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business
principles of finance

Questions and Answers of Principles Of Finance

What is synergy and how does it apply to mergers? (LG1)
Describe the three dimensions of revenue synergies that may be achieved in a merger. (LG1)
What is the difference between economies of scope and economies of scale? Can two firms involved in a merger benefit from both economies of scale and economies of scope? (LG1)
How can managers' personal incentives result in value-destroying mergers and acquisitions? (LG1)
Why is NPV valuation an appropriate tool to use in the evaluation of a merger target? (LG2)
What is the difference between business failure, economic failure, and tech- nical insolvency? (LG3)
What is the job of the trustee in an informal liquidation of a firm's assets? (LG3)
What is the difference between a Chapter 11 and a Chapter 7 bankruptcy? (LG4)
Does a Chapter 7 bankruptcy increase the probability that creditors will be paid in full more than a Chapter 11 bankruptcy? (LG4)
What is the order of payment to a firm's creditors in a Chapter 7 bankruptcy? (LG4)
To what extent are employees of a bankrupt firm paid their wages and benefits due? (LG4)
What is a credit-scoring model? (LG5)
What is the difference between a linear discriminant and a linear probabil- ity credit-scoring model? (LG5)
A firm has an Altman's Z-score of 1.76. What does this mean? (LG5)
The Altman's Z-score model has several weaknesses. What are they? (LG5)
A linear probability model you have developed finds that a firm has a PD of 0.16. What does this mean? (LG5)
List and describe the purpose of each part of a time line with an initial cash inflow and a future cash outflow. Which cash flows should be negative and which positive? Why? (LG1)
How are the present value and future value related? (LG2)
Would you prefer to have an investment earning 5 percent for 40 years or an investment earning 10 percent for 20 years? Explain. (LG3)
How are present values affected by changes in interest rates? (LG4)
Show how the Rule of 72 can be used to approximate the number of years to quadruple an investment. (LG6)
Without making any computations, indicate which of each pair has a higher interest rate: (LG7)
a. $100 doubles to $200 in five years or seven years.b. $500 increases in four years to $750 or to $800.c. $300 increases to $450 in two years or increases to $500 in three years. A $1,000 investment
Time Line Show the time line for a $600 cash inflow today, a $726 cash outflow in year 2, and a 10 percent interest rate. (LG1)
Time Line Show the time line for a $400 cash outflow today, a $518 cash inflow in year 3, and a 9 percent interest rate. (LG1)
One Year Future Value What is the future value of $500 deposited for one year earning a 9 percent interest rate annually? (LG2)
One Year Future Value What is the future value of $400 deposited for one year earning an interest rate of 9 percent per year? (LG2)
Multiyear Future Value How much would be in your savings account in eight years after depositing $150 today if the bank pays 8 percent per year? (LG3)
Multiyear Future Value Compute the value in 25 years of a $1,000 deposit earning 10 percent per year. (LG3)
Compounding with Different Interest Rates A deposit of $350 earns the following interest rates:a. 8 percent in the first year.b. 6 percent in the second year.c. 5 percent in the third year. What
Compounding with Different Interest Rates A deposit of $750 earns interest rates of 9 percent in the first year and 12 percent in the second year. What would be the second year future value? (LG3)
Discounting One Year What is the present value of a $250 payment in one year when the discount rate is 10 percent? (LG4)
Discounting One Year What is the present value of a $200 payment in one year when the discount rate is 7 percent? (LG4)
Present Value What is the present value of a $1,500 payment made in six years when the discount rate is 8 percent? (LG4)
Present Value Compute the present value of an $850 payment made in ten years when the discount rate is 12 percent. (LG4)
Present Value with Different Discount Rates Compute the present value of $1,000 paid in three years using the following discount rates: 6 percent in the first year, 7 percent in the second year, and
Present Value with Different Discount Rates Compute the present value of $5,000 paid in two years using the following discount rates: 8 percent in the first year and 7 percent in the second year.
Rule of 72 Approximately how many years are needed to double a $100 investment when interest rates are 7 percent per year? (LG6)
Rule of 72 Approximately how many years are needed to double a $500 investment when interest rates are 10 percent per year? (LG6)
Rule of 72 Approximately what interest rate is needed to double an investment over five years? (LG6)
Rule of 72 Approximately what interest rate is earned when an invest- ment doubles over 12 years? (LG6)
Rates over One Year Determine the interest rate earned on a $1,400 deposit when $1,700 is paid back in one year. (LG7)
Rates over One Year Determine the interest rate earned on a $2,300 deposit when $2,900 is paid back in one year. (LG7)
Interest-on-Interest Consider a $2,000 deposit earning 8 percent inter- est per year for five years. What is the future value, and how much total interest is earned on the original deposit versus how
Interest-on-Interest Consider a $5,000 deposit earning 10 percent interest per year for ten years. What is the future value, how much total interest is earned on the original deposit, and how much is
Comparing Cash Flows What would be more valuable, receiving $500 today or receiving $625 in three years if interest rates are 8 percent? Why? (LG5)
Comparing Cash Flows Which cash flow would you rather pay, $425 today or $500 in two years if interest rates are 10 percent? Why? (LG5)
Moving Cash Flows What is the value in year 3 of a $700 cash flow made in year 6 if interest rates are 10 percent? (LG5)
Moving Cash Flows What is the value in year 4 of a $1,000 cash flow made in year 6 if interest rates are 8 percent? (LG5)
Moving Cash Flows What is the value in year 10 of a $1,000 cash flow made in year 4 if interest rates are 9 percent? (LG5)
Moving Cash Flows What is the value in year 15 of a $250 cash flow made in year 3 if interest rates are 11 percent? (LG5)
Solving for Rates What annual rate of return is earned on a $1,000 invest- ment when it grows to $2,500 in six years? (LG7)
Solving for Rates What annual rate of return is earned on a $5,000 invest- ment when it grows to $9,500 in five years? (LG7)
Solving for Time How many years (and months) will it take $2 million to grow to $5 million with an annual interest rate of 7 percent? (LG8)
Solving for Time How long will it take $2,000 to reach $5,000 when it grows at 10 percent per year? (LG8)
Future Value At age 30 you invest $1,000 that earns 8 percent each year. At age 40 you invest $1,000 that earns 11 percent per year. In which case would you have more money at age 60? (LG2)
Future Value At age 25 you invest $1,500 that earns 8 percent each year. At age 40 you invest $1,500 that earns 11 percent per year. In which case would you have more money at age 65? (LG2)
Solving for Rates You invested $2,000 in the stock market one year ago. Today, the investment is valued at $1,500. What return did you earn? What return would you need to get next year to break even
Solving for Rates You invested $3,000 in the stock market one year ago. Today, the investment is valued at $3,750. What return did you earn? What return would you suffer next year for your investment
Solving for Rates What annual rate of return is earned on a $4,000 invest- ment made in year 2 when it grows to $7,000 by the end of year 7? (LG7)
Solving for Rates What annual rate of return is implied on a $2,500 loan taken next year when $3,500 must be repaid in year 4? (LG7)
General TVM Ten years ago, Hailey invested $2,000 and locked in a 9 percent annual interest rate for 30 years (end 20 years from now). Aidan can make a 20-year investment today and lock in a 10
Moving Cash Flows You are scheduled to receive a $500 cash flow in one year, a $1,000 cash flow in two years, and pay an $800 payment in three years. If interest rates are 10 percent per year, what
Spreadsheet Problem Oil prices have increased a great deal in the last decade. The table below shows the average oil price for each year since 1949. Many companies use oil products as a resource in
How can you add a cash flow in year 2 and a cash flow in year 4 in year 7? (LG1)
When you discount multiple cash flows, how does the future period that a cash flow is paid affect its present value and its contribution to the value of all the cash flows? (LG3)
How can you use the present value of an annuity concept to determine the price of a house you can afford? (LG4)
Since perpetuity payments continue forever, how can a present value be computed? Why isn't the present value infinite? (LG5)
Explain why you use the same adjustment factor, (1 + i), when you adjust annuity due payments for both future value and present value. (LG6)
Use the idea of compound interest to explain why EAR is larger than APR. (LG7)
Would you rather pay $10,000 for a 5-year, $2,500 annuity or a 10-year, $1,250 annuity? Why? (LG8)
The interest on your home mortgage is tax deductible. Why are the early years of the mortgage more helpful in reducing taxes than in the later years? (LG9)
How can you use the concepts illustrated in computing the number of payments in an annuity to figure how to pay off a credit card balance? How does the magnitude of the payment impact the number of
Future Value Compute the future value in year 8 of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 using a 10 percent interest rate. (LG1)
Future Value Compute the future value in year 7 of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using an 8 percent interest rate. (LG1)
Future Value of an Annuity What is the future value of a $900 annuity payment over five years if interest rates are 9 percent? (LG2)
Future Value of an Annuity What is the future value of a $700 annuity payment over six years if interest rates are 10 percent? (LG2)
Present Value Compute the present value of a $2,000 deposit in year 1 and another $1,500 deposit at the end of year 3 if interest rates are 10 percent. (LG3)
Present Value Compute the present value of a $2,000 deposit in year 1 and another $2,500 deposit at the end of year 4 using an 8 percent inter- est rate. (LG3)
Present Value of an Annuity What's the present value of a $900 annuity payment over five years if interest rates are 9 percent? (LG4)
Present Value of an Annuity What's the present value of a $700 annuity payment over six years if interest rates are 10 percent? (LG4)
Present Value of a Perpetuity What's the present value, when inter- est rates are 7.5 percent, of a $50 payment made every year forever? (LG5)
Present Value of a Perpetuity What's the present value, when inter- est rates are 8.5 percent, of a $75 payment made every year forever? (LG5)
Present Value of an Annuity Due If the present value of an ordinary, 7-year annuity is $6,500 and interest rates are 8.5 percent, what's the present value of the same annuity due? (LG6)
Present Value of an Annuity Due If the present value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what's the present value of the same annuity due? (LG6)
Future Value of an Annuity Due If the future value of an ordinary, 7-year annuity is $6,500 and interest rates are 8.5 percent, what is the future value of the same annuity due? (LG6)
Future Value of an Annuity Due If the future value of an ordinary, 6-year annuity is $8,500 and interest rates are 9.5 percent, what's the future value of the same annuity due? (LG6)
Effective Annual Rate A loan is offered with monthly payments and a 10 percent APR. What's the loan's effective annual rate (EAR)? (LG7)
Effective Annual Rate A loan is offered with monthly payments and a 13 percent APR. What's the loan's effective annual rate (EAR)? (LG7)
Future Value Given a 4 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,500. (LG1)
Future Value Given a 5 percent interest rate, compute the year 6 future value of deposits made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400. (LG1)
Future Value of Multiple Annuities Assume that you contribute $200 per month to a retirement plan for 20 years. Then you are able to increase the contribution to $400 per month for another 30 years.
Future Value of Multiple Annuities Assume that you contribute $150 per month to a retirement plan for 15 years. Then you are able to increase the contribution to $350 per month for the next 25 years.
Present Value Given a 6 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,200, $1,200, and $1,500. (LG3)
Present Value Given a 7 percent interest rate, compute the present value of payments made in years 1, 2, 3, and 4 of $1,000, $1,300, $1,300, and $1,400. (LG3)
Present Value of Multiple Annuities A small business owner visits her bank to ask for a loan. The owner states that she can repay a loan at $1,000 per month for the next three years and then $2,000
Present Value of Multiple Annuities A small business owner visits his bank to ask for a loan. The owner states that he can repay a loan at $1,500 per month for the next three years and then $500 per
Present Value You are looking to buy a car. You can afford $450 in monthly payments for four years. In addition to the loan, you can make a $1,000 down payment. If interest rates are 7 percent APR,
Present Value You are looking to buy a car. You can afford $650 in monthly payments for five years. In addition to the loan, you can make a $750 down payment. If interest rates are 8 percent APR,
Present Value of a Perpetuity A perpetuity pays $100 per year and inter- est rates are 7.5 percent. How much would its value change if interest rates increased to 9 percent? Did the value increase or

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