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Questions and Answers of Finance

For each of the cases in the following table, find the future value at the end of the deposit period, assuming that interest is compounded continuously at the given nominal annualrate.
You plan to invest $2,000 in an individual retirement arrangement (IRA) today at a nominal annual rate of 8%, which is expected to apply to all future years.a. How much will you have in the account
René Levin wishes to determine the future value at the end of 2 years of a $15,000 deposit made today into an account paying a nominal annual rate of 12%.a. Find the future value of René’s
Janet Boyle intends to deposit $300 per year in a credit union for the next 10 years, and the credit union pays an annual interest rate of 8%.a. Determine the future value that Janet will have at
For each of the cases shown in the following table, determine the amount of the equal, annual, end-of-year deposits necessary to accumulate the given sum at the end of the specified period, assuming
To supplement your planned retirement in exactly 42 years, you estimate that you need to accumulate $220,000 by the end of 42 years from today. You plan to make equal, annual, end-of-year deposits
A retirement home at Deer Trail Estates now costs $185,000. Inflation is expected to cause this price to increase at 6% per year over the 20 years before C. L. Donovan retires. How large an equal,
You have decided to endow your favorite university with a scholarship. It is expected to cost $6,000 per year to attend the university into perpetuity. You expect to give the university the endowment
While vacationing in Florida, John Kelley saw the vacation home of his dreams. It was listed with a sale price of $200,000. The only catch is that John is 40 years old and plans to continue working
Determine the equal, annual, end-of-year payment required each year over the life of the loans shown in the following table to repay them fully during the stated term of theloan.
Joan Messineo borrowed $15,000 at a 14% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, end-of-year payments.a. Calculate the annual, end-of-year
Liz Rogers just closed a $10,000 business loan that is to be repaid in three equal, annual, end-of-year payments. The interest rate on the loan is 13%. As part of her firm’s detailed financial
Tim Smith is shopping for a used car. He has found one priced at $4,500. The dealer has told Tim that if he can come up with a down payment of $500, the dealer will finance the balance of the price
Growth rates You are given the series of cash flows shown in the following table.a. Calculate the compound annual growth rate between the first and last payment in each stream.b. If year-1 values
Rishi Singh has $1,500 to invest. His investment counselor suggests an investment that pays no stated interest but will return $2,000 at the end of 3 years.a. What annual rate of return will Rishi
Clare Jaccard has $5,000 to invest. Because she is only 25 years old, she is not concerned about the length of the investment€™s life. What she is sensitive to is the rate of return she
What is the rate of return on an investment of $10,606 if the company will receive $2,000 each year for the next 10 years?
Raina Herzig wishes to choose the best of four immediate-retirement annuities available to her. In each case, in exchange for paying a single premium today, she will receive equal, annual,
Anna Waldheim was seriously injured in an industrial accident. She sued the responsible parties and was awarded a judgment of $2,000,000. Today, she and her attorney are attending a settlement
John Flemming has been shopping for a loan to finance the purchase of a used car. He has found three possibilities that seem attractive and wishes to select the one with the lowest interest rate. The
For each of the following cases, determine the number of years it will take for the initial deposit to grow to equal the future amount at the given interestrate.
Manuel Rios wishes to determine how long it will take an initial deposit of $10,000 to double.a. If Manuel earns 10% annual interest on the deposit, how long will it take for him to double his
In each of the following cases, determine the number of years that the given annual end-of-year cash flow must continue to provide the given rate of return on the given initialamount.
Mia Salto wishes to determine how long it will take to repay a loan with initial proceeds of $14,000 where annual end-of-year installment payments of $2,450 are required.a. If Mia can borrow at a 12%
What is the real rate of interest? Differentiate it from the nominal rate of interest for the risk-free asset, a 3-month U.S. Treasury bill.
What is the term structure of interest rates, and how is it related to the yield curve?
For a given class of similar-risk securities, what does each of the following yield curves reflect about interest rates: (a) Downward-sloping; (b) Upward-sloping; and (c) Flat? What is the
Briefly describe the following theories of the general shape of the yield curve: (a) Expectations theory; (b) Liquidity preference theory; and (c) Market segmentation theory.
List and briefly describe the potential issuer- and issue-related risk components that are embodied in the risk premium. Which are the purely debt-specific risks?
What are typical maturities, denominations, and interest payments of a corporate bond? What mechanisms protect bondholders?
Differentiate between standard debt provisions and restrictive covenants included in a bond indenture. What are the consequences if a bond issuer violates any of these covenants?
How is the cost of bond financing typically related to the cost of short-term borrowing? In addition to a bond’s maturity, what other major factors affect its cost to the issuer?
What is a conversion feature? A call feature? What are stock purchase warrants?
What is the current yield for a bond? How are bond prices quoted? How are bonds rated, and why?
Compare the basic characteristics of Eurobonds and foreign bonds.
Why is it important for financial managers to understand the valuation process?
What are the three key inputs to the valuation process?
Does the valuation process apply only to assets that provide an annual cash flow? Explain.
Define and specify the general equation for the value of any asset, V0.
What basic procedure is used to value a bond that pays annual interest? Semiannual interest?
What relationship between the required return and the coupon interest rate will cause a bond to sell at a discount? At a premium? At its par value?
If the required return on a bond differs from its coupon interest rate, describe the behavior of the bond value over time as the bond moves toward maturity.
As a risk-averse investor, would you prefer bonds with short or long periods until maturity? Why?
What is a bond’s yield to maturity (YTM)? Briefly describe the use of a financial calculator and the use of an Excel spreadsheet for finding YTM.
The risk-free rate on T-bills recently was 1.23%. If the real rate of interest is estimated to be 0.80%, what was the expected level of inflation?
The yields for Treasuries with differing maturities on a recent day were as shown in the table.a. Use the information to plot a yield curve for this date.b. If the expectations hypothesis is true,
The yields for Treasuries with differing maturities, including an estimate of the real rate of interest, on a recent day were as shown in the following table:Use the information in the preceding
Recently, the annual inflation rate measured by the Consumer Price Index (CPI) was forecast to be 3.3%. How could a T-bill have had a negative real rate of return over the same period? How could it
Calculate the risk premium for each of the following rating classes of long-term securities, assuming that the yield to maturity (YTM) for comparable Treasuries is 4.51%.Rating class
You have two assets and must calculate their values today based on their different payment streams and appropriate required returns. Asset 1 has a required return of 15% and will produce a stream of
A bond with 5 years to maturity and a coupon rate of 6% has a par, or face, value of $20,000. Interest is paid annually. If you required a return of 8% on this bond, what is the value of this bond to
Carl Foster, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today’s marketplace. He has looked up the rate paid on 3-month
To estimate the real rate of interest, the economics division of Mountain Banks'a major bank holding company'has gathered the data summarized in the following table. Because there is a high
Zane Perelli currently has $100 that he can spend today on polo shirts costing $25 each. Alternatively, he could invest the $100 in a risk-free U.S. Treasury security that is expected to earn a 9%
A firm wishing to evaluate interest rate behavior has gathered yield data on five U.S. Treasury securities, each having a different maturity and all measured at the same point in time. The summarized
A recent study of inflationary expectations has revealed that the consensus among economic forecasters yields the following average annual rates of inflation expected over the periods noted. (Note:
A firm wishing to evaluate interest rate behavior has gathered data on the nominal rate of interest and on inflationary expectations for five U.S. Treasury securities, each having a different
The following yield data for a number of highest-quality corporate bonds existed at each of the three points in time noted.a. On the same set of axes, draw the yield curve at each of the three given
The real rate of interest is currently 3%; the inflation expectation and risk premiums for a number of securities follow.a. Find the risk-free rate of interest, RF, that is applicable to each
Eleanor Burns is attempting to find the nominal rate of interest for each of two securities'A and B'issued by different firms at the same point in time. She has gathered the following data:a. If the
Charter Corp. has issued 2,500 debentures with a total principal value of $2,500,000. The bonds have a coupon interest rate of 7%.a. What dollar amount of interest per bond can an investor expect to
Assume that the Financial Management Corporation’s $1,000-par-value bond had a 5.700% coupon, matured on May 15, 2020, had a current price quote of 97.708, and had a yield to maturity (YTM) of
Imagine that you are trying to evaluate the economics of purchasing an automobile. You expect the car to provide annual after-tax cash benefits of $1,200 at the end of each year and assume that you
Using the information provided in the following table, find the value of each asset.
Laura Drake wishes to estimate the value of an asset expected to provide cash inflows of $3,000 per year at the end of years 1 through 4 and $15,000 at the end of year 5. Her research indicates that
Complex Systems has an outstanding issue of $1,000-parvalue bonds with a 12% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date.a. If bonds of
Calculate the value of each of the bonds shown in the following table, all of which pay interest annually.
Midland Utilities has outstanding a bond issue that will mature to its $1,000 par value in 12 years. The bond has a coupon interest rate of 11% and pays interest annually.a. Find the value of the
Pecos Manufacturing has just issued a 15-year, 12% coupon interest rate, $1,000-par bond that pays interest annually. The required return is currently 14%, and the company is certain it will remain
Lynn Parsons is considering investing in either of two outstanding bonds. The bonds both have $1,000 par values and 11% coupon interest rates and pay annual interest. Bond A has exactly 5 years to
The relationship between a bond€™s yield to maturity and coupon interest rate can be used to predict its pricing level. For each of the bonds listed, state whether the price of the bond
The Salem Company bond currently sells for $955, has a 12% coupon interest rate and a $1,000 par value, pays interest annually, and has 15 years to maturity.a. Calculate the yield to maturity (YTM)
Yield to maturity Each of the bonds shown in the following table pays interest annually.a. Calculate the yield to maturity (YTM) for each bond.b. What relationship exists between the coupon interest
Mark Goldsmith’s broker has shown him two bonds. Each has a maturity of 5 years, a par value of $1,000, and a yield to maturity of 12%. Bond A has a coupon interest rate of 6% paid annually. Bond
Find the value of a bond maturing in 6 years, with a $1,000 par value and a coupon interest rate of 10% (5% paid semiannually) if the required return on similar-risk bonds is 14% annual interest (7%
Calculate the value of each of the bonds shown in the following table, all of which pay interestsemiannually.
Calculate the value of a $5,000-par-value bond paying quarterly interest at an annual coupon interest rate of 10% and having 10 years until maturity if the required return on similar-risk bonds is
What are the key differences between debt and equity?
What risks do common stockholders take that other suppliers of capital do not?
How does a rights offering protect a firm’s stockholders against the dilution of ownership?
Explain the relationships among authorized shares, outstanding shares, treasury stock, and issued shares.
What are the advantages to both U.S.-based and foreign corporations of issuing stock outside their home markets? What are American depositary receipts (ADRs)? What are American depositary shares
What claims do preferred stockholders have with respect to distribution of earnings (dividends) and assets?
Explain the cumulative feature of preferred stock. What is the purpose of a call feature in a preferred stock issue?
What is the difference between a venture capitalist (VC) and an angel capitalist (angel)?
What are the four ways that VCs are most commonly organized? How are their deals structured and priced?
What general procedures must a private firm follow to go public via an initial public offering (IPO)?
What role does an investment banker play in a public offering? Describe an underwriting syndicate.
Describe the events that occur in an efficient market in response to new information that causes the expected return to exceed the required return. What happens to the market value?
What does the efficient-market hypothesis (EMH) say about (a) Securities prices, (b) Their reaction to new information, and (c) Investor opportunities to profit? What is the behavioral finance
Describe, compare, and contrast the following common stock dividend valuation models:(a) Zero-growth,(b) Constant-growth, and(c) Variable-growth.
Describe the free cash flow valuation model and explain how it differs from the dividend valuation models. What is the appeal of this model?
Explain each of the three other approaches to common stock valuation: (a) Book value, (b) Liquidation value, and (c) Price/earnings (P/E) multiples. Which of these is considered the best?
Explain the linkages among financial decisions, return, risk, and stock value.
Assuming that all other variables remain unchanged, what impact would each of the following have on stock price?(a) The firm’s risk premium increases.(b) The firm’s required return decreases.(c)
A balance sheet balances assets with their sources of debt and equity financing. If a corporation has assets equal to $5.2 million and a debt ratio of 75.0%, how much debt does the corporation have
Angina, Inc., has 5 million shares outstanding. The firm is considering issuing an additional 1 million shares. After selling these shares at their $20 per share offering price and netting 95% of the
Figurate Industries has 750,000 shares of cumulative preferred stock outstanding. It has passed the last three quarterly dividends of $2.50 per share and now (at the end of the current quarter)
Today the common stock of Gresham Technology closed at $24.60 per share, down $0.35 from yesterday. If the company has 4.6 million shares outstanding and annual earnings of $11.2 million, what is its
Stacker Weight Loss currently pays an annual year-end dividend of $1.20 per share. It plans to increase this dividend by 5% next year and maintain it at the new level for the foreseeable future. If

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