Question: Annuities are attractive investment vehicles for

> Describe risk in finance as up and down movement of return. Does this idea make sense in terms of the variance definition?

> What is the fundamental motivation behind portfolio theory? That is, what are people trying to achieve by investing in portfolios of stocks rather than in a few individual stocks or in debt? What observations prompted this view?

> How is the IPO price of a stock determined? Is that price likely to be the stock’s intrinsic value.

> Do stocks that don't pay dividends have value? Why?

> Discuss the accuracy of stock valuation, and compare it with that of bond valuation.

> Describe the approach to valuing a stock expected to grow at more than one rate in the future. Can there be more than two rates? What two things have to be true of the last rate?

> What is meant by normal growth? Contrast normal and super normal growth. How long can each last? Why?

> Why are growth rate models practical and convenient ways to look at stock valuation?

> Verbally rationalize the validity of a stock valuation model that doesn't contain a selling price as a source of cash flow to the investor. Give two independent arguments.

> Why did securities analysts issue biased reports in the 1990s? In what direction were the reports biased?

> How and why is the U.S. dollar unique among the world's currencies?

> Describe the primary conflict of interest that caused the public accounting industry to fail in its duty to protect the investing public’s interests in the 1990s.

> Describe the feature of financial reporting that made leasing popular before FASB 13.

> Is investing in options really investing or is it more like gambling?

> Options are more exciting than investing in the underlying stocks because they offer leverage. Explain this statement.

> What does the efficient market hypothesis say? What is its implication for stock analysis?

> Compare fundamental analysis and technical analysis. Which makes more sense to you?

> Discuss the relative riskiness of investment in bonds, common stock, and preferred stock.

> Preferred stock is said to be a hybrid of common stock and bonds. Explain fully. Describe the cash flows associated with preferred stock and their valuation.

> What is the relationship between bond prices and interest rates? Verbally describe how this relationship comes about. How can we use this relationship to estimate the value of a bond?

> Discuss the nature of stock as an investment. Do most stockholders play large roles in the management of the firms in which they invest? Why or why not?

> What is a trade deficit, and why does it hurt us to consistently run a deficit with another country?

> Describe bond pricing as two time-value-of-money problems.

> Why do bonds have indentures?

> If bonds pay fixed interest rates, how can they be sold year after year on the secondary market? Include the idea of how yields adjust to changing market interest rates.

> Two interest rates are associated with pricing a bond. Name and describe each. How are they used? Describe a third rate not used in pricing.

> What is a call provision? Why do companies put them in bonds? Define: call-protected period and call premium/penalty

> Describe the nature of a bond. Include at least the following ideas. term/maturity face value debt vs. equity "buying" a bond non-amortized one borrower/many lenders risk conflict with stockholders

> How can two knowledgeable people come to different conclusions about the value of the same security? Can this happen if they have access to the same information?

> Contrast real assets and financial (paper) assets. What is the basis for the value of each?

> Corporate executives sometimes abuse their positions by overpaying themselves at the expense of stockholders. When that happens are the executives’ gains dollar for dollar losses to stockholders or can investors lose more or less than the amounts by whi

> How and why do sinking funds enhance the safety of lenders?

> Describe the difference between a floating and a fixed exchange rate system.

> Under what conditions is a bond almost certain to be called at a particular date in the future? How does this condition affect its price?

> The Greenbay Motor Company ordered six German built engines at, €15,000 each when the direct exchange rate was $1.2500 per euro, and elected not to cover the obligation with a forward contract. When the bill was due three months later, the rate was $1.1

> Suppose a car manufactured in Japan in the mid-1980s, when there were 250 yen to the dollar, cost 2 million yen to produce, and was marked up 25% for sale in the United States. Assume the car's cost in yen and markup are the same today, but that the e

> The Cline family made a trip to Europe in 2015. They paid the following amounts in local currency for hotel, entertainment, and transportation. How much did the trip cost once they got to Europe? Use the exchange rates in Table 18.1. England.

> Segwick Petroleum Ltd. has a dividend reinvestment plan in which new stock is issued to participating investors. Segwick's payout ratio is 40%, and 30% of stockholders participate in the plan. The firm's ROE is 10%. What percentage increase in flotati

> Bob and Chris received a grant through their University to travel to Germany to do research. The grant awarded them $2,000 for room and board during their stay. It was paid to them in U.S. dollars on May 31 at which time the dollar was worth €.77980.

> Atkins Company has just issued a series of bonds with 5- through 10-year maturities. The company’s default risk is 0.5% on 5-year bonds, and grows by 0.2% for each year that’s added to the bond’s term. Atkins’ liquidity risk is 1.0% on 5-year bonds, an

> The following direct quote exchange rates are found on the spot market today. a. Euro: $.9347 b. Israeli shekel: $.2586 c. British (U.K.) pound: $1.6544 d. Japanese yen: $0.009423 Calculate the price of a U.S. dollar in terms of each currency, the ind

> Using words only, describe the process of finding a bond's yield at a given selling price.

> Construct an amortization schedule for the last six months of the loan. (Hint: What is the unpaid balance at the end of 29 ½ years?)

> What are the monthly payments on the loan? Construct an amortization table for the first six months of the loan.

> Partridge Inc. sells about $45 million a year on credit. Good credit and collections performance in the industry results in a 35-day ACP. a. What is the maximum receivables balance Partridge can tolerate and still receive a good rating with respect to

> Construct an amortization schedule for a four-year, $10,000 loan at 6% interest compounded annually.

> A $10,000 car loan has payments of $361.52 per month for three years. What is the interest rate? Assume monthly compounding and give the answer in terms of an annual rate.

> Harry Clements would like to buy a new car. He can afford payments of $650 a month. The bank makes four-year car loans at 12% compounded monthly. How much can Harry borrow toward a new car?

> You are a securities salesperson. Many of your clients are elderly people who want very secure investments. They remember the days when interest rates were very stable (before the 1970s) and bond prices hardly fluctuated at all regardless of their term

> What would you pay for an annuity of $2,000 paid every six months for 12 years if you could invest your money elsewhere at 10% compounded semiannually?

> The Winthrop Company is constructing a five-year plan. The firm's ACP is currently 90 days, while its inventory turnover ratio is 3 × based on COGS. The company has forecast aggressive revenue growth along with efficiency improvements in man

> What causes maturity risk? In other words, why do long-term bonds respond differently to interest rate changes than short-term bonds? (Hint: Think about how the present value formulas work.)

> Go to a currency exchange site on the internet and look up today's exchange rates for the currencies in problem 1. Resolve the problems using today's rates. Analyze how the rates have changed since May 6, 2015.

> Livetree Ltd. is developing a detailed financial plan for next year, and expects to have the following fixed asset accounts by the end of this year ($000) The capital plan already completed calls for expenditures of $7,042,000 on new equipment next yea

> How many years will it take for $850 per year to amount to $20,000 if the interest rate is 8%?

> Emmons Motors is a distributor of electric motors. The firm projects product demand next year of 25,000 units. It costs $320 to place an order with suppliers. Management has determined that the EOQ is 1,000 units. How much per year does it cost Emmon

> Zuker Distributors handles the warehousing of perishable foods and is considering replacing one of its primary cold storage units. One supplier has offered a unit for $250,000 with an expected life of 10 years. The unit is projected to reduce electrici

> How much will $650 per year be worth in eight years at interest rates of a. 12% b. 8% c. 6%

> The Longenes Company uses a target capital structure when calculating the cost of capital. The target structure and current component costs based on market conditions follow. * The costs of debt and preferred stock are already adjusted for taxes and/o

> Suppose the strategic options available to the Rollins Company in the last problem result in temporarily enhanced growth. Each option can be associated with a super normal growth rate that lasts for some period after which growth returns to the firm's n

> Suppose Hammell of the previous problem needs to issue new stock to raise additional equity capital. What is its cost of new equity if and flotation costs are 12%?

> The Framingham Company expects to grow at 4% indefinitely. Economists are currently asserting that investment opportunities in short term government securities (treasury bills) are readily available at a risk-free rate of 5%. The stock market is returni

> What is interest rate or price risk? Why is it sometimes called maturity risk? Explain fully.

> The Longlife Insurance Company of the preceding problem has several bonds outstanding that are currently selling to yield 9%. What does this imply about the cost of the firm's equity?

> Grandma's Cookies Inc. is considering acquiring Mother's Baked Goods Inc. After consideration of all benefits, synergies and tax effects, Grandma (originally a finance major) has estimated that the incremental cash flows from the acquisition will be abo

> The Longlife Insurance Company has a beta of .8. The average stock currently returns 15% and short-term treasury bills are offering 6%. Estimate Longlife's cost of retained earnings.

> Schoen Industries pays interest of $3 million each year on bonds with an average coupon rate of 7.5%. The firm has 4.5 million shares of stock outstanding and pays out 100% of earnings in dividends. Earnings per share (EPS) is $3.50. Schoen’s cost of

> Klints Inc. paid an annual dividend of $1.45 last year. The firm’s stock sells for $29.50 per share, and the company is expected to grow at about 4% per year into the foreseeable future. Estimate Klints’ cost of retained earnings.

> Assume that Meade Metals Inc of the previous problem is replacing an old truck with a new one instead of replacing an outside delivery service. The old truck was purchased 8 years ago for $120,000. It has been depreciated straight line based on a ten-y

> A few years ago Hendersen Corp issued preferred stock paying 8% of its par value of $50. The issue is currently selling for $38. Preferred stock flotation costs are 15% of the proceeds of the sale. What is Hendersen's cost of preferred stock?

> The York Company has an average receivables balance of $55,000, which turns over once every 30 days. It offers all of its receivables to its bank as collateral for short-term borrowing (pledging). The bank generally accepts 60% of the accounts offered

> Harris Inc.’s preferred stock was issued five years ago to yield 9%. Investors buying those shares on the secondary market today are getting a 14% return. Harris generally pays flotation costs of 12% on new securities issues. What is Harris’s cost of

> Jenkins Appliances has cash flow problems and needs to borrow between $50,000 and $60,000 for approximately sixty (60) days. Because the business is small and relatively new, unsecured loans are very hard to get and are expensive when they are available.

> What is valuation, and why are we interested in the results?

> Calculate the effective interest rate on loans with the following minimum compensating balance requirements: Compensating Balance 20% Loan Rate a. 6.5% b. 12.0% 10% с. 10.5% 15% d. 14.0% 25% е. 8.5% 30%

> Hampshire Motors Ltd., a British manufacturing company, wants to buy a production machine that isn’t available in England. Comparable products are made by an American company and a French firm. The Americans have quoted Hampshire a price of $175,000 whil

> An American importer owes vendors the following sums a. 140,560 Canadian dollars b. 392,000 Australian dollars c. 1,362,000 Mexican pesos d. 680,540 British (U.K.) pounds e. 14,673 Euros State each debt in U.S. dollars.

> In the situation at Wachusett Window outlined in the last question, do you think a higher prompt payment discount alongside the new sales program would have kept receivables down? Why?

> You're interested in investing in the Peters Company, which has shown a remarkable increase in EPS over the last three years. You investigate and find that the company's debt-to-equity ratio has increased dramatically over the same period and is now fou

> The Cranston Company would like to acquire the Lamont Company, but overtures made to management have been emphatically rebuffed. Five investors who were involved in the company's founding and continue to be active in its management own 45% of Lamont's st

> Shelton Pharmaceuticals Inc. is planning to introduce a new drug for pain relief. Management expects to sell 3 million units in the first year at $8.50 each, and anticipates 10% growth in sales per year thereafter. Operating costs are estimated at 70%

> The Grass Ridge Company has the following current asset accounts Its current ratio is 2.5:1. The bank is willing to lend the company enough to finance its working capital needs under a $10 million revolving credit arrangement at a base rate of 12% wi

> Using the information from the previous problem, randomly select four NPV outcomes from the data. (Select one cash flow from each year and compute the project NPV and the probability of that NPV implied by those selections.) Do your selections give a sen

> The Montauk Company has a dividend reinvestment plan in which shareholders owning 25% of its common stock participate. Last year the firm’s EPS was $4.20 and its payout ratio was 50%. There are 2 million shares of common stock outstanding. How much ne

> The amount formulas share a closer relationship than the annuity formulas. Explain and interpret this statement.

> Calculate the effective interest rate implied by the following terms of sale, using a 365-day year. 2/10, net 30 1/5, net 15 .5/10, net 30 2.5/10, net 25 1/5, net 20

> Moser Materials Inc. is considering acquiring Newkirk Products, which produces a number of products that would enhance Moser’s product line. Last year Newkirk reported a $30 million loss. Moser has estimated that Newkirk will break even in the fourth y

> What is the effective interest rate on a $750,000 loan at 8% for 120 days if a 20% minimum compensating balance is required?

> Scherbert Industries has the following balance sheet accounts as of 12/31/x3 (not a complete balance sheet): Calculate gross and net working capital. Accounts Payable. $650,000 Accounts Receivable 845,000 Accruals. 257,500 Cash .. 137,200 Common S

> Willerton Industries Inc. has the following balances in its capital accounts as of 12/31/x3: Calculate Willerton’s capital structure based on book values. Long Term Debt $65,000,000 Preferred Stock $15,000,000 Common Stock $40,000

> Southport Inc. has an inventory turnover of 10X, an ACP of 45 days, and turns over its payables once a month. How long are Southport's operating and cash conversion cycles? (Use a 360-day year.)

> The Manning Company's stock is currently selling for $23. It has the following prospects for next year: Calculate Manning's expected return for a one-year holding period. Next year's Stock Price Dividend $1.00 $1.50 $2.00 Probability $25 $30 $35 .

> Watson Waterbed Works Inc. has an EBIT of $2.75 million, can borrow at 15% interest, and pays combined state and federal income taxes of 40%. It currently has no debt and is capitalized by equity of $12 million. The firm has 1.5 million shares of common

> What interest rate would you need to get to have an annuity of $7,500 per year accumulate to $279,600 in 15 years?

> The Aztec Corporation has the following capital components and costs. Calculate Aztec's WACC. Value $23,625 $ 4,350 $52,275 Component Debt Cost 12.0% Preferred Stock Common Equity 13.5% 19.2%

> What is a sinking fund? How is it related to time value?

> Calculate BWP’s DFL and DTL before and after the acquisition of the new machine

> The Alligator Lock Company is planning a two-for-one stock split. You own 5,000 shares of Alligator's common stock that is currently selling for $120 a share. a. What is the value of your Alligator stock now, and what will it be after the split? b. Alli

> The Dentite Corporation’s bonds are currently selling to yield new buyers a 12% return on their investment. Dentite’s marginal tax rate including both federal and state taxes is 38%. What is the firm’s cost of debt?

> Asbury Corp. issued 30-year bonds 11 years ago with a coupon rate of 9.5%. Those bonds are now selling to yield 7%. The firm also issued some 20-year bonds two years ago with an 8% coupon rate. The two bond issues are rated equally by Standard and Poor