Question: You purchase a bond with an invoice

> Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the fi rm needs to plow back its earnings to fuel growth. The company will pay a $10 per share dividend in 10 years and will in

> Great Pumpkin Farms just paid a dividend of $3.50 on its stock. The growth rate in dividends is expected to be a constant 5 percent per year indefinitely. Investors require a 14 percent return on the stock for the first three years, a 12 percent return f

> Dimeback, Inc., is obligated to pay its creditors $7,300 during the year. a. What is the market value of the shareholders’ equity if assets have a market value of $8,400? b. What if assets equal $6,700?

> Red, Inc., Yellow Corp., and Blue Company each will pay a dividend of $2.35 next year. The growth rate in dividends for all three companies is 5 percent. The required return for each company’s stock is 8 percent, 11 percent, and 14 percent, respectively.

> Resnor, Inc., has an issue of preferred stock outstanding that pays a $5.50 dividend every year in perpetuity. If this issue currently sells for $108 per share, what is the required return?

> Suppose you know that a company’s stock currently sells for $47 per share and the required return on the stock is 11 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it’s t

> Keenan Co. is expected to maintain a constant 5.2 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 6.3 percent, what is the required return on the company’s stock?

> The Jackson–Timberlake Wardrobe Co. just paid a dividend of $1.95 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year indefinitely. If investors require an 11 percent return on The Jackson–Timberlake Wardro

> The chapter shows that in the two-stage dividend growth model, the growth rate in the first stage, g1 , can be greater than or less than the discount rate, R . Can they be exactly equal?

> Regarding the two-stage dividend growth model in the chapter, show that the price of a share of stock today can be written as follows: Can you provide an intuitive interpretation of this expression? D, X (1+g,) P.=R- 8, + 81 1+R 1+ 8, 1 + R D, X (1

> Assume a stock has dividends that grow at a constant rate forever. If you value the stock using the constant dividend growth model, how many years worth of dividends constitute one-half of the stock’s current price?

> This one’s a little harder. Suppose the current share price for the firm in the previous problem is $63.82 and all the dividend information remains the same. What required return must investors be demanding on Storico stock?

> Storico Co. just paid a dividend of $2.45 per share. The company will increase its dividend by 20 percent next year and will then reduce its dividend growth rate by 5 percentage points per year until it reaches the industry average of 5 percent dividend

> Prepare a 2009 balance sheet for Bertinelli Corp. based on the following information: cash =$195,000; patents and copyrights =$780,000; accounts payable =$405,000; accounts receivable =$137,000; tangible net fixed assets =$2,800,000; inventory =$264,000;

> Consider four different stocks, all of which have a required return of 19 percent and a most recent dividend of $4.50 per share. Stocks W, X, and Y are expected to maintain constant growth rates in dividends for the foreseeable future of 10 percent, 0 pe

> Chartreuse County Choppers Inc. is experiencing rapid growth. The company expects dividends to grow at 25 percent per year for the next 11 years before leveling off at 6 percent into perpetuity. The required return on the company’s stock is 12 percent. I

> You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today’s newspaper. What was the closing price for this stock that appeared in yesterday’s paper? If the company currently ha

> E-Eyes.com Bank just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity, beginning 20 years from now. If the market requires a 6.4 percent return on this investment, how much does a share of preferred stock cost today

> Teder Corporation stock currently sells for $64 per share. The market requires a 10 percent return on the firm’s stock. If the company maintains a constant 4.5 percent growth rate in dividends, what was the most recent dividend per share paid on the stoc

> Antiques R Us is a mature manufacturing fi rm. The company just paid a $10.46 dividend, but management expects to reduce the payout by 4 percent per year indefi nitely. If you require an 11.5 percent return on this stock, what will you pay for a share to

> Ragan, Inc., was founded nine years ago by brother and sister Carrington and Genevieve Ragan. The company manufactures and installs commercial heating, ventilation, and cooling (HVAC) units. Ragan, Inc., has experienced rapid growth because of a propriet

> A substantial percentage of the companies listed on the NYSE and NASDAQ don’t pay dividends, but investors are nonetheless willing to buy shares in them. How is this possible given your answer to the previous question?

> One of the assumptions of the two stage growth model is that the dividends drop immediately from the high growth rate to the perpetual growth rate. What do you think about this assumption? What happens if this assumption is violated?

> When it comes to voting in elections, what are the differences between U.S. political democracy and U.S. corporate democracy?

> Given the following information for Rosato Pizza Co., calculate the depreciation expense: sales=$41,000; costs=$19,500; addition to retained earnings=$5,100; dividends paid=$1,500; interest expense=$4,500; tax rate=35 percent.

> Referring to the previous questions, under what circumstances might a company choose not to pay dividends?

> Some companies, such as Reader’s Digest, have created classes of stock with no voting rights at all. Why would investors buy such stock?

> Suppose the real rate is 3 percent and the inflation rate is 4.7 percent. What rate would you expect to see on a Treasury bill?

> Say you own an asset that had a total return last year of 11.4 percent. If the inflation rate last year was 4.8 percent, what was your real return?

> An investment offers a 14 percent total return over the coming year. Bill Bernanke thinks the total real return on this investment will be only 9 percent. What does Bill believe the inflation rate will be over the next year?

> Ashes Divide Corporation has bonds on the market with 14.5 years to maturity, a YTM of 6.8 percent, and a current price of $924. The bonds make semiannual payments. What must the coupon rate be on these bonds?

> Ngata Corp. issued 12-year bonds 2 years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM?

> Grohl Co. issued 11-year bonds a year ago at a coupon rate of 6.9 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.4 percent, what is the current bond price?

> Kiss the Sky Enterprises has bonds on the market making annual payments, with 13 years to maturity, and selling for $1,045. At this price, the bonds yield 7.5 percent. What must the coupon rate be on the bonds?

> Ackerman Co. has 9 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $934, what is its YTM?

> Jetson Spacecraft Corp. shows the following information on its 2009 income statement: sales=$196,000; costs $104,000; other expenses=$6,800; depreciation expense=$9,100; interest expense=$14,800; taxes=$21,455; dividends=$10,400. In addition, you’re told

> Staind, Inc., has 7.5 percent coupon bonds on the market that have 10 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 8.75 percent, what is the current bond price?

> Suppose you buy a 7 percent coupon, 20-year bond today when it’s first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? Why?

> Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the co

> You are planning to save for retirement over the next 30 years. To save for retirement, you will invest $900 a month in a stock account in real dollars and $450 a month in a bond account in real dollars. The effective annual return of the stock account i

> 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

> Consider the prices in the following three Treasury issues as of May 15, 2007: The bond in the middle is callable in February 2008. What is the implied value of the call feature? May 13n May 13 May 13 6.500 106:10 106:12 -13 5.28 8.250 103:14 103:1

> The McKeegan Corporation has two different bonds currently outstanding. Bond M has a face value of $20,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $1,100 every six months over the subsequent eight years, and

> Bond P is a premium bond with a 12 percent coupon. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 9 percent, and have five years to maturity. What is the current yield for bond P? For bon

> You want to have $1.5 million in real dollars in an account when you retire in 40 years. The nominal return on your investment is 11 percent and the inflation rate is 3.8 percent. What real amount must you deposit each year to achieve your goal?

> Suppose your company needs to raise $30 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 8 percent, and you’re evaluating two issue alternatives: an 8 percent semiannual coupon bond and a

> Sunset Boards is a small company that manufactures and sells surfboards in Malibu. Tad Marks, the founder of the company, is in charge of the design and sale of the surfboards, but his background is in surfing, not business. As a result, the company&acir

> Suppose the following bond quotes for IOU Corporation appear in the financial page of today’s newspaper. Assume the bond has a face value of $1,000 and the current date is April 15, 2009. What is the yield to maturity of the bond? What

> You purchase a bond with a coupon rate of 6.8 percent and a clean price of $1,073. If the next semiannual coupon payment is due in two months, what is the invoice price?

> Bond X is a premium bond making annual payments. The bond pays an 8 percent coupon, has a YTM of 6 percent, and has 13 years to maturity. Bond Y is a discount bond making annual payments. This bond pays a 6 percent coupon, has a YTM of 8 percent, and als

> Locate the Treasury bond in Figure 7.4 maturing in November 2024. 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 7.4 Answer: This is a premium bond b

> In comparing accounting net income and operating cash flow, name two items you typically find in net income that are not in operating cash flow. Explain what each is and why it is excluded in operating cash flow.

> Locate the Treasury issue in Figure 7.4 maturing in November 2027. Is this a note or a bond? What is its coupon rate? What is its bid price? What was the previous day’s asked price? Treasury Bonds Maturity Coupon Bid Asked Chg Asked

> If Treasury bills are currently paying 7 percent and the inflation rate is 3.8 percent, what is the approximate real rate of interest? The exact real rate?

> Mark Sexton and Todd Story, the owners of S&S Air, have decided to expand their operations. They instructed their newly hired financial analyst, Chris Guthrie, to enlist an underwriter to help sell $35 million in new 10-year bonds to finance construction

> Why is it that municipal bonds are not taxed at the federal level, but are taxable across state lines? Why are U.S. Treasury bonds not taxable at the state level? (You may need to dust off the history books for this one.)

> Your company will generate $73,000 in annual revenue each year for the next eight years from a new information database. If the appropriate interest rate is 8.5 percent, what is the present value of the savings?

> Suppose an investment offers to triple your money in 12 months (don’t believe it). What rate of return per quarter are you being offered?

> If the appropriate discount rate for the following cash flows is 8.45 percent per year, what is the present value of the cash flows? Year …………………………………… Cash Flow 1…………………………………………………………$1,650 2………………………………………………………………..0 3…………………………………………………..……..4,200

> Beginning three months from now, you want to be able to withdraw $2,300 each quarter from your bank account to cover college expenses over the next four years. If the account pays .65 percent interest per quarter, how much do you need to have in your ban

> The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $25,000 per year forever. If the required return on this investment is 7.2 percent, how much will you pay for the policy?

> 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

> In preparing a balance sheet, why do you think standard accounting practice focuses on historical cost rather than market value?

> This question illustrates what is known as discount interest. Imagine you are discussing a loan with a somewhat unscrupulous lender. You want to borrow $25,000 for one year. The interest rate is 15 percent. You and the lender agree that the interest on t

> An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure: Time ……………………………………………….Salary 0…………………………………………………………$7,000,000 1………………………………………………………….$4,500,000 2…………………………………………………………$5,000,000 3…………………

> After deciding to buy a new car, you can either lease the car or purchase it on a three-year loan. The car you wish to buy costs $32,000. The dealer has a special leasing arrangement where you pay $99 today and $450 per month for the next three years. If

> Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with retirement income of $20,000 per month for 25 years, with the first payment received 30 years and 1 month from now. Second, he wo

> Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $8,400 every year instead of equal annual payments. Data from problem 55: Prepare an amortization schedule for a five-year loan of $42,000. The interest rate is 8 perc

> Prepare an amortization schedule for a five-year loan of $42,000. The interest rate is 8 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year? How much total interest is paid over the life of the loa

> You want to buy a new sports car from Muscle Motors for $68,000. The contract is in the form of a 60-month annuity due at an 7.85 percent APR. What will your monthly payment be?

> Suppose you are going to receive $10,000 per year for five years. The appropriate interest rate is 11 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 a

> A 5-year annuity of ten $7,000 semiannual payments will begin 8 years from now, with the first payment coming 8.5 years from now. If the discount rate is 10 percent compounded monthly, what is the value of this annuity five years from now? What is the va

> A local finance company quotes a 16 percent interest rate on one-year loans. So, if you borrow $25,000, the interest for the year will be $4,000. Because you must repay a total of $29,000 in one year, the finance company requires you to pay $29,000/12, o

> Referring back to the General Motors example used at the beginning of the chapter, note that we suggested that General Motors’ stockholders probably didn’t suffer as a result of the reported loss. What do you think was the basis for our conclusion?

> Given an interest rate of 6.2 percent per year, what is the value at date t =7 of a perpetual stream of $3,500 payments that begins at date t= 15?

> You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,200 payments and has an interest rate of 8.5 percent compounded monthly. Investment B is an 8 percent continuously compounded lump sum invest

> A 15-year annuity pays $1,500 per month, and payments are made at the end of each month. If the interest rate is 11 percent compounded monthly for the first seven years, and 7 percent compounded monthly thereafter, what is the present value of the annuit

> What is the present value of $4,000 per year, at a discount rate of 10 percent, if the first payment is received 8 years from now and the last payment is received 25 years from now?

> Consider a firm with a contract to sell an asset for $165,000 four years from now. The asset costs $94,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year, will the firm make a profit on this asset? At what rate does

> You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage loan for 80 percent of the $2,900,000 purchase price. The monthly payment on this loan will be $15,000. What is the APR on this loan? The EAR?

> You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $500,000 per year. Thus, in one year, you receive $1.5 million. In two years you get $2 million, and so on. If the appropriate interest rate

> The present value of the following cash flow stream is $6,550 when discounted at 10 percent annually. What is the value of the missing cash flow? Year ……………………….…………… Cash Flow 1………………………………………………………….$1,700 2………………………………………………………………….? 3………………………………………

> You need a 30-year, fixed-rate mortgage to buy a new home for $240,000. Your mortgage bank will lend you the money at a 6.35 percent APR for this 360-month loan. However, you can afford monthly payments of only $1,150, so you offer to pay off any remaini

> You want to borrow $73,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,450, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?

> Could a company’s cash flow to stockholders be negative in a given year? Explain how this might come about. What about cash flow to creditors?

> You’re prepared to make monthly payments of $340, beginning at the end of this month, into an account that pays 6 percent interest compounded monthly. How many payments will you have made when your account balance reaches $20,000?

> What is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 15-year annuity of $9,000 per year at the current interest rate of 10 percent per year. What happens to the value of your investment if in

> Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you just received your salary of $50,000 and you plan to spend all of it. However, you want to start saving for retirement beginning next year. Y

> You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 30 years, which will increase 5 percent per year. If the appropriate discount rate is 8 percent, what is the present value of your winnings?

> You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $95,000 per year for the next two years, or you can have $70,000 per year for the next two years, along with a

> You want to be a millionaire when you retire in 40 years. How much do you have to save each month if you can earn a 12 percent annual return? How much do you have to save if you wait 10 years before you begin your deposits? 20 years?

> You have an investment that will pay you 1.17 percent per month. How much will you have per dollar invested in one year? In two years?

> You are planning to save for retirement over the next 30 years. To do this, you will invest $700 a month in a stock account and $300 a month in a bond account. The return of the stock account is expected to be 11 percent, and the bond account will pay 6

> You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 1.5 percent per year, compounded monthly for the first six months, increasing thereafter to 18 percent compounded monthly. Assuming you transfer the

> You are looking at an investment that has an effective annual rate of 17 percent. What is the effective semiannual return? The effective quarterly return? The effective monthly return?

> Suppose a company’s operating cash flow has been negative for several years running. Is this necessarily a good sign or a bad sign?

> What is the primary disadvantage of the corporate form of organization? Name at least two advantages of corporate organization.

> First Simple Bank pays 7 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to match First Simple Bank over an investment horizon of 10 ye

> If the appropriate discount rate for the following cash flows is 11 percent compounded quarterly, what is the present value of the cash flows? Year Cash …………….………………Flow 1………………………………………….……….$ 725 2………………………………………….…..…….980 3………………………………………………….…….0 4

> In the previous problem, suppose you make $3,600 annual deposits into the same retirement account. How large will your account balance be in 30 years? Data from previous problem: You are planning to make monthly deposits of $300 into a retirement accoun