25 Value of an annuity versus a single amount Assume that you just won the state lottery.Your prize can be taken either in the form of $40,000 at the end of each of the next 25 years (that is,
P5–24 Funding your retirement You plan to retire in exactly 20 years. Your goal is to create a fund that will allow you to receive $20,000 at the end of each year for the 30 years between
P5–23 Value of a retirement annuity An insurance agent is trying to sell you an immediate retirement annuity, which for a single amount paid today will provide you with$12,000 at the end of each
P5–22 Retirement planning Hal Thomas, a 25-year-old college graduate, wishes to retire at age 65. To supplement other sources of retirement income, he can deposit $2,000 each year into a
P5–21 Time value: Annuities Marian Kirk wishes to select the better of two 10-year annuities, C and D. Annuity C is an ordinary annuity of $2,500 per year for 10 years. Annuity D is an annuity due
P5–18 Calculating deposit needed You put $10,000 in an account earning 5%. After 3 years, you make another deposit into the same account. Four years later (that is, 7 years after your original
P5–15 Time value and discount rates You just won a lottery that promises to pay you$1,000,000 exactly 10 years from today. Because the $1,000,000 payment is guaranteed by the state in which you
P5–14 Time value An Iowa state savings bond can be converted to $100 at maturity 6 years from purchase. If the state bonds are to be competitive with U.S. savings bonds, which pay 8% annual
P5–13 Time value Jim Nance has been offered an investment that will pay him $500 three years from today.a. If his opportunity cost is 7% compounded annually, what value should he place on this
P5–12 Present value concept Answer each of the following questions.a. What single investment made today, earning 12% annual interest, will be worth$6,000 at the end of 6 years?b. What is the
P5–9 Single-payment loan repayment A person borrows $200 to be repaid in 8 years with 14% annually compounded interest. The loan may be repaid at the end of any earlier year with no prepayment
P5–8 Time value Misty needs to have $15,000 at the end of 5 years to fulfill her goal of purchasing a small sailboat. She is willing to invest a lump sum today and leave the money untouched for 5
P5–7 Time value You can deposit $10,000 into an account paying 9% annual interest either today or exactly 10 years from today. How much better off will you be at the end of 40 years if you decide
P5–6 Time value As part of your financial planning, you wish to purchase a new car exactly 5 years from today. The car you wish to purchase costs $14,000 today, and your research indicates that its
P5–5 Time value You have $1,500 to invest today at 7% interest compounded annually.a. Find how much you will have accumulated in the account at the end of(1) 3 years, (2) 6 years, and (3) 9
P5–3 Future value You have $100 to invest. If you can earn 12% interest, about how long does it take for your $100 investment to grow to $200? Suppose that the interest rate is just half that, at
P5–1 Using a time line The financial manager at Starbuck Industries is considering an investment that requires an initial outlay of $25,000 and is expected to result in cash inflows of $3,000 at
E5–6 Jack and Jill have just had their first child. If college is expected to cost $150,000 per year in 18 years, how much should the couple begin depositing annually at the end of each year to
E5–5 Joseph is a friend of yours. He has plenty of money but little financial sense. He received a gift of $12,000 for his recent graduation and is looking for a bank in which to deposit the funds.
E5–3 Gabrielle just won $2.5 million in the state lottery. She is given the option of receiving a total of $1.3 million now, or she can elect to be paid $100,000 at the end of each of the next 25
E5–2 If Bob and Judy combine their savings of $1,260 and $975, respectively, and deposit this amount into an account that pays 2% annual interest, compounded monthly, what will the account balance
E5–1 Assume that a firm makes a $2,500 deposit into its money market account. If this account is currently paying 0.7% (yes, that’s right, less than 1%!), what will the account balance be after 1
ST5–4 Deposits needed to accumulate a future sum Judi Janson wishes to accumulate$8,000 by the end of 5 years by making equal, annual, end-of-year deposits over the next 5 years. If Judi can earn
ST5–2 Future values of annuities Ramesh Abdul wishes to choose the better of two equally costly cash flow streams: annuity X and annuity Y. X is an annuity due with a cash inflow of $9,000 for each
ST5–1 Future values for various compounding frequencies Delia Martin has $10,000 that she can deposit in any of three savings accounts for a 3-year period. Bank A compounds interest on an annual
5-30 As a savvy finance major you realize that you can quickly estimate your retirement age by knowing how much you need to retire, how much you can contribute each month to your retirement account,
5-29 You want to buy a new car as a graduation present for yourself, but before finalizing a purchase you need to consider the monthly payment amount. Based on the information provided at MFL, find
5-28 How can you determine the unknown number of periods when you know the present and future values—single amount or annuity—and the applicable rate of interest?
5-27 Describe the procedure used to amortize a loan into a series of equal periodic payments.
5-26 How can you determine the size of the equal, annual, end-of-period deposits necessary to accumulate a certain future sum at the end of a specified future period at a given annual interest rate?
5-25 Rather than comparing future values, you often compare the effective annual rates of various investment opportunities with differing compounding frequencies. Based on the information provided at
5-24 What if your short term investments provide continuous compounding?Based on the information provided at MFL, determine the future value of an investment opportunity based on continuous
5-23 You are responsible for managing your company’s short term investments and you know that the compounding frequency of investment opportunities is quite important. Based on the information
5-22 Differentiate between a nominal annual rate and an effective annual rate (EAR). Define annual percentage rate (APR) and annual percentage yield (APY).
5-21 How does the future value of a deposit subject to continuous compounding compare to the value obtained by annual compounding?
5-20 What effect does compounding interest more frequently than annually have on (a) future value and (b) the effective annual rate (EAR)? Why?
5-19 To give yourself a financial head start after college you have decided to work summer jobs and invest the money you earn until after graduation.You expect that your earnings each summer will
5-18 How is the future value of a mixed stream of cash flows calculated?How is the present value of a mixed stream of cash flows calculated?
5-17 Rather than making contributions to an IRA at the end of each year, you decide to make equal contributions at the beginning of each year. Based on the information provided at MFL, solve for the
5-16 You have just graduated from college, begun your new career, and now it is time to buy your first home. Based on the information provided at MFL, determine how much you can spend for your new
5-15 Since tax time comes around every year you smartly decide to make equal contributions to your IRA at the end of every year. Based on the information provided at MFL, calculate the future value
5-14 What is a perpetuity? Why is the present value of a perpetuity equal to the annual cash payment divided by the interest rate?
5-13 How can the formula for the present value of an ordinary annuity be modified to find the present value of an annuity due?
5-12 How can the formula for the future value of an annuity be modified to find the future value of an annuity due?
5-11 What are the most efficient ways to calculate the present value of an ordinary annuity?
5-10 What is the difference between an ordinary annuity and an annuity due?Which is more valuable? Why?
5–9 It is never too soon to begin investing for a child’s college education.Based on the information provided at MFL, determine the present value you would need to invest today to ensure that
5–8 It is tax time and you would like to make a tax deductible contribution to an Individual Retirement Account (IRA). Based on the information provided at MFL, find the future value of an IRA
5–7 How are present value and future value calculations related?
5–6 What effect does increasing the required return have on the present value of a future amount? Why?
5–5 What is meant by “the present value of a future amount”? What is the general equation for present value?
5–4 What effect would a decrease in the interest rate have on the future value of a deposit? What effect would an increase in the holding period have on future value?
5–3 How is the compounding process related to the payment of interest on savings? What is the general equation for future value?
5–2 Define and differentiate among the three basic patterns of cash flow:(1) a single amount, (2) an annuity, and (3) a mixed stream.
5–1 What is the difference between future value and present value? Which approach is generally preferred by financial managers? Why?
LG 6 Describe the procedures involved in (1)determining deposits needed to accumulate a future sum, (2) loan amortization, (3) finding interest or growth rates, and (4) finding an unknown number of
LG 5 Understand the effect that compounding interest more frequently than annually has on future value and on the effective annual rate of interest.
LG 4 Calculate both the future value and the present value of a mixed stream of cash flows.
LG 3 Find the future value and the present value of both an ordinary annuity and an annuity due, and find the present value of a perpetuity.
LG 2 Understand the concepts of future value and present value, their calculation for single amounts, and the relationship between them.
LG 1 Discuss the role of time value in finance, the use of computational tools, and the basic patterns of cash flow.
P8–31 ETHICS PROBLEM Risk is a major concern of almost all investors. When shareholders invest their money in a firm, they expect managers to take risks with those funds. What do you think are the
P8–29 Shifts in the security market line Assume that the risk-free rate, RF, is currently 8%;the market return, rm, is 12%; and asset A has a beta, bA, of 1.10.a. Draw the security market line
P8–28 Security market line (SML) Assume that the risk-free rate, RF, is currently 9% and that the market return, rm, is currently 13%.a. Draw the security market line (SML) on a set of

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