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principles of finance

Questions and Answers of Principles Of Finance

d. Assume you can take more than one project at the same time. Also assume that you can invest in a fraction of a project (you do not have to buy the entire project). You have only $200. What will
c. Assume that you can take more than one project at the same time and you have no budget constraints (and the projects are independent of each other). What will you do?
b. Assume that the projects can be done only once. If you can choose only one of the projects above (i.e., the projects are mutually exclusive), which one will you choose?
. Calculate the IRR of Project D.
e. It cannot be determined which project an investor who requires a 15% rate of return will choose without knowing the projects NPV.
d. An investor who requires a 22% rate of return will shy away from both projects.
c. An investor who requires a 17% rate of return will necessarily prefer Project B.
b. An investor who requires a 10% rate of return will necessarily prefer Project A.
a. An investor who requires a 0% rate of return will be indifferent regarding the choice of project.
projects (A or B). The projects have negative cash flow at time 0 and positive cash flows later on. The project’s IRRs are 15% for Project A and 20% for Project B. Additionally, their NPV charts
f. What is the range of interest rate in which you will reject both projects?
e. What is the range of interest rate in which you will prefer Project B over A? and what is the range in which you will prefer Project A over B?
d. What is the cost of capital at which you are indifferent between the two projects?
. If the cost of capital is 4%, which one will you choose?
b. If the cost of capital is 7%, which one will you choose?
a. What is the IRR of each project?
13. (Mutually exclusive projects) The following projects are offered to you. The annual cash flows are expected to continue forever
12. (MIRR) For the question above, if your “reinvestment or financing rate” is 15%, what is the modified IRR?
d. For what range of cost of capital should you accept the project?Explain.
c. If your cost of capital is 45%, should you make the investment?
b. If your cost of capital is 10%, should you make the investment?
a. If your cost of capital is 5%, should you make the investment?
c. What is the monthly rent after the renovation that will make Mr. Fox indifferent between doing, or not doing, the renovation?
b. What is the yearly alternative cost of capital that will make Mr. Fox indifferent between doing, or not doing, the renovation?
a. Should Mr. Fox invest in the apartment renovation?
8. (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
b. What is the marketing campaign’s IRR
a. If your company’s cost of capital (the discount rate) is 10%, should it undertake the marketing campaign? Explain.
5. (NPV and IRR) You work in a company that sells furniture. The company is considering a new marketing campaign. The marketing campaign cost is$1M to be paid immediately. You expect that as a result
b. What is the largest lease payment you would be willing to make?
a. Should you lease or purchase the asset?
4. (NPV or IRR) You are considering buying an asset that has a 3- year life and costs $2,000. As an alternative to buying the asset, you can lease it for $600 per year; the first payment is due today
After 5 years, the landfill will be full. The costs of closing the land fill, incurred at the end of year 6, are $1,500,000. This includes the costs of abiding by various ecological regulations, etc.
The annual net cash inflows from the landfill are $450,000. These represent the fees the company collects in return for giving trash collection companies the right to dump their trash in the
The initial cost of the landfill is $800,000: This covers the expense of digging the hole, fencing it, and providing appropriate truck access.
6. We can solve for the number of periods using the NPER function.
5. We can solve for the interest rate of the annuity using the RATE function.
4. We can solve for the periodic payment using the PMT function.
3. We can solve for the future value using the other four arguments (or omit PV and Excel will plug “0” for PV).
2. We can solve for the present value using the last four arguments (or omit FV and Excel will plug “0” for FV).
1. The reason we get a negative PV value when we solve for PV and PMT is entered in positive number.
c. (More challenging) Set up the formula for the savings amount so that you can solve for various starting ages. Do a sensitivity analysis which shows the amount you need to save as a function of the
b. How much should you deposit in each of the initial years in order to fully fund the withdrawals if you start saving at age 60?
a. How much should you deposit in each of the initial years in order to fully fund the withdrawals?
The interest rate is 12%.
Starting from your 65th birthday until your 84th, you would like to withdraw $50,000 per year (no plans for after that).
You intend to make a deposit today and at the beginning of each of the next 9 years (that is, on your 55th, 56th, ..., 64th birthdays).
25. (Financial planning) You’re 55 years old today, and you wish to start saving for your pension. Here are the parameters:
23. (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
b. What will be the amount of his yearly payment to the dealer?(Hint: This is similar to the college savings problem discussed in Section 2.5.)
a. How much will John need to finance through the dealer?
22. (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
c. If you did not have any current savings and did not expect to be able to start saving money for the next 5 years (that is, your first savings payment will be made on your 45th birthday), how much
b. For this part, assume that you already have $50,000 in savings today.How much would you need to save today and at ages 41 to 64 to be able to afford this retirement plan?
a. How much will you need to have saved by your retirement date?
19. (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
d. $300 a year in perpetuity (meaning: forever), with the first payment at the end of this year
c. $9,000 at the end of 4 years
b. $10,000 at the end of 5 years
a. $5,000 today
16. (PV single cash flow + annuities) Assuming that the interest rate is 5%, which of the following is more valuable?
a. If Michael is 25 today and retires at age 65, how much money will he have accumulated from savings on coffee versus latte? Assume that the weekly interest rate is 0.1% and that the savings occur
13. (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
c. Find the answers to parts a and b above assuming that the interest rate is 7%.
b. What is the longest they can live from the apartment proceeds before the money runs out?
a. If they can earn 6% annually on the proceeds from their house and if they live for 10 more years, how much will they be able to leave to their children as an inheritance?
12. (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
b. In Section 2.1, we show that the accumulation grows by a factor of(1+ r)n. Solve the problem again by solving 70 13 50 1 5 . = *( + r) .
a. Use the template in this problem to arrive at the answer with trial and error.
2. (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?
2. r and n must be presented in the same “time frame.” Make sure that if n represents years, then r represents the annual discount rate. Similarly, if n represents months, then r should be a
1. Choose a discount rate that is appropriate to the riskiness and the duration of the cash flows being discounted. Uncle Simon’s promise of $100 per year for 5 years is assumed to be as good as
10. Adams Corporation (B). The Brazilian government under President Lula has instituted a new tax policy aimed at encouraging foreign MNEs to come to Brazil but reinvest their profits in the country,
8. Surgical Tools, Inc. Surgical Tools, Inc. of Illinois wants to set up a regular procedure for transferring funds from its newly opened manufacturing subsidiary in Korea to the United States. The
6. Balanced Tire Company (A). Balanced Tire Company manufactures automobile tires for sale to retail outlets in the United States and, through a wholly owned distribution subsidiary, in neighboring
5. Crystal Publishing Company. Crystal Publishing Company publishes books in Europe through sepa- rate subsidiaries in several countries. On a Europe- wide basis, Crystal publishing experiences
4. GeoTech Agriculture. GeoTech Agriculture, Inc. (U.S.) manufactures basic farm equipment in China, Spain, and Iowa in the United States. Each sub- sidiary has monthly unsettled balances due to or
3. Futebal do Brasil, S.A. Futebal do Brazil, S.A. pur- chases newly sewn soccer balls from Pakistani man- ufacturers and distributes them in Argentina, Brazil, and Chile. All operations are through
4. Recent Economic and Financial Data. Use the fol- lowing Web sites to obtain recent economic and financial data used for all approaches to forecasting presented in this chapter. Economist.com
11. Purchasing Power Parity Forecasts. Using the the- ory of purchasing power parity, and that forecasted changes in consumer prices are the best measures of expected inflation, forecast the
9. Forecasting the Argentine Peso. As illustrated in the graph below, the Argentine peso moved from its fixed exchange rate of Ps1.00/$ to over Ps2.00/$ in a matter of days in early January 2002.
4. Euros and Yen. The Japanese yen-euro cross-rate is one of the more significant currency values for global trade and commerce. The following graph shows this cross-rate back-calculated from early
1. Canadian Loonie. The Canadian dollar's value against the US dollar has seen some significant changes over recent history. Using the following graph of the C$/US$ exchange rate for the 27 year
25. Plummeting Yen Carry-Trade. The Japanese yen, long the home of the global carry-trade as the lowest interest cost source of funds of any major industrial market, began strengthening in August
24. Brynja Johannsdottir and the Icelandic Carry- Trade. Brynja Johannsdottir is Icelandic by birth, but is working for Magma Capital, a currency hedge fund run out of New York. The high money market
23. The Beer Standard. In 1999 The Economist maga- zine reported the creation of an index or standard for the evaluation of currency values in Africa. Beer was chosen as the product for comparison
15. Luis Pinzon-30 Days Later. One month after the events described in the previous questions, Luis Pinzon again has $1,000,000 (or its Swiss franc equiv- alent) to invest for three months. He now
13. Luis Pinzon-CIA New York. Luis Pinzon is a for- eign exchange dealer for a bank in New York. He has $1,000,000 (or its Swiss franc equivalent) for a short- term money market investment and
11. Copenhagen CIA (A). John Duell, a foreign exchange trader at J.P. Morgan Chase, can invest $5 million or the foreign currency equivalent of the bank's short-term funds in covered interest arbi-
7. Akira Numata CIA Japan. Akira Numata, a for- eign exchange trader at Credit Suisse (Tokyo), is exploring covered interest arbitrage possibilities. He wants to invest $5,000,000 or its yen
1 The Latin American Big Mac Index: Historical Comparison. This textbook has used The Economist magazine's Big Mac Index for many years. Below are the Big Mac prices and actual exchange rates for
1 The Latin American Big Mac Index: Historical Comparison. This textbook has used The Economist magazine's Big Mac Index for many years. Below are the Big Mac prices and actual exchange rates for
1 The Latin American Big Mac Index: Historical Comparison. This textbook has used The Economist magazine's Big Mac Index for many years. Below are the Big Mac prices and actual exchange rates for
1 The Latin American Big Mac Index: Historical Comparison. This textbook has used The Economist magazine's Big Mac Index for many years. Below are the Big Mac prices and actual exchange rates for
14. Mattel's Global Performance. Mattel (U.S.) achieved significant sales growth in its major inter- national regions between 2001 and 2004. In its filings with the United States Security and
13. Chinese Sourcing and the Yuan. Harrison Equip- ment of Denver, Colorado, purchases all of its. hydraulic tubing from manufacturers in mainland China. In June 2005 the company completed a
11. Pacific Precision (A): European Sales. Pacific Precision is a Hong Kong-based exporter of machine tools, and files all of its financial statements in Hong Kong dollars (HK$). The company's
9. Pharmaceutical Acquisitions. During the 1960s many conglomerates were created by a firm enjoying a high price/earnings ratio (P/E). They then used their highly valued stock to acquire other firms
7. Powlitz Manufacturing (A). Dual classes of com- mon stock are common in a number of countries. Assume that Powlitz Manufacturing has the follow- ing capital structure at book value:The A-shares
6. Microsoft's Dividend. In January 2003 Microsoft announced that it would begin paying a dividend of $0.16 per share. Given the following share prices for Microsoft stock in the recent past, how

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