You would like to buy the house and take the mortgage described in Problem 27. You can afford to pay only $23,500 per year. The bank agrees to allow you to pay this amount each year, yet still borrow $300,000. At the end of the mortgage (in 30 years), you must make a balloon payment; that is, you must repay the remaining balance on the mortgage. How much will this balloon payment be?
> HMK Enterprises would like to raise $10 million to invest in capital expenditures. The company plans to issue five-year bonds with a face value of $1000 and a coupon rate of 6.5% (annual payments). The following table summarizes the yield to maturity for
> What is the shape of the yield curve given in the following term structure? What expectations are investors likely to have about future interest rates? 1 year 2 years 3 years 5 years 7 years 10 years 20 years Term 1.99 2.41 2.74 3.32 3.76 4.13 4.93
> Andrew Industries is contemplating issuing a 30-year bond with a coupon rate of 7% (annual coupon payments) and a face value of $1000. Andrew believes it can get a rating of A from Standard & Poor’s. However, due to recent financial difficulties at the c
> You have just taken out a five-year loan from a bank to buy an engagement ring. The ring costs $5000. You plan to put down $1000 and borrow $4000. You will need to make annual payments of $1000 at the end of each year. Show the timeline of the loan from
> The following table summarizes the yields to maturity on several one-year, zero-coupon securities: Security……………………Yield (%) Treasury…………………… …………3.1 AAA corporate…………………………3.2 BBB corporate…………………………4.2 B corporate ……………………………..4.9 a. What is the price
> You have found three investment choices for a one-year deposit: 10% APR compounded monthly, 10% APR compounded annually, and 9% APR compounded daily. Compute the EAR for each investment choice. (Assume that there are 365 days in the year.)
> Suppose you purchase a 30-year, zero-coupon bond with a yield to maturity of 6%. You hold the bond for five years before selling it. a. If the bond’s yield to maturity is 6% when you sell it, what is the rate of return of your investment? b. If the bond’
> Anzio, Inc., has two classes of shares. Class B has ten times the voting rights as Class A. If you own 10% of the class A shares and 20% of the Class B shares, what percentage of the total voting rights do you hold?
> What is the percentage change in the price of each bond if its yield to maturity falls from 6% to 5%?
> Suppose you purchase a ten-year bond with 6% annual coupons. You hold the bond for four years, and sell it immediately after receiving the fourth coupon. If the bond’s yield to maturity was 5% when you purchased and sold the bond, a. W
> Your company currently has $1000 par, 6% coupon bonds with ten years to maturity and a price of $1078. If you want to issue new ten-year coupon bonds at par, what coupon rate do you need to set? Assume that for both bonds, the next coupon payment is due
> Assuming the yield to maturity remains constant, what is the price of the bond immediately after it makes its first coupon payment?
> Assuming the yield to maturity remains constant, what is the price of the bond immediately before it makes its first coupon payment?
> You are pleased to see that you have been given a 5% raise this year. However, you read on the Wall Street Journal Web site that inflation over the past year has been 2%. How much better off are you in terms of real purchasing power?
> What was the price of this bond when it was issued?
> Suppose a seven-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading with a yield to maturity of 6.75%. a. Is this bond currently trading at a discount, at par, or at a premium? Explain. b. If the yield to maturity of the bond rises
> Maynard Steel plans to pay a dividend of $3 this year. The company has an expected earnings growth rate of 4% per year and an equity cost of capital of 10%. a. Assuming that Maynard’s dividend payout rate and expected growth rate remain constant, and tha
> You have just turned 22 years old, have just received your bachelor’s degree, and have accepted your first job. Now you must decide how much money to put into your retirement plan. The plan works as follows: Every dollar in the plan earns 7% per year. Yo
> You have purchased a 10% coupon bond for $1040. What will happen to the bond’s price if market interest rates rise?
> Suppose a five-year, $1000 bond with annual coupons has a price of $900 and a yield to maturity of 6%. What is the bond’s coupon rate?
> Suppose a ten-year, $1000 bond with an 8% coupon rate and semiannual coupons is trading for a price of $1034.74. a. What is the bond’s yield to maturity (expressed as an APR with semiannual compounding)? b. If the bond’s yield to maturity changes to 9% A
> You own 20% of the stock of a company that has ten directors on its board. How much representation can you get on the board if the company has cumulative voting? How much representation can you ensure if the company has straight voting?
> Assume the current Treasury yield curve shows that the spot rates for 6 months, 1 year, and 1 1/2 years are 1%, 1.1%, and 1.3%, all quoted as semiannually compounded APRs. What is the price of a $1000 par, 4% coupon bond maturing in 11/2 years (the next
> You are buying a house and the mortgage company offers to let you pay a “point” (1% of the total amount of the loan) to reduce your APR from 6.5% to 6.25% on your $400,000, 30-year mortgage with monthly payments. If you plan to be in the house for at lea
> You have just taken out a $20,000 car loan with a 6% APR, compounded monthly. The loan is for five years. When you make your first payment in one month, how much of the payment will go toward the principal of the loan and how much will go toward interest
> Assume the inflation rate is 3% APR, compounded annually. Would you rather earn a nominal return of 5% APR, compounded semiannually, or a real return of 2% APR, compounded quarterly?
> Suppose Oppenheimer Bank is offering a 30-year mortgage with an EAR of 6.80%. If you plan to borrow $150,000, what will your monthly payment be?
> You have been offered a job with an unusual bonus structure. As long as you stay with the firm, you will get an extra $70,000 every seven years, starting seven years from now. What is the present value of this incentive if you plan to work for the compan
> If the rate of inflation is 5%, what nominal interest rate is necessary for you to earn a 3% real interest rate on your investment?
> In 1975, interest rates were 7.85% and the rate of inflation was 12.3% in the United States. What was the real interest rate in 1975? How would the purchasing power of your savings have changed over the year?
> Suppose Cisco Systems pays no dividends but spent $5 billion on share repurchases last year. If Cisco’s equity cost of capital is 12%, and if the amount spent on repurchases is expected to grow by 8% per year, estimate Cisco’s market capitalization. If C
> Your firm has taken out a $500,000 loan with 9% APR (compounded monthly) for some commercial property. As is common in commercial real estate, the loan is a 5-year loan based on a 15-year amortization. This means that your loan payments will be calculate
> You have credit card debt of $25,000 that has an APR (monthly compounding) of 15%. Each month you pay a minimum monthly payment only. You are required to pay only the outstanding interest. You have received an offer in the mail for an otherwise identical
> The mortgage on your house is five years old. It required monthly payments of $1402, had an original term of 30 years, and had an interest rate of 10% (APR). In the intervening five years, interest rates have fallen and so you have decided to refinance—t
> Your friend tells you he has a very simple trick for taking one-third off the time it takes to repay your mortgage: Use your Christmas bonus to make an extra payment on January 1 of each year (that is, pay your monthly payment due on that day twice). If
> You graduate and get a $10,000 check from your grandparents. You decide to save it toward a down payment on a house. You invest it earning 10% per year and you think you will need to have $20,000 saved for the down payment. How long will it be before the
> If you decide to take the mortgage in Problem 11, Oppenheimer Bank will offer you the following deal: Instead of making the monthly payment you computed in that problem every month, you can make half the payment every two weeks (so that you will make 52/
> Consider again the setting of Problem 19. Now that you realize your best investment is to prepay your student loan, you decide to prepay as much as you can each month. Looking at your budget, you can afford to pay an extra $250 per month in addition to y
> You have an outstanding student loan with required payments of $500 per month for the next four years. The interest rate on the loan is 9% APR (monthly). You are considering making an extra payment of $100 today (i.e., you will pay an extra $100 that you
> You have some extra cash this month and you are considering putting it toward your car loan. Your interest rate is 7%, your loan payments are $600 per month, and you have 36 months left on your loan. If you pay an additional $1000 with your next regular
> You are thinking about leasing a car. The purchase price of the car is $30,000. The residual value (the amount you could pay to keep the car at the end of the lease) is $15,000 at the end of 36 months. Assume the first lease payment is due one month afte
> You have just purchased a car and taken out a $50,000 loan. The loan has a five-year term with monthly payments and an APR of 6%. a. How much will you pay in interest, and how much will you pay in principal, during the first month, second month, and firs
> AFW Industries has 200 million shares outstanding and expects earnings at the end of this year of $700 million. AFW plans to pay out 60% of its earnings in total, paying 40% as a dividend and using 20% to repurchase shares. If AFW’s earnings are expected
> You have just sold your house for $1,000,000 in cash. Your mortgage was originally a 30-year mortgage with monthly payments and an initial balance of $800,000. The mortgage is currently exactly 18 1/2 years old, and you have just made a payment. If the i
> You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2356 and you have made every payment on time. The original term of the mortgage was 30 years, and the mortga
> When you purchased your car, you took out a five-year annual-payment loan with an interest rate of 6% per year. The annual payment on the car is $5000. You have just made a payment and have now decided to pay the loan off by repaying the outstanding bala
> You are saving for retirement. To live comfortably, you decide you will need to save $2 million by the time you are 65. Today is your twenty-second birthday, and you decide, starting today and continuing on every birthday up to and including your 65th bi
> Assume that your parents wanted to have $160,000 saved for college by your eighteenth birthday and they started saving on your first birthday. They saved the same amount each year on your birthday and earned 8% per year on their investments. a. How much
> Your grandmother has been putting $1000 into a savings account on every birthday since your first (that is, when you turned one). The account pays an interest rate of 3%. How much money will be in the account immediately after your grandmother makes the
> What is the present value of $1000 paid at the end of each of the next 100 years if the interest rate is 7% per year?
> You are thinking about buying a piece of art that costs $50,000. The art dealer is proposing the following deal: He will lend you the money, and you will repay the loan by making the same payment every two years for the next 20 years (i.e., a total of 10
> You are thinking of purchasing a house. The house costs $350,000. You have $50,000 in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annua
> You have decided to buy a perpetual bond. The bond makes one payment at the end of every year forever and has an interest rate of 5%. If the bond initially costs $1000, what is the payment every year?
> You have an investment opportunity that requires an initial investment of $5000 today and will pay $6000 in one year. What is the rate of return of this opportunity?
> You have an investment account that started with $1000 ten years ago and which now has grown to $5000. a. What annual rate of return have you earned (you have made no additional contributions to the account)? b. If the savings bond earns 15% per year fro
> You are thinking about buying a savings bond. The bond costs $50 today and will mature in 10 years with a value of $100. What annual interest rate will the bond earn?
> A rich aunt has promised you $5000 one year from today. In addition, each year after that, she has promised you a payment (on the anniversary of the last payment) that is 3% larger than the last payment. She will continue to show this generosity for 20 y
> You work for a pharmaceutical company that has developed a new drug. The patent on the drug will last 17 years. You expect that the drug’s profits will be $2 million in its first year and that this amount will grow at a rate of 5% per year for the next 1
> When Alfred Nobel died, he left the majority of his estate to fund five prizes, each to be awarded annually in perpetuity starting one year after he died (the sixth one, in economics, was added later). a. If he wanted the cash award of each of the five p
> Colgate-Palmolive Company has just paid an annual dividend of $0.96. Analysts are predicting an 11% per year growth rate in earnings over the next five years. After then, Colgate’s earnings are expected to grow at the current industry average of 5.2% per
> The British government has a consol bond outstanding paying £100 per year forever. Assume the current interest rate is 4% per year. a. What is the value of the bond immediately after a payment is made? b. What is the value of the bond immediately before
> You are thinking of building a new machine that will save you $1000 in the first year. The machine will then begin to wear out so that the savings decline at a rate of 2% per year forever. What is the present value of the savings if the interest rate is
> A rich relative has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $1000. Each year after that, you will receive a payment on the anniversary of the last payment that is 8% larger than the last payment. This patte
> You are trying to decide how much to save for retirement. Assume you plan to save $5000 per year with the first investment made 1 year from now. You think you can earn 10% per year on your investments and you plan to retire in 43 years, immediately after
> When Alex Rodriguez moved to the Texas Rangers in 2001, he received a lot of attention for his “$252 million” contract (the total of the payments promised was $252 million). Assume the following about the contract: Rod
> Assume that Social Security promises you $40,000 per year starting when you retire 45 years from today (the first $40,000 will come 45 years from now). If your discount rate is 7%, compounded annually, and you plan to live for 15 years after retiring (so
> You figure that the total cost of college will be $100,000 per year 18 years from today. If your discount rate is 8% compounded annually, what is the present value today of 4 years of college costs starting 18 years from today?
> Brett has almond orchards, but he is sick of almonds and prefers to eat walnuts instead. The owner of the walnut orchard next door has offered to swap this year’s crop with him. Assume he produces 1000 tons of almonds and his neighbor produces 800 tons o
> Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has a one-ton supply of shrimp. The market price of shrimp is $10,000 per ton. a. What is the value of a ton of shrimp to him? b. Would
> Some companies cross-list their shares, meaning that their stock trades on more than one stock exchange. For example, Research In Motion, the maker of BlackBerry mobile devices, trades on both the Toronto Stock Exchange and NASDAQ. If its price in Toront
> Suppose Big Bank offers an interest rate of 5.5% on both savings and loans, and Bank Enn offers an interest rate of 6% on both savings and loans. a. What profit opportunity is available? b. Which bank would experience a surge in the demand for loans? Whi
> How would your answer to Problem 7 change if you endow it now, but it makes the first award to a student 10 years from today? Information from Problem 7: You want to endow a scholarship that will pay $10,000 per year forever, starting one year from now.
> Gillette Corporation will pay an annual dividend of $0.65 one year from now. Analysts expect this dividend to grow at 12% per year thereafter until the fifth year. After then, growth will level off at 2% per year. According to the dividend-discount model
> Honda Motor Company is considering offering a $2000 rebate on its minivan, lowering the vehicle’s price from $30,000 to $28,000. The marketing group estimates that this rebate will increase sales over the next year from 40,000 to 55,000 vehicles. Suppose
> Your grandfather put some money in an account for you on the day you were born. You are now 18 years old and are allowed to withdraw the money for the first time. The account currently has $3996 in it and pays an 8% interest rate. a. How much money would
> Your mom is thinking of retiring. Her retirement plan will pay her either $250,000 immediately on retirement or $350,000 five years after the date of her retirement. Which alternative should she choose if the interest rate is a. 0% per year? b. 8% per ye
> Your cousin is currently 12 years old. She will be going to college in 6 years. Your aunt and uncle would like to have $100,000 in a savings account to fund her education at that time. If the account promises to pay a fixed interest rate of 4% per year,
> Your brother has offered to give you either $5000 today or $10,000 in 10 years. If the interest rate is 7% per year, which option is preferable?
> What is the present value of $10,000 received a. 12 years from today when the interest rate is 4% per year? b. 20 years from today when the interest rate is 8% per year? c. 6 years from today when the interest rate is 2% per year?
> Calculate the future value of $2000 in a. 5 years at an interest rate of 5% per year. b. 10 years at an interest rate of 5% per year. c. 5 years at an interest rate of 10% per year. d. Why is the amount of interest earned in part (a) less than half the a
> Suppose you invest $1000 in an account paying 8% interest per year. a. What is the balance in the account after 3 years? How much of this balance corresponds to “interest on interest”? b. What is the balance in the account after 25 years? How much of thi
> Consider the following alternatives: i. $100 received in one year ii. $200 received in 5 years iii. $300 received in 10 years a. Rank the alternatives from most valuable to least valuable if the interest rate is 10% per year. b. What is your ranking if t
> You want to endow a scholarship that will pay $10,000 per year forever, starting one year from now. If the school’s endowment discount rate is 7%, what amount must you donate to endow the scholarship?
> Suppose the interest rate is 4%. a. Having $200 today is equivalent to having what amount in one year? b. Having $200 in one year is equivalent to having what amount today? c. Which would you prefer, $200 today or $200 in one year? Does your answer depen
> Cooperton Mining just announced it will cut its dividend from $4 to $2.50 per share and use the extra funds to expand. Prior to the announcement, Cooperton’s dividends were expected to grow at a 3% rate, and its share price was $50. With the planned expa
> A friend asks to borrow $55 from you and in return will pay you $58 in one year. If your bank is offering a 6% interest rate on deposits and loans: a. How much would you have in one year if you deposited the $55 instead? b. How much money could you borro
> You have $100 and a bank is offering 5% interest on deposits. If you deposit the money in the bank, how much will you have in one year?
> Local Co. has sales of $10 million and cost of sales of $6 million. Its selling, general and administrative expenses are $500,000 and its research and development is $1 million. It has annual depreciation charges of $1 million and a tax rate of 35%. a. W
> Find online the annual 10-K report for Peet’s Coffee and Tea (PEET) for 2008. Answer the following questions from the income statement: a. What were Peet’s revenues for 2008? By what percentage did revenues grow from 2007? b. What were Peet’s operating a
> In April 2010, the following information was true about Abercrombie and Fitch (ANF) and The Gap (GPS), both clothing retailers. Values (except price per share) are in millions of dollars. a. What is the market-to-book ratio of each company? b. What concl
> In July 2007, Apple had cash of $7.12 billion, current assets of $18.75 billion, and current liabilities of $6.99 billion. It also had inventories of $0.25 billion. a. What was Apple’s current ratio? b. What was Apple’s quick ratio? c. In July 2007, Dell
> In June 2007, General Electric (GE) had a book value of equity of $117 billion, 10.3 billion shares outstanding, and a market price of $38.00 per share. GE also had cash of $16 billion, and total debt of $467 billion. a. What was GE’s market capitalizati
> Consider the following potential events that might have occurred to Global on December 30, 2010. For each one, indicate which line items in Global’s balance sheet would be affected and by how much. Also indicate the change to Global’s book value of equit
> You have a loan outstanding. It requires making three annual payments of $1000 each at the end of the next three years. Your bank has offered to allow you to skip making the next two payments in lieu of making one large payment at the end of the loan’s t
> For 2010, Wal-Mart and Target had the following information (all values are in millions of dollars): a. What is each company’s accounts receivable days? b. What is each company’s inventory turnover? c. Which company is
> You are analyzing the leverage of two firms and you note the following (all values in millions of dollars): a. What is the market debt-to-equity ratio of each firm? b. What is the book debt-to-equity ratio of each firm? c. What is the interest coverage r
> DFB, Inc., expects earnings this year of $5 per share, and it plans to pay a $3 dividend to shareholders. DFB will retain $2 per share of its earnings to reinvest in new projects that have an expected return of 15% per year. Suppose DFB will maintain the
> Suppose a firm’s tax rate is 35%. a. What effect would a $10 million operating expense have on this year’s earnings? What effect would it have on next year’s earnings? b. What effect would a $10 million capital expense have on this year’s earnings, if th
> Suppose that in 2010, Global launched an aggressive marketing campaign that boosted sales by 15%. However, their operating margin fell from 5.57% to 4.50%. Suppose that they had no other income, interest expenses were unchanged, and taxes were the same p
> If JPJ Corp (the company from the previous question) is able to increase sales by 10% but keep its total and fixed asset growth to only 5%, what will its new asset turnover ratios be?
