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principles of finance

Questions and Answers of Principles Of Finance

(Risk-return trade-off) One of the ways in which the U.S. helps foreign countries is to guarantee their bank loans. Explain (in short) what are the benefits for foreign countries in getting those
(Ex-ante and ex-post risk and return) During a finance lecture, Professor Johnson explained to his students the relation between higher risk and higher expected returns. At the end of the lecture,
(Risk and volume of trade) On 15 January 2016, the U.S. government issued two series of bonds. The two series are completely identical except for the fact that the volume of trade in the first series
(Expected return calculation) “DEF” is a firm that is traded on NASDAQ. On 1/1/2014, the company issued 10,000 zero coupon bonds. Each bond has a face value of $100 and matures on 1/1/2019. The
(Risk and return) Can you think of a risk-based explanation for the following finding? Over the last 40 years, “small stocks”—defined as shares of firms with a low market value—had higher
(Trading volume and return) A well-known finance professor published a paper in which he argued that due to the high volume of stock trade in the Internet, he expects stock returns to decline in
(Annual return calculation) At the end of 2009, an investor bought 10,000 shares of Yakuna Corporation for ¥456 each in the Japanese stock market(¥ is the symbol for Japanese yen). At that time,
(Return calculation) On 1 January 2010, an American investor bought$1,000,000 worth of Swiss francs (SFr) and put it in a savings account for 1 year. The annual interest rate in Swiss francs was 6%.
(Compute average return and sigma) Go to the Principles of Finance with Excel companion website for Chapter 7, where you’ll find a template for daily adjusted closing prices for AMD Corporation’s
(Compute average return and sigma) Go to the Principles of Finance with Excel student website for Chapter 7, where you’ll find a template for data on annual stock prices for Ford Motor Company for
(Compute average return and sigma) Go to the Principles of Finance with Excel companion website for Chapter 7, where you’ll find data on annual stock prices for Kellogg for 1995–2014. Compute the
(Compute average return and sigma) Go to the Principles of Finance with Excel companion website for Chapter 7, where you’ll find a template with data on annual stock prices for Kellogg and Ford for
You are considering a project whose cash flows are given below:a. Calculate the present values of the future cash flows of the project.b. Calculate the project's net present value.c. Calculate the
Your firm is considering two projects with the following cash flows:a. If the appropriate discount rate is 12%, rank the two projects.b. Which project is preferred if you rank by IRR?c. Calculate the
Your uncle is a proud owner of an up-market clothing store. Because business is down he is considering replacing the languishing tie department with a new sportswear department. In order to examine
You are the owner of a factory that supplies chairs and tables to schools in Denver. You sell each chair for $1.76 and each table for $4.40 based on the following calculation:You have received an
A factory is considering the purchase of a new machine for one of its units. The machine costs$100,000. The machine will be depreciated on a straight line basis over its 10-year life to a salvage
You are considering the following investment:The discount rate is 11% and the corporate tax rate is 34%.a. Calculate the project NPV using straight-line depreciation.b. What will be the company's
A company is considering buying a new machine for one of its factories. The cost of the machine is $60,000 and its expected life span is five years. The machine will save the cost of a worker
The ABD Company is considering buying a new machine for one of its factories. The machine cost is $100,000 and its expected life span is 8 years. The machine is expected to reduce the production cost
You are the owner of a factory located in a hot tropical climate. The monthly production of the factory is $100,000 except during June-September when it falls to $80,000 due to the heat in the
The “Cold and Sweet” (C&S) company manufactures ice-cream bars. The company is considering the purchase of a new machine that will top the bar with high quality chocolate. The cost of the machine
The "Less Is More" company manufactures swimsuits. The company is considering expanding to the bath robes market. The proposed investment plan includes:• Purchase of a new machine: The cost of the
A company is considering whether to buy a regular or color photocopier for the office. The cost of the regular machine is $10,000, its life span is 5 years and the company has to pay another $1,500
The ZZZ Company is considering investing in a new machine for one of its factories. The company has two alternatives to choose from:The life span of each machine is 5 years. ZZZ sells each unit for a
Poseidon is considering opening a shipping line from Athens to Rhodes. In order to open theshipping line Poseidon will have to purchase two ships that cost 1,000 gold coins each. The life span of
Kane Running Shoes is considering the manufacturing of a special shoe for race walking which will indicate if an athlete is running (i.e. both legs are not touching the ground). The chief economist
Back to the model of section 8.3 as given in the book. Suppose that the fixed assets at cost follow the following step function:Incorporate this function into the model. (100%* Sales Fixed Assets at
a. Consider the model in section 8.3. Make two changes in the model: i) Let debt be the plug and keep cash constant at its year-0 level. ii) Suppose that the firm has 1000 shares and that it decides
It’s 1 January 2001 and you’re considering buying a $1,000 face-value U.S. Treasury bill which matures in 1 year. The interest rate is 7% annually.1.a. If you buy the T-Bill now, how much will
Below you will find price data for 3 mutual funds:2.a. Compute the annual returns on the funds for the period.2.b. Compute the mean, variance, and standard deviation of the fund returns.2.c. Graph
Here is the monthly stock price data for Ford corporation and GM corporation:Calculate:• Monthly returns for each firm.• Covariance between returns of Ford corporation and GM corporation.•
By using the returns of Ford and GM corporations you calculated in the previous question, perform a regression of Ford’s returns vs. GM’s returns. Report:• The slope of the regression.• The
Here is stock price and dividend data for Kellogg Co.:5.a. Calculate the dividend-adjusted returns for each of the years, their mean and their standard deviation.5.b. Stock analysts like to talk
Below you will find stock price, dividend, and split data for IBM. Calculate the dividend and split-adjusted returns for each of the years, their mean and their standard deviation. 1 A B C D IBM
Compute the covariance and correlation coefficient between IBM and Kellogg (previous two questions). Are there any advantages to diversifying between IBM and Kellogg?
Here is the stock price and split data for HeavySteel corporation.7.a. Calculate the split-adjusted returns for each year and its statistics (mean and standard deviation).7.b. If you bought 100
A reverse split is just like a split, but only in a reverse direction. For example, in 1 for 2 reverse split, you receive 1 shares for every 2 shares you hold. How would your answers to the previous
Here are two companies: Young corporation and Mature corporation. Young Corporation grows very rapidly, does not pay any dividends and retains all its profits. Mature Corporation stopped growing a
Below you will find the annual returns of two assets. Fill in the blanks and graph the returns of the portfolios (rows 13-27). A B C 1 Asset 1 Asset 2 2 31-Dec-90 12.56% 7.56% 3 31-Dec-91 13.50%
Here is data on the stock prices and returns of General Electric, Boeing and S&P 500 index.Calculate the highlighted cells. A B C D E F G 1 Date GE MONTHLY RETURNS ON GE, BOEING, S&P500, 2000 GE
By using information provided in the previous problem, perform a regression of the portfolio returns vs. S&P500 index returns for the period of 24 months. Report: The slope of the regression, its
(This is a hard question!) On the disk which comes with the book, you will find 2 years of monthly un-adjusted and adjusted stock price data for AT&T corporation (symbol: T).Calculate:16.a.
Explain why each of the following statements is correct or incorrect:17.a. Diversification reduces risk because prices of stocks do not usually move exactly together.17.b. The expected return on a
(FV single cash flow) You just put $600 in the bank, and you intend to leave it there for 10 years. If the bank pays you 15% interest per year, how much will you have at the end of 10 years?
(FV single cash flow, finding r) Five years ago you made a deposit of $50.The value of this deposit today is $70.13. What was the annual return earned on the deposit?a. Use the template in this
(Savings plans) You plan to open a savings account by depositing $1,000 in the bank today. You also plan to deposit $1,000 in the bank in 1 year, 2 years, . . . , 9 years. If the bank pays interest
(FV annuity) Your parents have just opened a savings account for you. They plan to make monthly deposits of $200 for the next 10 years (120 deposits)where the first deposit starts today. Assume that
(PV single cash flow, finding r) If you deposit $25,000 today, Union Bank offers to pay you $50,000 at the end of 10 years. What is the annual interest rate offered by the bank?
(PV annuity) Your uncle has just announced that he’s going to give you$10,000 per year at the end of each of the next 4 years. If the relevant interest rate is 7%, what’s the value today of this
(PV growing annuity) “Starving artists” is an organization that supports painters by giving them a guaranteed annual income. Majd has been promised an annual payment from Starving Artists. The 10
(Annuity, calculating r) Screw-’Em-Good Corp. (SEG) has just announced a revolutionary security: If you pay SEG $1,000 now, you will get back $150 at the end of each of the next 15 years. What is
(FV single cash flow, two interest rates) You have just received a $15,000 signing bonus from your new employer and decide to invest it for 2 years.Your banker suggests two alternatives, both of
(FV of annuity) In the spreadsheet, below we calculate the future value of 5 deposits of $100, with the first deposit made at time 0.As shown in Section 2.1, this calculation can also be made using
(FV annuity) Abner and Maude are both in their eighties. They’re thinking of selling their house for $500,000 and moving into an apartment complex for seniors. The senior complex will cost $50,000
(FV annuity) Michael is considering his consumption habits, trying to figure out how to save money. He realizes that he could save $10 every week by ordering regular coffee instead of latte at the
(PV annuity) Your annual salary is $100,000. You are offered two options for a severance package. Option 1 pays you 6 months’ salary now. Option 2 pays you and your heirs $6,000 per year forever
(PV of annuity, finding r) You have just invested $10,000 in a new fund that pays $1,500 at the end of each of the next 10 years. What is the compound rate of interest being offered in the fund?
(PV single cash flow + annuities) Assuming that the interest rate is 5%, which of the following is more valuable?a. $5,000 todayb. $10,000 at the end of 5 yearsc. $9,000 at the end of 4 yearsd. $300
(PV perpetuity, finding r) A fund of $10,000 is set up to pay $250 at the end of each year indefinitely. What is the fund’s rate? (There’s no Excel function that answers this question—use some
(PV growing cash flows) You are the CFO of Termination, Inc. Your company has 40 employees, each earning $40,000 per year. Employee salaries grow at 4%per year. Starting from next year, and every
(Financial planning, finding pmt) Anuradha Dixit just turned 55.Anuradha is planning to retire in 10 years, and she currently has $500,000 in her pension fund. Based on the longevity pattern of her
(Financial planning, finding pmt) Solve the previous problem using functions PV and PMT and the template below: A B 1 SAVING FOR THE FUTURE 2 Pension savings today 500,000 3 Annual desired pension
(Financial planning) Today is your 40th birthday. You expect to retire at age 65, and actuarial tables suggest that you will live to be 100.You want to move to Hawaii when you retire. You estimate
(Financial planning) John is turning 13 today. His birthday resolution is to start saving toward the purchase of a car that he wants to buy on his 18th birthday. The car costs $15,000 today, and he
(Financial planning) Mary has just completed her undergraduate degree from Northwestern University and is already planning to enter an MBA program 4 years from today. The MBA tuition will be $50,000
(Financial planning) You are 30 years old today and are considering studying for an MBA. You have just received your annual salary of $50,000 and expect it to grow by 3% per year. MBAs typically earn
(Financial planning) You’re 55 years old today, and you wish to start saving for your pension. Here are the parameters:• You intend to make a deposit today and at the beginning of each of the
(Financial planning) Section 2.5. of this chapter discusses the problem of Linda Jones’s parents, who wish to save for Linda’s college education. The setup of the problem implicitly assumes that
How will passive and active capital structure changes differ? (LG1)
Why is debt often referred to as leverage in finance? (LG2)
In M&M's perfect world, will the debt holders ever bear any of the risk of the firm? (LG3)
Why does allowing for the existence of corporate taxation cause firms to prefer the maximum amount of debt possible? (LG4)
If an investor wanted to reduce the risk of a leveraged stock in his port- folio, how could he go about doing so while still retaining shares in the company? (LG5)
Explain why, in a world with both corporate taxes and the chance of bank- ruptcy, a small firm with volatile EBIT is unlikely to have much debt. (LG7)
If the U.S. government completely eliminated taxation at the corporate level, how would this influence the capital structures of firms in a world with bankruptcy? (LG7)
Would you expect a utility company to have high or low debt levels? Why? (LG8)
Capital Structure Weights Suppose that Lil John Industries' equity is currently selling for $37 per share and that 2 million shares are outstand- ing. If the firm also has 30,000 bonds outstanding,
Capital Structure Weights Suppose that Papa Bell, Inc.'s, equity is cur- rently selling for $55 per share, with 4 million shares outstanding. If the firm also has 17,000 bonds outstanding, and they
Restructuring Strategy Suppose that Lil John Industries' equity is cur- rently selling for $27 per share and that 2 million shares are outstand- ing. The firm also has 50,000 bonds outstanding, which
Capital Structure Weights Suppose that Papa Bell, Inc.'s, equity is cur rently selling for $45 per share, with 4 million shares outstanding. The firm also has 7,000 bonds outstanding, which are
Expected EPS after Leveraging Daddi Mac, Inc., doesn't face any taxes and has $290 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity
Expected EPS after Leveraging HiLo, Inc., doesn't face any taxes and has $150 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of equity is
Standard Deviation in EPS after Leveraging HiLo, Inc., doesn't face any taxes and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of
Expected EPS after Leveraging with Taxes NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value
Expected EPS after Leveraging with Taxes GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of
Standard Deviation in EPS after Leveraging with Taxes NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and
Standard Deviation in EPS after Leveraging with Taxes GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and
Break-Even EBIT with Taxes NoNuns Cos. has a 25 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is
Break-Even EBIT with Taxes GTB, Inc., has a 34 percent tax rate and has $100 million in assets, currently financed entirely with equity. Equity is worth $7 per share, and book value of equity is
Why might a firm's investors wish to delay receiving cash from the firm? (LG1)
Why might the government actually want the capital gains tax rate to be lower than the dividend tax rate? (LG2)
What condition would have to be necessary in order for the riskiness of the firm's cash flows to investors to be affected by the firm's dividend payout policy? (LG2)
Explain how an announced increase in a firm's dividend payout might be perceived as either a good or a bad information signal. (LG3)
We talked about how a firm might attract a different clientele by switch- ing dividend payout policies. Might a particular clientele change its preference for dividends vs. capital gains through no
If a firm follows the modified residual dividend model discussed in this chapter, are extraordinary dividends paid out of residual net income? (LG4)
Could the record date ever be before the ex-dividend date? Why or why not? (LG5)
Suppose a firm managed to consistently lower the length of time between the ex-dividend date and the payment date. On average, how would this affect the firm's stock price? (LG5)
If a firm announces a dividend decrease, would you expect the stock price to go down more or less than the present value of that decrease? Why? (LG5)
How big of a stock dividend would a firm have to announce for the stock price to be affected as much as it would through a 3-for-1 stock split? (LG6)

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