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principles of finance

Questions and Answers of Principles Of Finance

(NPV, IRR, IRR, crossover point) 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
(NPV and IRR with alternative costs) Mr. Fox has just bought an old apartment for $1,000,000. Mr. Fox plans to rent out the apartment. The apartment in its current condition can be rented out for
(Multiple IRRs) You observe the following project in the market. Your cost of capital is 10%:a. Should you take the project or reject it? Explain.b. What is the range of cost of capital for which you
(MIRR) For the question above, what is the modified IRR (MIRR) of the project assuming the “reinvestment or financing rate” is also the discount rate (10%)?
(Multiple IRRs) You would like to open an investment company named Rip’em. The cost of building up the company is $750,000. You offer your clients the following deal: For five annual deposits of
(MIRR) For the question above, if your “reinvestment or financing rate” is 15%, what is the modified IRR?
(Mutually exclusive projects) The following projects are offered to you. The annual cash flows are expected to continue forever.a. What is the IRR of each project?b. If the cost of capital is 7%,
(IRR) You are offered the following two projects:a. What is the IRR of Project A?b. What is the IRR of Project B?c. If your cost of capital is 10%, which project should you choose? A B C D E 1 Year 0
(NPV curves) A company would like to invest in one of two mutually exclusive projects (A or B). The projects have negative cash flow at time 0 and positive cash flows later on. The project’s IRRs
(Lease vs. purchase) You’re considering leasing or purchasing an asset with the following cash flows:a. Calculate the present value of the lease versus the purchase. Which is preferable?b. What is
(Lease vs. purchase) You intend to buy a new laptop. Its price at electronic shops is $2,000, but your next-door neighbor offered to lease you the same computer for monthly payments of $70 for a
(Car leasing) You’re considering leasing or purchasing a car. The details of each method of financing are given below:a. The lease is for 24 months. What should you do?b. What will be your answer
(NPV and PI) You are offered the following four single projects (there is only one of each project):Assume that the company is indifferent between taking and rejecting Project D.a. Calculate the IRR
(EAC) Your friend is not sure whether she should buy or lease a car. She presents you the following financial information:• The car of her dreams costs $20,000. The car is expected to be replaced
(NPV, EAC) Emma, the CFO of a company, would like to purchase a new car. She intends to replace the car every few years. The annual expected dollar costs of the car are given below:Also assume:•
(NPV, IRR, EAC, PI, challenging) Your company is considering an investment in the following projects (cash flows are in thousand dollars).The CFO of your company has calculated the following values
(Leverage) Your friend presents you with the following deal: You can buy a box for $9, decorate it at a cost of $1, and sell it in 1 year for $11.a. You have $100 to invest in the boxes (and
(Interest-only loan, amortization table) You are taking an interest-only $10,000 loan. The loan is to be paid in 2 years and carries monthly interest payments of 0.5%.a. Show an amortization table
(Interest-only loan) Your friend took a $50,000 loan. The loan is a 15-year, 5% “interest-only” loan (paying interest in the loan period and the principal in one installment at the end).a. Show
(Balloon loan) Christine would like to take a loan. The loan carries a 1%monthly interest rate. Christine can only pay back $800 every month.a. What is the highest loan that Christine can take?
(Interest-only loan, refinancing) Five years ago, you took an interest-only loan. The loan carries a 1% monthly interest rate, and the loan principal is$150,000. The loan has two more years (24
(An equal payment loan, refinancing) Omer is the CFO of ABC Corp. The firm just took a $1M loan with 20 equal annual payments and an annual interest rate of 10%.a. What is the annual payment on the
(An equal term loan, amortization table) Ruth and Moab have just purchased their dream apartment. They have financed the purchase with a term loan of$150,000 (mortgage). The loan term is for 10
(An equal payment loan, finding n) You would like to borrow $200,000 to finance your new house. The bank charges a monthly interest rate of 0.75%.What is the loan term in years if you would like to
(Mortgage, finding PV) Jane would like to purchase a new car. She has$5,000 in cash. She is also willing to take a car loan and pay a monthly amount of $200 for the next 5 years. Assuming that Jane
(Mortgage, finding n) ABC Corp. would like to borrow $10M to fund a new manufacturing plant. According to the projected business plan, ABC feels comfortable with an equal annual payment of
(Mortgage, finding r, payment breakdown, and outstanding balance) You are interviewing with one of the largest mortgage brokerage firms. Your future boss asks you to analyze a $150,000 mortgage with
(Mortgage, amortization table) “Iris” company took a 5-year, $150,000 loan carrying a 10% annual interest rate. The loan will be paid back in five equal annual installments.a. What is the fixed
(Mortgage, refinancing a loan) You financed the purchase of a $300,000 apartment with a down payment in cash of 20% of the purchase price. The remaining 80% is financed with a mortgage with a 1%
(Equal principal payment loan) You took a 5-year, $100,000 loan. The loan has equal principal payments. The loan carries a 6% annual interest rate and is paid back in annual payments.a. What is the
(APR and EAIR) Your local bank has offered you a mortgage of $100,000.There are no points, no origination fees, and no extra initial costs (meaning: you get the full $100,000). The mortgage is to be
(APR vs. EAIR) You’ve been offered three credit cards:• Credit card 1 charges 19% annually, on a monthly basis.• Credit card 2 charges 19% annually, on a weekly basis• Credit card 3 charges
(APR vs. EAIR) A recent notice from your credit card company included the following statement:Annual Percentage Rate for Cash Advances:Your annual percentage rate for cash advances is the U.S. Prime
(EAIR for 1 year) You are considering buying the latest stereo system model.The dealer in “The Stereo World” store has offered you two payment options.You can either pay $10,000 now, or you can
(EAIR annuity) You have two options of paying for your new dishwasher: You can either make a single payment of $400 today, or you can pay $70 for each of the next 6 months, with the first payment
(EAIR annuity) Your lovely wife has decided to buy you a vacuum cleaner for your birthday (she always supports you in your hobbies…). She called your best friend, a manager of a vacuum cleaner
(Average compounding rate) WindyRoad is an investment company which has two mutual funds. The WindyRoad Dull Fund invests in boring corporate bonds, and its Lively Fund invests in “high-risk,
(EAIR with processing fees) Your local bank has offered you a 5-year,$100,000 mortgage. The bank is charging 1.2 points, and the processing fee to be paid immediately is $600. If the interest rate is
(Mortgage + EAIR + processing fee) Your local bank has offered you a 20-year, $100,000 mortgage. The bank is charging 1.5 points, with “processing” costs of $750; both points and processing costs
(Mortgage + EAIR) Your local bank has offered you a 20-year, $100,000 mortgage. The bank is charging 1.5 points, with “processing” costs of $750;both points and processing costs are deducted from
(Mortgage + EAIR) You just bought the first floor of the famous “Egg-Plant”Building for $250,000. You plan to rent the space to convenience stores. Your banker has offered you a mortgage with the
(EAIR in loans) You’re considering buying a new top-of-the-line luxury car.The car’s list price is $99,000. The dealer has offered you two alternatives for purchasing the car:• You can buy the
(FV calculation with stated rate) You plan to put $1,000 in a savings plan and leave it there for 5 years. You can choose between various alternatives. How much will you have in 5 years under each
(PV with stated rate) Assuming that the interest rate is 5%, compounded semi-annually, 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
(FV with stated rate) You plan to put $10,000 in a savings plan for 2 years. How much will you have at the end of 2 years with each of the following options?a. Receive 12% stated annual interest
(Refinancing mortgage, EAIR) Michael Smith was in trouble: He was unemployed and living on his monthly disability pay of $1,200. His credit card debts of $19,000 were threatening to overwhelm this
(EAIR on a lease) Capital Star Motors of Canberra, Australia, has the following lease offer for a Smart car:• Lease term: 48 months• No initial deposit, $8,995 balloon payment at end of lease•
(Sunk costs) We return to the sunk cost example of Section 6.2. You have invested $100,000 in a badly built house. For $20,000 invested today, you can fix up the house and sell it 1 year from today
(Sunk costs) 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
(Marginal vs. average costs) 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
(NPV and cash flows) 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
(Depreciation) You are considering the following investment:a. Assuming that the investment can be depreciated using 7-year straight-line depreciation with no salvage value, calculate the project
(NPV and cash flows) 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 5 years. The machine will save the cost
(NPV and cash flows) 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 will be depreciated
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
(Cash-flow analysis) 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.
(Cash-flow analysis) The “Less Is More” company manufactures swimsuits.The company is considering expanding to the bathrobe market. The proposed investment plan includes:• Purchase of a new
(Cash-flow analysis, replacing equipment) The “Car Clean” company operates a car wash business. The company’s current cleaning machine was bought 2 years ago at the price of $60,000. The life
(Cash-flow analysis) 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
(Cash-flow analysis, break-even points) The Coka company is a soft drink company. Until today, the company bought empty cans from an outside supplier that charges $0.20 per can. In addition, the
(Cash-flow analysis) The ZZZ Company is considering investing in a new machine for one of its factories. The company can choose either Machine A or Machine B. The life span of each machine is 5
(Cash-flow analysis, replacing a machine) The Easy Sight Company manufactures sunglasses. The company has two machines, each of which produces 1,000 sunglasses per month. The book value of each of
(Cash-flow analysis) Poseidon is considering opening a shipping line from Athens to Rhodes. In order to open the shipping line, Poseidon will have to purchase two ships that cost 1,000 gold coins
(Cash-flow analysis) Kane Running Shoes is considering the manufacturing of a special shoe for race walking that will indicate if an athlete is running(this happens if neither of the walker’s legs
(Cash-flow analysis) The Aphrodite Company is a manufacturer of perfume. The company is about to launch a new line of products. The marketing department has to decide whether to use an aggressive or
(Cash-flow analysis) The Long-Life Company has a new vaccine. The company estimates that it has a 10-year monopoly for the production of the vaccine, and it is trying to estimate how many vaccines it
(Should we only consider returns?) Professor Smith was bragging at the local watering hole about her abilities as an investor in the stock market: “In the last month, I earned 8% on my
(Factors affecting return) Can a corporate bond have a lower expected return than a government bond? Can it have lower ex-post return?
(Factors affecting return) During a stamp collector convention, the chairman spoke about the profitability of investing in rare stamps. “Last year I invested$150,000 in rare stamps. These stamps
(Risk-averse investor) A basic assumption of economics is that investors are risk averse, meaning that when they view asset A as riskier than asset B they will demand a higher expected return.A
(Risk-neutral investor) A risk-neutral investor is willing to make bets with an expected return of zero. Suppose a risk-neutral investor is offered the chance to participate in a die-toss game using
(Risk-neutral investor) On Planet “Apathy,” all investors are indifferent to risk. The annual expected returns of government bonds are 5%. Does that mean that the average stock returns should be
(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

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