1.

Chris Angle can borrow from its bank at 20 percent to take a cash discount. The terms of the cash discount are 1.5/17 net 50.

a. Compute the cost of not taking the cash discount. (Use 365 days in a year. Round intermediate calculations to 4 decimal places. Round the final answer to 2 decimal places.)

Cost of not taking a cash discount %

b. Should Chris borrow the funds?

• Yes

• No

2.

Your bank will lend you $9,600 for 30 days at a cost of $102 interest.

a. What is your annual rate of interest? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Annual rate of interest %

b. What is your effective annual rate? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Effective annual rate %

3.

Dr. Painkiller is going to borrow $6,500 for one year at 8 percent interest.

What is the annual rate of interest if the loan is discounted? (Use 365 days in a year. Do not round intermediate calculation. Round the final answer to 2 decimal places.)

Annual rate of interest %

4.

The Reynolds Company buys from its suppliers on terms of 4/10, net 51. Reynolds has not been utilizing the discount offered and has been taking 62 days to pay its bills. The suppliers seem to accept this payment pattern, and Reynolds credit rating has not been hurt.

Mr. Duke, Reynolds Companys vice-president, has suggested that the company begin to take the discount offered. Mr. Duke proposes the company borrow from its bank at a stated rate of 22 percent. The bank requires a 10 percent compensating balance on these loans. Current account balances would not be available to meet any of this required compensating balance.

a. Calculate the cost of not taking a cash discount. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Cost of not taking a cash discount %

b. Calculate the annual rate of interest if the company borrows from the bank. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Annual rate of Interest %

c. Do you agree with Mr. Duke's proposal?

• Yes

• No

5.

The treasurer of Brandon Blue Sox is seeking a $23,000 loan for 180 days from the Brandon Credit Union. The stated interest rate is 15 percent and there is a 20 percent compensating balance requirement. The treasurer always keeps a minimum of $1,800 in the firms chequing account. These funds could count toward meeting any compensating balance requirements.

What is the annual rate of interest on this loan? (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

Annual rate of interest %

6.

Exodus Limousine Company has $1,000 par value bonds outstanding at 12 percent interest. The bonds will mature in 40 years with annual payments.

Compute the current price of the bonds if the current yield to maturity is: (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answers to 2 decimal places.)

Price of the bond

a. 7 percent

$

b. 17 percent

$

7. Applied Software has a $1,000 par value bond outstanding that pays 20 percent interest with annual payments. The current yield to maturity on such bonds in the market is 9 percent.

Compute the price of the bonds for these maturity dates: (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answers to 2 decimal places.)

	Price of the bond
a. 30 years	$
b. 18 years	$
c. 4 years	$

8.Ron Rhodes calls his broker to inquire about purchasing a bond of Golden Years Recreation Corporation. His broker quotes a price of $1,180. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 12 percent annual interest payable semiannually, and has 10 years remaining until maturity. The current yield to maturity on similar bonds is 10 percent.

a. Compute the new price of the bond. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

New price of the bond $

b. Do you think the bond is overpriced?

• Yes

• No

9.

The Vinny Cartier Company issued bonds at $1,000 per bond. The bonds had a 30-year life when issued, with semiannual payments at the then annual rate of 14 percent. This return was in line with required returns by bondholders at that point, as described below:

Real rate of return	5	%
Inflation premium	5
Risk premium	4
Total return	14	%

Assume that ten years later the inflation premium is 2 percent, the risk premium has declined to 3 percent and both are appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 20 years remaining until maturity.

Compute the new price of the bond. (Use a Financial calculator to arrive at the answers. Do not round intermediate calculations. Round the final answer to 2 decimal places.)

New price of the bond $

10.A preferred share of Hilton Chocolate Company pays an annual dividend of $8.80. It has a required rate of return of 11 percent.

Compute the price of a preferred share.

Price of preferred share $

11. XTech issued preferred shares many years ago. They carry a fixed dividend of $7 per share. With the passage of time, yields have soared from the original 12 percent to 16 percent (yield is the same as required rate of return).

a. What was the original issue price? (Round the final answer to 2 decimal places.)

Original price of preferred share $

b. What is the current value of a XTech preferred share? (Round the final answer to 2 decimal places.)

Current price of preferred share $

c. If the yield on the Preferred Stock Index declines, how will the price of these preferred shares be affected?

• The price of preferred stock will increase.

• The price of preferred stock will decrease.

12.

The Quaid Brothers Corporation has preferred shares outstanding that pay an annual dividend of $15.35. Each has a price of $190.

What is the required rate of return (yield) on the preferred stock? (Round the final answer to 2 decimal places.)

Required rate of return %

13.Stagnant Iron and Steel Co. currently pays a $9.70 annual cash dividend (D₀). It plans to maintain the dividend at this level for the foreseeable future, as no future growth is anticipated.

If the required rate of return by common shareholders (K_e) is 19 percent, what is the price of each common share? (Round the final answer to 2 decimal places.)

Price of common share $

14.Triple Peaks Playhouse will pay a quarterly dividend of $0.60 at the end of the next quarter. It has common share price of $40.00 and a constant growth rate of 4 percent.

Compute the required rate of return. (Round the final answer to 2 decimal places.)

Required rate of return %