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Questions and Answers of Corporate Finance

A mortgage company offers to lend you $85,000; the loan calls for payments of $8,273.59 at the end of each year for 30 years. What interest rate is the mortgage company charging you?
To complete your last year in business school and then go through law school, you will need $10,000 per year for 4 years, starting next year (that is, you will need to withdraw the first $10,000 one
While Mary Corens was a student at the University of Tennessee, she borrowed $12,000 in student loans at an annual interest rate of 9%. If Mary repays $1,500 per year, then how long (to the nearest
You need to accumulate $10,000. To do so, you plan to make deposits of $1,250 per year—with the first payment being made a year from today—into a bank account that pays 12% annual interest. Your
What is the present value of a perpetuity of $100 per year if the appropriate discount rate is 7%? If interest rates in general were to double and the appropriate discount rate rose to 14%, what
Assume that you inherited some money. A friend of yours is working as an unpaid intern at a local brokerage firm, and her boss is selling securities that call for 4 payments of $50 (1 payment at the
Assume that your aunt sold her house on December 31, and to help close the sale she took a second mortgage in the amount of $10,000 as part of the payment. The mortgage has a quoted (or nominal)
Your company is planning to borrow $1 million on a 5-year, 15%, annual payment, fully amortized term loan. What fraction of the payment made at the end of the second year will represent repayment of
a. It is now January 1. You plan to make a total of 5 deposits of $100 each, one every 6 months, with the first payment being made today. The bank pays a nominal interest rate of 12% but uses
Anne Lockwood, manager of Oaks Mall Jewelry, wants to sell on credit, giving customers 3 months to pay. However, Anne will have to borrow from her bank to carry the accounts receivable. The bank will
Assume that your father is now 50 years old, which he plans to retire in 10 years, and that he expects to live for 25 years after he retires—that is, until age 85. He wants his first retirement
You want to accumulate $1 million by your retirement date, which is 25 years from now. You will make 25 deposits in your bank, with the first occurring today. The bank pays 8% interest, compounded
Draw time lines for (a) A $100 lump sum cash flow at the end of year 2, (b) An ordinary annuity of $100 per year for 3 years, and (c) An uneven cash flow stream of -$50, $100, $75, and $50 at the end
What is the future value of an initial $100 after 3 years if it is invested in an account paying 10%annual interest?
What is the present value of $100 to be received in 3 years if the appropriate interest rate is 10%?
We sometimes need to find out how long it will take a sum of money (or anything else) to grow to some specified amount. For example, if a company's sales are growing at a rate of 20%per year, how
If you want an investment to double in 3 years, what interest rate must it earn?Assume that you are nearing graduation and have applied for a job with a local bank. As part of the bank’s evaluation
What is the difference between an ordinary annuity and an annuity due? What type of annuity is shown below? How would you change it to the other type of annuity?Assume that you are nearing graduation
What is the future value of a 3-year ordinary annuity of $100 if the appropriate interest rate is 10%?Assume that you are nearing graduation and have applied for a job with a local bank. As part of
What is the present value of the annuity?Assume that you are nearing graduation and have applied for a job with a local bank. As part of the bank’s evaluation process, you have been asked to take
What would the future and present values be if the annuity were an annuity due?Assume that you are nearing graduation and have applied for a job with a local bank. As part of the bank’s evaluation
What is the present value of the following uneven cash flow stream? The appropriate interest rate is 10%, compoundedannually.
Define (a) the stated, or quoted, or nominal rate, (iNom), and (b) the periodic rate (iPer).
Will the future value be larger or smaller if we compound an initial amount more often than annually, for example, every 6 months, or semiannually, holding the stated interest rate constant? Why?
What is the future value of $100 after 5 years under 12% annual compounding? Semiannual compounding? Quarterly compounding? Monthly compounding? Daily compounding
What is the effective annual rate (EAR or EFF%)? What is the EFF% for a nominal rate of 12%, compounded semiannually? Compounded quarterly? Compounded monthly? Compounded daily?
Will the effective annual rate ever be equal to the nominal (quoted) rate?
1. Construct an amortization schedule for a $1,000, 10% annual rate loan with 3 equal installments.2. What is the annual interest expense for the borrower, and the annual interest income for the
Suppose on January 1 you deposit $100 in an account that pays a nominal, or quoted, interest rate of 11.33463%, with interest added (compounded) daily. How much will you have in your account on
What is the value at the end of Year 3 of the following cash flow stream if the quoted interest rate is 10%, compoundedsemiannually?
What is the PV of the same stream?
Is the stream an annuity?
An important rule is that you should never show a nominal rate on a time line or use it in calculations unless what condition holds?
Suppose someone offered to sell you a note calling for the payment of $1,000 15 months from today. They offer to sell it to you for $850. You have $850 in a bank time deposit which pays a 6.76649%
Define each of the following terms:a. Bond; Treasury bond; corporate bond; municipal bond; foreign bondb. Par value; maturity date; coupon payment; coupon interest ratec. Floating-rate bond; zero
Short-term interest rates are more volatile than long-term interest rates, so short-term bond prices are more sensitive to interest rate changes than are long-term bond prices.” Is this statement
The rate of return you would get if you bought a bond and held it to its maturity date is called the bond’s yield to maturity. If interest rates in the economy rise after a bond has been issued,
If you buy a callable bond and interest rates decline, will the value of your bond rise by as much as it would have risen if the bond had not been callable? Explain.
A sinking fund can be set up in one of two ways. Discuss the advantages and disadvantages of each procedure from the viewpoint of both the firm and its bondholders.
Jackson Corporation’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 8%. The bonds have a yield to maturity
Wilson Wonders’s bonds have 12 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850.
Heath Foods’s bonds have 7 years remaining to maturity. The bonds have a face value of $1,000 and a yield to maturity of 8%. They pay interest annually and have a 9% coupon rate. What is their
The real risk-free rate of interest is 4%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury
A Treasury bond that matures in 10 years has a yield of 6%. A 10-year corporate bond has a yield of 9%. Assume that the liquidity premium on the corporate bond is 0.5%. What is the default risk
The real risk-free rate is 3%, and inflation is expected to be 3% for the next 2 years. A 2-year Treasury security yields 6.3%. What is the maturity risk premium for the 2-year security?
Renfro Rentals has issued bonds that have a 10% coupon rate, payable semiannually. The bonds mature in 8 years, have a face value of $1,000, and a yield to maturity of 8.5%. What is the price of the
Thatcher Corporation’s bonds will mature in 10 years. The bonds have a face value of $1,000 and an 8% coupon rate, paid semiannually. The price of the bonds is $1,100. The bonds are callable in 5
The Garraty Company has two bond issues outstanding. Both bonds pay $100 annual interest plus $1,000 at maturity. Bond L has a maturity of 15 years, and Bond S has a maturity of 1 year.a. What will
The Brownstone Corporation’s bonds have 5 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 9%.a. What is the yield to
A 10-year, 12% semiannual coupon bond with a par value of $1,000 may be called in 4 years at a call price of $1,060. The bond sells for $1,100. (Assume that the bond has just been issued.)a. What is
You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity?
A bond that matures in 7 years sells for $1,020. The bond has a face value of $1,000 and a yield to maturity of 10.5883%. The bond pays coupons semiannually. What is the bond’s current yield?
Absalom Motors’s 14% coupon rate, semiannual payment, $1,000 par value bonds that mature in 30 years are callable 5 years from now at a price of $1,050. The bonds sell at a price of $1,353.54, and
A bond trader purchased each of the following bonds at a yield to maturity of 8%. Immediately after she purchased the bonds, interest rates fell to 7%. What is the percentage change in the price of
An investor has two bonds in his portfolio. Each bond matures in 4 years, has a face value of $1,000, and has a yield to maturity equal to 9.6%. One bond, Bond C, pays an annual coupon of 10%; the
The real risk-free rate is 2%. Inflation is expected to be 3% this year, 4% next year, and then 3.5% thereafter. The maturity risk premium is estimated to be 0.0005 × (t − 1), where t = number of
Assume that the real risk-free rate, r*, is 3% and that inflation is expected to be 8% in Year 1, 5% in Year 2, and 4% thereafter. Assume also that all Treasury securities are highly liquid and free
Because of a recession, the inflation rate expected for the coming year is only 3%. However, the inflation rate in Year 2 and thereafter is expected to be constant at some level above 3%. Assume that
Suppose Hillard Manufacturing sold an issue of bonds with a 10-year maturity, a $1,000 par value, a 10% coupon rate, and semiannual interest payments.a. Two years after the bonds were issued, the
Arnot International’s bonds have a current market price of $1,200. The bonds have an 11% annual coupon payment, a $1,000 face value, and 10 years left until maturity. The bonds may be called in 5
Suppose you and most other investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real
What are the key features of a bond?
What are call provisions and sinking fund provisions? Do these provisions make bonds more or less risky?
How is the value of any asset whose value is based on expected future cash flows determined?
How is the value of a bond determined? What is the value of a 10-year, $1,000 par value bond with a 10 percent annual coupon if its required rate of return is 10 percent?
What would be the value of the bond described in part d if, just after it had been issued, the expected inflation rate rose by 3 percentage points, causing investors to require a 13 percent return?
What would happen to the bonds' value if inflation fell, and rd declined to 7 percent? Would we now have a premium or a discount bond?
What would happen to the value of the 10-year bond over time if the required rate of return remained at 13 percent, or if it remained at 7 percent?
What is the yield to maturity on a 10-year, 9 percent annual coupon, $1,000 par value bond that sells for $887.00? That sells for $1,134.20? What does the fact that a bond sells at a discount or at
What are the total return, the current yield, and the capital gains yield for the discount bond? (Assume the bond is held to maturity and the company does not default on the bond.)
How does the equation for valuing a bond change if semiannual payments are made? Find the value of a 10-year, semiannual payment, 10 percent coupon bond if nominal rd = 13%.
Suppose a 10-year, 10 percent, semiannual coupon bond with a par value of $1,000 is currently selling for $1,135.90, producing a nominal yield to maturity of 8 percent. However, the bond can be
If you bought this bond, do you think you would be more likely to earn the YTM or the YTC? Why?
Write a general expression for the yield on any debt security (rd) and define these terms: real risk-free rate of interest (r*), inflation premium (IP), default risk premium (DRP), liquidity premium
Define the nominal risk-free rate (rRF). What security can be used as an estimate of rRF?
Describe a way to estimate the inflation premium (IP) for a T-Year bond.
What is a bond spread and how is it related to the default risk premium? How are bond ratings related to default risk? What factors affect a company’s bond rating?
What is interest rate (or price) risk? Which bond has more interest rate risk, an annual payment 1-year bond or a 10-year bond? Why?
What is reinvestment rate risk? Which has more reinvestment rate risk, a 1-year bond or a 10-year bond?
How are interest rate risk and reinvestment rate risk related to the maturity risk premium?
What is the term structure of interest rates? What is a yield curve?
Briefly describe bankruptcy law. If this firm were to default on the bonds, would the company be immediately liquidated? Would the bondholders be assured of receiving all of their promised payments?
Define each of the following terms:a. Mission statement; corporate scope; statement of corporate objectives; corporate strategiesb. Operating plan; financial plan; sales forecastc. Spontaneous
Some liability and net worth items increase spontaneously with increases in sales. Put a check (??) by those items listed below that typically increasespontaneously:
The following equation is sometimes used to forecast financial requirements:AFN = (A0*/S0) (ΔS) – (L0*/S0) (ΔS) – MS1 (1 – POR)What key assumption do we make when using this equation? Under
Name five key factors that affect a firm’s external financing requirements.
What is meant by the term “self-supporting growth rate?” How is this rate related to the AFN equation, and how can that equation be used to calculate the self-supporting growth rate?
Suppose a firm makes the policy changes listed below. If a change means that external, nonspontaneous financial requirements (AFN) will increase, indicate this by a (+); indicate a decrease by a (?);
Assume that you recently received your MBA and now work as assistant to the CFO of a relatively large corporation. Your boss has asked you to prepare a financial forecast for the coming year, using
Baxter Video Products’s sales are expected to increase by 20% from $5 million in 2010 to $6 million in 2011. Its assets totaled $3 million at the end of 2010. Baxter is already at full capacity, so
Refer to Problem 12-1. What would be the additional funds needed if the company’s year-end 2010 assets had been $4 million? Assume that all other numbers, including sales, are the same as in
Refer to Problem 12-1. Return to the assumption that the company had $3 million in assets at the end of 2010, but now assume that the company pays no dividends. Under these assumptions, what would be
Bannister Legal Services generated $2,000,000 in sales during 2010, and its year-end total assets were $1,500,000. Also, at year-end 2010, current liabilities were $500,000, consisting of $200,000 of
At year-end 2010, Bertin Inc.’s total assets were $1.2 million and its accounts payable were $375,000. Sales, which in 2010 were $2.5 million, are expected to increase by 25% in 2011. Total assets
The Booth Company's sales are forecasted to double from $1,000 in 2010 to $2,000 in 2011. Here is the December 31, 2010, balance sheet: Booth's fixed assets were used to only 50% of capacity during
Upton Computers makes bulk purchases of small computers, stocks them in conveniently located warehouses, ships them to its chain of retail stores, and has a staff to advise customers and help them
Stevens Textiles's 2010 financial statements are shown below: Balance Sheet as of December 31, 2010 (Thousands of Dollars) a. Suppose 2011 sales are projected to increase by 15% over 2010 sales.
Garlington Technologies Inc.'s 2010 financial statements are shown below: Balance Sheet as of December 31, 2010 Suppose that in 2011 sales increase by 10% over 2010 sales and that 2011 dividends
Do you think Adam Lee should develop a strategic plan for the company? Why? What are the central elements of such a plan? What is the role of finance in a strategic plan?
Based on the data in Figure MC-1, how well run does Hatfield appear to be in comparison to other firms in its industry? What are its primary strengths and weaknesses? Be specific in your answer, and

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