Two banks in the area offer 30-year, $200,000 mortgages at 5.3 percent and charge a $2,400 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the loan application is denied, whereas that charged by I. M. Greedy and Sons Mortgage Bank is not. The current disclosure law requires that any fees that will be refunded if the applicant is rejected be included in calculating the APR, but this is not required with nonrefundable fees (presumably because refundable fees are part of the loan rather than a fee). What are the EARs on these two loans? What are the APRs?
> Barrett Pharmaceuticals is considering a drug project that costs $2.5 million today and is expected to generate end-of-year annual cash flows of $227,000, forever. At what discount rate would Barrett be indifferent between accepting or rejecting the proj
> Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9, but management expects to reduce the payout by 4 percent per year, indefinitely. If you require an 11 percent return on this stock, what will you pay for a share today?
> Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?
> Redan Manufacturing uses 1,700 switch assemblies per week and then reorders another 1,700. If the relevant carrying cost per switch assembly is $7, and the fixed order cost is $725, is Redan’s inventory policy optimal? Why or why not?
> Microhard has issued a bond with the following characteristics: Par: $1,000 Time to maturity: 15 years Coupon rate: 7 percent Semiannual payments Calculate the price of this bond if the YTM is: a. 7 percent b. 9 percent c.5 percent
> Cow Chips, Inc., a large fertilizer distributor based in California, is planning to use a lockbox system to speed up collections from its customers located on the East Coast. A Philadelphia-area bank will provide this service for an annual fee of $15,000
> The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid
> All else being the same, which has more interest rate risk, a long term bond or a short-term bond? What about a low coupon bond compared to a high coupon bond? What about a long-term, high coupon bond compared to a short-term, low coupon bond?
> Hacker Software has 6.2 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 105 percent of par. What is the current yield on the bonds? The YTM? The effective annual yield?
> Etonic Inc. is considering an investment of $365,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first year will be $245,000 and $70,000, respectively. Both reve
> The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of projects A, B, and C as follows: Suppose the relevant discount rate is 12 percent a year. a. Compute the profitability index for each of the three projects. b. Compute the NPV
> First National Bank charges 11.2 percent compounded monthly on its business loans. First United Bank charges 11.4 percent compounded semiannually. As a potential borrower, to which bank would you go for a new loan?
> The DuPont identity presented in the chapter is commonly referred to as the three-factor DuPont identity. Another common way that the DuPont identity is expressed is the five-factor model, which is: Derive the five-factor DuPont identity (EBT is earnin
> Eberhart Manufacturing has projected sales of $145 million next year. Costs are expected to be $81 million and net investment is expected to be $15 million. Each of these values is expected to grow at 14 percent the following year, with the growth rate d
> Huang, Inc., is obligated to pay its creditors $10,900 very soon. a. What is the market value of the shareholders’ equity if assets have a market value of $12,400? b. What if assets equal $9,600?
> Atreides International has operations in Arrakis. The balance sheet for this division in Arrakeen solaris shows assets of 34,000 solaris, debt in the amount of 12,000 solaris, and equity of 22,000 solaris. a. If the current exchange ratio is 1.20 solari
> A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $11,000 each, with the first payment occurring today, your child’s 12th birthday. Beginning on your child’s 18th birthday, the plan will
> Bentley Corp. and Rolls Manufacturing are considering a merger. The possible states of the economy and each company’s value in that state are shown here: Bentley currently has a bond issue outstanding with a face value of $125,000. Rol
> Harrods PLC has a market value of £400 million and 30 million shares outstanding. Selfridge Department Store has a market value of £160 million and 18 million shares outstanding. Harrods is contemplating acquiring Selfridge. Harrods’s CFO concludes that
> Bird’s Eye Tree houses, Inc., a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank
> The Silver Spokes Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 600 bicycles. The average cost to the shop of a bicycle is $525. The owner knows that only 96 percent of the customers
> We are evaluating a project that costs $644,000, has an eight-year life, and has no salvage value. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 70,000 units per year. Price per unit is $37, variab
> Janicek Corp. is experiencing rapid growth. Dividends are expected to grow at 30 percent per year during the next three years, 18 percent over the following year, and then 8 percent per year indefinitely. The required return on this stock is 11 percent,
> The Faulk Corp. has a 6 percent coupon bond outstanding. The Gonas Company has a 14 percent bond outstanding. Both bonds have 12 years to maturity, make semiannual payments, and have a YTM of 10 percent. If interest rates suddenly rise by 2 percent, what
> a. What is the relationship between the price of a bond and its YTM? b. Explain why some bonds sell at a premium over par value while other bonds sell at a discount. What do you know about the relationship between the coupon rate and the YTM for premium
> McGilla Golf would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. What is the sensitivity of the NPV to each of these variables?
> The Locker Co. had $273,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s income taxes. What is the average tax rate? What is the marginal tax rate? Table 2.3 Taxable Income Tax Rate 0- 50
> You have just won the lottery. You will receive $2,500,000 today, and then receive 40 payments of $1,250,000. These payments will start one year from now and will be paid every six months. A representative from Greenleaf Investments has offered to purcha
> How do financial cash flows and the accounting statement of cash flows differ? Which is more useful for analyzing a company?
> Klingon Cruisers, Inc., purchased new cloaking machinery three years ago for $9.5 million. The machinery can be sold to the Romulans today for $6.5 million. Klingon’s current balance sheet shows net fixed assets of $5.2 million, current liabilities of $2
> Use the information in Figure 31.1 to answer the following questions: a. What is the six-month forward rate for the Japanese yen in yen per U.S. dollar? Is the yen selling at a premium or a discount? Explain. b. What is the three-month forward rate for B
> The exchange rate for the Australian dollar is currently A$1.40. This exchange rate is expected to rise by 10 percent over the next year. a. Is the Australian dollar expected to get stronger or weaker? b. What do you think about the relative inflation ra
> If a project with conventional cash flows has a payback period less than the project’s life, can you definitively state the algebraic sign of the NPV? Why or why not? If you know that the discounted payback period is less than the project’s life, what ca
> Fair-to-Midland Manufacturing, Inc., (FMM) has applied for a loan at True Credit Bank. Jon Fulkerson, the credit analyst at the bank, has gathered the following information from the company’s financial statements: Total assets ………………………………………….$75,000 E
> Paul Adams owns a health club in downtown Los Angeles. He charges his customers an annual fee of $500 and has an existing customer base of 600. Paul plans to raise the annual fee by 6 percent every year and expects the club membership to grow at a consta
> Assume that the following balance sheets are stated at book value. The fair market value of James’ fixed assets is equal to the book value. Jurion pays $15,000 for James and raises the needed funds through an issue of long-term debt. Co
> Explain why diversification per se is probably not a good reason for merger.
> Kyoto Joe, Inc., sells earnings forecasts for Japanese securities. Its credit terms are 2/15, net 30. Based on experience, 65 percent of all customers will take the discount. a. What is the average collection period for Kyoto Joe? b. If Kyoto Joe sells 1
> An insurance company is offering a new policy to its customers. Typically the policy is bought by a parent or grandparent for a child at the child’s birth. The details of the policy are as follows: The purchaser (say, the parent) makes the following six
> When Marilyn Monroe died, ex-husband Joe DiMaggio vowed to place fresh flowers on her grave every Sunday as long as he lived. The week after she died in 1962, a bunch of fresh flowers that the former baseball player thought appropriate for the star cost
> The Trektronics store begins each week with 750 phasers in stock. This stock is depleted each week and reordered. If the carrying cost per phaser is $65 per year and the fixed order cost is $395, what is the total carrying cost? What is the restocking co
> Purple Feet Wine, Inc., receives an average of $16,000 in checks per day. The delay in clearing is typically three days. The current interest rate is .018 percent per day. a. What is the company’s float? b. What is the most Purple Feet should be willing
> For the company in the previous problem, what is the dividend yield? What is the expected capital gains yield?
> Watters Umbrella Corp. issued 15-year bonds 2 years ago at a coupon rate of 6.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?
> A corollary to the Rule of 72 is the Rule of 69.3. The Rule of 69.3 is exactly correct except for rounding when interest rates are compounded continuously. Prove the Rule of 69.3 for continuously compounded interest.
> A useful rule of thumb for the time it takes an investment to double with discrete compounding is the “Rule of 72.” To use the Rule of 72, you simply divide 72 by the interest rate to determine the number of periods it takes for a value today to double.
> In each of the following cases, find the unknown variable. Ignore taxes. Accounting Break-even Unit Variable Cost Unit Price Fixed Costs Depreciation 95,300 $ 41 $30 $ 820,000 143,806 56 2,750,000 $1,150,000 7,835 97 160,000 105,000
> Your Christmas ski vacation was great, but it unfortunately ran a bit over budget. All is not lost: You just received an offer in the mail to transfer your $10,000 balance from your current credit card, which charges an annual rate of 18.6 percent, to a
> This problem illustrates a deceptive way of quoting interest rates called add-on interest. Imagine that you see an advertisement for Crazy Judy’s Stereo City that reads something like this: “$1,000 Instant Credit! 18% Simple Interest! Three Years to Pay!
> You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes similar to this one are very common with home mortgages. Th
> Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price represents a financial break-even level for the project. Gut
> M.V.P. Games, Inc., has hired you to perform a feasibility study of a new video game that requires a $7 million initial investment. M.V.P. expects a total annual operating cash flow of $1.3 million for the next 10 years. The relevant discount rate is 10
> You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff is able to return to work. The jury has already decided
> This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $20,000 for one year. The interest rate is 15 percent. You and the lender agree that the interest on t
> Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years, because the firm needs to plow back its earnings to fuel growth. The company will pay a $15 per share dividend in 10 years and will in
> An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure: Time………….………….……... Salary 0………..…….….….…. $8, 500,000 1…………….….………….3, 900,000 2……………….………….4, 600,000 3……………………………5, 300,000 4……………………….…..5
> Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for AZ-Motorcars is 10 percent. a. Based on the payback period, which project should be accepted? b. Based on the NPV, which project should
> After deciding to buy a new car, you can either lease the car or purchase it with a three-year loan. The car you wish to buy costs $31,000. The dealer has a special leasing arrangement where you pay $1,500 today and $405 per month for the next three year
> Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $23,000 per month for 20 years, with the first payment received 30 years and 1 month from now. Second, he
> On September 1, 2009, Susan Chao bought a motorcycle for $30,000. She paid $1,000 down and financed the balance with a five-year loan at a stated annual interest rate of 7.2 percent, compounded monthly. She started the monthly payments exactly one month
> Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $1.4 million. The fixed asset will be depreciated straight-line to zero over its threeyear tax life, after which it will be w
> You have 30 years left until retirement and want to retire with $2 million. Your salary is paid annually, and you will receive $70,000 at the end of the current year. Your salary will increase at 3 percent per year, and you can earn a return of 9 percent
> What is the equation for the present value of a growing perpetuity with a payment of C one period from today if the payments grow by C each period?
> You have recently won the super jackpot in the Washington State Lottery. On reading the fine print, you discover that you have the following two options: a. You will receive 31 annual payments of $250,000, with the first payment being delivered today. Th
> Audrey Sanborn has just arranged to purchase a $550,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 6.1 percent stated annual interest rate, compounded monthly, and calls for equal monthly payments over the next 30 yea
> Tom Adams has received a job offer from a large investment bank as a clerk to an associate banker. His base salary will be $55,000. He will receive his first annual salary payment one year from the day he begins to work. In addition, he will get an immed
> You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate your children’s college expenses to be $45,000 per year
> You want to lease a set of golf clubs from Pings Ltd. The lease contract is in the form of 24 equal monthly payments at a 10.4 percent stated annual interest rate, compounded monthly. Because the clubs cost $2,300 retail, Pings wants the PV of the lease
> Find the APR, or stated rate, in each of the following cases: Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) Semiannually 9.8% Monthly 19.6 Weekly 8.3 Infinite 14.2
> Locate the Treasury bond in Figure 8.4 maturing in November 2039. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread? Figure 8.4 |Treasury Notes & Bonds Asked Maturity 2013 May 3
> You want to buy a new sports car from Muscle Motors for $73,000. The contract is in the form of a 60-month annuity due at a 6.45 percent APR. What will your monthly payment be?
> Suppose you are going to receive $20,000 per year for five years. The appropriate interest rate is 7 percent. a. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an an
> A 5-year annuity of ten $5,300 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 12 percent compounded monthly, what is the value of this annuity five years from now? What is the va
> A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 7 percent interest per week. a. What APR must the store report to its customers? What is the EAR that the customers are actuall
> Sparkling Water, Inc., expects to sell 2.8 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.25 in real terms and will cost $.90 in real terms. Sales income and costs occur at year-end. Revenues will rise a
> Happy Times currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30 days. Based on the following information, what do you recommend? The required return is .95 percent per month. Cur
> Hughes Co. is growing quickly. Dividends are expected to grow at a rate of 20 percent for the next three years, with the growth rate falling off to a constant 5 percent thereafter. If the required return is 12 percent and the company just paid a $2.80 di
> Laurel, Inc., and Hardy Corp. both have 7 percent coupon bonds outstanding, with semiannual interest payments, and both are priced at par value. The Laurel, Inc., bond has 2 years to maturity, whereas the Hardy Corp. bond has 15 years to maturity. If int
> The 100-year bonds we discussed in the chapter have something in common with junk bonds. Critics charge that, in both cases, the issuers are really selling equity in disguise. What are the issues here? Why would a company want to sell “equity in disguise
> McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for
> Consider the following cash flows on two mutually exclusive projects: The cash flows of project A are expressed in real terms, whereas those of project B are expressed in nominal terms. The appropriate nominal discount rate is 13 percent and the inflat
> Locate the Treasury bond in Figure 8.4 maturing in February 2037. What is its coupon rate? What is its bid price? What was the previous day’s asked price?
> Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless communication devices. Consider the following cash flows of the thr
> Find the EAR in each of the following cases: Stated Rate (APR) Number of Times Compounded Effective Rate (EAR) 7% Quarterly 16 Monthly Daily 12 Infinite
> The Le Bleu Company has a ratio of long-term debt to total assets of .35 and a current ratio of 1.25. Current liabilities are $950, sales are $5,780, profit margin is 9.4 percent, and ROE is 18.2 percent. What is the amount of the firm’s net fixed assets
> Which of the following should be treated as an incremental cash flow when computing the NPV of an investment? a. A reduction in the sales of a company’s other products caused by the investment. b. An expenditure on plant and equipment that has not yet be
> You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.40 percent per year, compounded monthly for the first six months, increasing thereafter to 18 percent compounded monthly. Assuming you transfer the
> Schwert Corp. shows the following information on its 2012 income statement: sales = $185,000; costs = $98,000; other expenses = $6,700; depreciation expense = $16,500; interest expense = $9,000; taxes = $19,180; dividends = $9,500. In addition, you’re to
> Lakonishok Equipment has an investment opportunity in Europe. The project costs €19 million and is expected to produce cash flows of €3.6 million in Year 1,€4.1 million in Year 2, and €5.1 million in Year 3. The current spot exchange rate is $1.09/€ and
> Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual after tax cash flow by $390,000 indefinitely. The current m
> The Harrington Corporation is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Harrington should proceed or not. The required return is 2.5 percent per period. Curre
> Lohn Corporation is expected to pay the following dividends over the next four years: $10, $7, $6, and $2.75. Afterwards, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 13 per
> Miller Corporation has a premium bond making semiannual payments. The bond pays a coupon of 8 percent, has a YTM of 6 percent, and has 13 years to maturity. The Modigliani Company has a discount bond making semiannual payments. This bond pays a coupon of
> Why it that municipal bonds are not is taxed at the federal level, but are taxable across state lines? Why it is that U.S. Treasury bonds are not taxable at the state level?
> McGilla Golf has decided to sell a new line of golf clubs. The clubs will sell for $875 per set and have a variable cost of $430 per set. The company has spent $150,000 for a marketing study that determined the company will sell 60,000 sets per year for
> Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $2,900,000 and will last for six years. Variable costs are 35 percent of sales, and fixed costs are $195,000 per year. Machine B costs $5,700,00
> Mario Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash flows of the two mutually exclusive projects for Mari
> FFDP Corp. has yearly sales of $28 million and costs of $12 million. The company’s balance sheet shows debt of $54 million and cash of $18 million. There are 950,000 shares outstanding and the industry EV/EBITDA multiple is 7.5. What is the company’s ent
> It is sometimes stated that “the internal rate of return approach assumes reinvestment of the intermediate cash flows at the internal rate of return.” Is this claim correct? To answer, suppose you calculate the IRR of a project in the usual way. Next, su
> An investment project provides cash inflows of $840 per year for eight years. What is the project payback period if the initial cost is $3,200? What if the initial cost is $4,800? What if it is $7,300?
