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Questions and Answers of Corporate Finance

Calculating Annuity Future Values You are planning to make monthly deposits of $250 into a retirement account that pays 10 percent interest compounded monthly. If your first deposit will be made one
Calculating Annuity Future Values In the previous problem, suppose you make $3,000 annual deposits into the same retirement account, how large will your account balance be in 30 years?
Calculating Annuity Present Values Beginning three months from now, you want to be able to withdraw $1,500 each quarter from your bank account to cover college expenses over the next four, years. If
Discounted Cash Flow Analysis if the appropriate discount rate for the following cash flows is 11 percent compounded quarterly, what is the present value of the cash flows?
Discounted Cash Flow Analysis 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?
Simple Interest versus Compound Interest First Simple Bank pays 6 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what
Calculating EAR you are looking at an investment that has an effective annual rate of 18 percent. What is the effective semiannual return, the effective quarterly return the effective monthly return?
Calculating Interest Expense you receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.5 percent per year, compounded monthly for the first six
Calculating Annuities you are planning to save for retirement over the next 30 years. To do this, you will invest $600 a month in a stock account and $300 a month in a bond account. The return of the
Calculating Future Values you have an investment that will pay you 1.08 percent per month. How much will you have per dollar invested in one year? In two years?
Calculating Annuity Payments 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 an 11 percent annual return? How much do you have to
Calculating Rates of Return Suppose an investment offers to quadruple your money in 12 months (don’t believe it). What rate of return per quarter are you being offered?
Comparing Cash Flow Streams you’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $90,000 per year for
Growing Annuity You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 25 years, which will increase 5 percent per year. If the appropriate discount rate
Growing Annuity 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.
Present Value and Interest Rates what is the relationship between the value of an annuity and the level of interest rates? Suppose you just bought a 10-year annuity of $7,000 per year at the current
Calculating the Number of Payments you’re prepared to make monthly payments of $225, beginning at the end of this month, into an account that pays 9 percent interest compounded monthly. How many
Calculating Annuity Present Values You want to borrow $55,000 from your local bank to buy a new sailboat, you can afford to make monthly payments of $1,120, but no more. Assuming monthly compounding,
Calculating Loan Payments You need a 30-year, fixed-rate mortgage to buy a new home for $220,000, your mortgage bank will lend you the money at a 6.8 percent APR for this 360-month loan. However, you
Present and Future Values the present value of the following cash flow stream is $6,785 when discounted at 10 percent annually. What is the value of the missing cash flow?Year
Calculating Present Values You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $400,000 per year. Thus, in one year, you receive $1.4
EAR versus 4PR 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 $2,400,000 purchase price. The monthly payment on
Present Value and Break-Even Interest Consider a firm with a contract to sell an asset for $145,000 three years from now. The asset costs $94,000 to produce today. Given a relevant discount rate on
Present Value and Multiple Cash Flows What is the present value of $2,000 per year, at a discount rate of 10 percent, if the first payment is received 9 years from now and the last payment is
Variable Interest Rates a 15-year annuity pays $1,500 per month, and payments are made at the end of each month. If the interest rate is 13 percent compounded monthly for the first seven years, and
Comparing Cash Flow Streams you have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,000 payments and has an interest rate of 9.5 percent
Calculating Present Value of a Perpetuity Given an interest rate of 5.7 percent per year, .what is the value at date t = 7 of a perpetual stream of $5,000 payments that begins at date t = 15?
Calculating EAR a local finance company quotes a 15 percent interest rate on one-year loans. So, if you borrow $20.000, the interest for the year will be $3.000. Because you must repay a total of
Calculating Present Values a 5-year annuity often $6,000 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 10 percent
Calculating Annuities Due As discussed in the text, an ordinary annuity assumes equal payments at the end of each period over the life of the annuity. An annuity due is the same thing except the
Calculating Annuities due you want to buy a new sports car from Muscle Motors for $61,000. The contract is in the form of a 60-month annuity due at an 8.15 percent APR. What will your monthly payment
Amortization with Equal Payments Prepare an amortization schedule for a five-year loan of $36,000, the interest rate is 9 percent per year, and the loan calls for equal annual payments. How much
Amortization with Equal Principal Payments Rework Problem 55 assuming that the loan agreement calls for a principal reduction of $7,200 every 5iear instead of equal annual payments.
Calculating Annuity Values 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 20
Calculating Annuity Values 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 528.000. The dealer has a special leasing
Calculating Annuity Values an All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure: All salaries are to be paid in lump sums. The player has
Discount Interest Loans 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.
Calculating Annuity Values 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
Calculating EAR with Points you are looking at a one-year loan of $10,000. The interest rate is quoted as 9 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of
Calculating EAR with Points the interest rate on a one-year loan is quoted as 12 percent plus two points (see the previous problem). What is the EAR? Is your answer affected by the loan amount?
EAR versus APR Two banks in the area offer 30-year, $220,000 mortgages at 7.2 percent and charge a $1,500 loan application fee, however, the application fee charged by Insecurity Bank and Trust is
Calculating EAR with Add-On Interest 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
Calculating Annuity Payments this is a classic retirement problem. A time line will help in solving it. Your friend is celebrating her 35th birthday today and wants to start saving for her
Calculating the Number of Periods 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
Future Value and Multiple Cash Flows 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
Calculating a Balloon Payment you have just arranged for $450,000 mortgage to finance the purchase of a large tract of land. The mortgage has an 8.5 percent APR, and it calls for monthly payments
Calculating Interest Rates a financial planning service offers a college savings program. The plan calls for you to make six annual payments of $5,000 each, with the first payment occurring today,
Break-Even Investment Returns your financial planner offers you two different investment plans. Plan X is a $15,000 annual perpetuity. Plan Y is a 10-year, $20,000 annual annuity. Both plans will
Perpetual Cash Flows What the value of an investment that pays $7,500 every other year forever, if the first payment occurs one year from today and the discount rate is 11 percent compounded daily?
Ordinary Annuities and Annuities Due As discussed in the text, ‘an annuity due is identical to an ordinary annuity except that the periodic payments occur at the beginning of each period and not at
Calculating Growing Annuities you have 30 years left until retirement and want to retire with $1 million. Your salary is paid annually, and you will receive $55,000 at the end of the current year.
Calculating EAR a check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 8 percent interest per week.a. What APR must the store
Present Value of a Growing Perpetuity 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?
Rule of 72 ‘Earlier, we discussed the Rule of 72, a useful approximation for many interest rates and periods for the time it takes a lump sum to double in value. For a 10 percent interest rate,
Rule of 69.3 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
Treasury Bonds is it true that a U.S. Treasury security is risk-free?
Interest Rate Risk which has greater interest rate risk, a 30-year Treasury bond or a 30-year BB corporate bond?
Treasury pricing with regard to bid and ask prices on a Treasury bond, is it possible for the bid price to be higher? Why or why not?
Yield to Maturity treasury bid and ask quotes are sometimes given in terms of yields, so there would be a bid yield and an ask yield. Which do you think would be larger? Explain.
Call Provisions a company is contemplating a long-term bond issue. It is debating whether to include a call provision. What are the benefits to the company from including a call provision? What are
Coupon Rate how does a bond issuer decide on the appropriate coupon rate to set on its bonds? Explain the difference between the coupon rate and the required return on a bond.
Real and Nominal Returns Are there any circumstances under which an investor might be more concerned about the nominal return on an investment than the real return?
Band Ratings Companies pay rating agencies such as Moody’s and S&P to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated; doing so
Bond Ratings U.S. Treasury bonds are not rated. Why? Often, junk bonds are not rated. Why?
Term Structure what is the difference between the term structure of interest rates and the yield curve?
Crossover Bonds Looking back at the crossover bonds we discussed in the chapter, why do you think split ratings such as these occur?
Municipal Bonds 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
Bond Market what are the implications for bond investors of the lack of transparency in the bond market?
Rating Agencies A controversy erupted regarding bond-rating agencies when some agencies began to provide unsolicited bond ratings. Why do you think this is controversial?
Bonds as Equity 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
Interpreting Bond Yields 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
Interpreting Bond Yields 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?
Bond Prices Carpenter, Inc., has 8 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 9 percent, what is the current
Bond Yields Linebacker Co. has 7 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $1,080, what is its YTM?
Coupon Rates Hawk Enterprises has bonds on the market making annual payments, with 16 years to maturity, and selling for $870. At this price, the bonds yield 7.5 percent. What must theV coupon rate
Bond Prices Cutler Co. issued 11-year bonds a year ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If the YTM on these bonds is 8.6 percent, what is the current bond price?
Bond Yields Ngata Corp. issued 12-year bonds 2 years ago at a coupon rate of 9.2 percent. The bonds make semiannual payments. If these bonds currently sell for 104 percent of par value, what is the
Coupon Rates Wimbley Corporation has bonds on the market with 14.5 years to maturity, a YTM of 6.8 percent, and a current price of $1,136.50. The bonds make semiannual payments. What must the coupon
Calculating Real Rates of Return If Treasury bills are currently paying 8 percent and the inflation rate is 45 percent, what is the approximate real rate of interest the exact real rate?
Inflation and Nominal Returns Suppose the real rate is 4 percent and the inflation rate is 5.8 percent what rate would you expect to see on a Treasury bill?
Nominal and Real Returns an investment offers a 15 percent total return over the coming year Bill Bernanke thinks the total real return on this investment will be only 7 percent. What does Bill
Nominal versus Real Returns Say you own an asset that had a total return last year of 14.2 percent. If the inflation rate last year was 5.3 percent, what was your real return?
Bond Price Movements Bond X is a premium bond making annual payments. The bond pays a 9 percent coupon, has a YTM of 7 percent, and has 13 years to maturity. Bond Y is a discount bond making annual
Interest Rate Risk Both Bond Sam and Bond Dave have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has 2 years to maturity, whereas Bond Dave has. 15 years to
Interest Rate Risk Bond J is a 4 percent coupon bond. Bond K is a 12 percent coupon bond. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 7 percent. If interest
Bond Yields Caribbean Reef Software has 8.4 percent coupon bonds on the market with nine years to maturity. The bonds make semiannual payments and currently sell for 95.5 percent of par. What is the
Bond Yields Giles Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 7 percent coupon bonds on the market that sell for $1,062, make semiannual
Accrued Interest you purchase a bond with an invoice price of $1,090. The bond has a coupon rate of 8.6 percent, and there are five months to the next semiannual coupon date. What is the clean price
Accrued Interest You purchase a bond with a coupon rate of 7.5 percent and a clean price of $865. If the next semiannual coupon payment is due in three months, what is the invoice price?
Finding the Bond Maturity Jude Corp. has 9 percent coupon bonds making annual payments with a YTM of 6.3 percent. The current yield on these bonds is 7.1 percent. How many years do these bonds have
Using Bond Quotes 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
Bond Prices versus Yieldsa. 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
Interest on Zeroes Snowflake Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds
Zero Coupon Bonds suppose your company needs to raise $20 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 7 percent, and you’re
Finding the Maturity you’ve just found a 10 percent coupon bond on the market that sells for par value. What is the maturity on this bond?
Real Cash Flows you want to have $1 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 4.5 percent. What
Components of Bond Returns bond P is a premium bond with a 9 percent coupon. Bond D is a 5 percent coupon bond currently selling at a discount. Both bonds make annual payments; have a YTM of 7
Holding Period Yield the YTM on a bond is the interest rate you earn on your investment if interest rates don’t change, if you actually sell the bond before it matures, your realized return is
Valuing Bonds The Marigold 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,
Valuing the Call Feature Consider the prices in the following three Treasury issues as of May 15, 2007:

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