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fundamentals of corporate finance
Questions and Answers of
Fundamentals Of Corporate Finance
Suppose you are still committed to owning a $120,000 Ferrari (see Question 9). If you believe your mutual fund can achieve an 11 percent annual rate of return and you want to buy the car in 10 years
Mercer Shaved Ice Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value
You have just made your first $2,000 contribution to your individual retirement account. Assuming you earn a 9 percent rate of return and make no additional contributions, what will your account be
You are scheduled to receive $30,000 in two years. When you receive it, you will invest it for six more years at 5.5 percent per year. How much will you have in eight years?
Rasputin, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash flows in Year 4? What is the future value
You expect to receive $10,000 at graduation in two years. You plan on investing it at 12 percent until you have $120,000. How long will you wait from now?
Investment X offers to pay you $3,000 per year for eight years, whereas Investment Y offers to pay you $5,000 per year for four years. Which of these cash flow streams has the higher present value if
An investment offers $4,100 per year for 15 years, with the first payment occurring one year from now. If the required return is 10 percent, what is the value of the investment? What would the value
If you put up $20,000 today in exchange for a 8.25 percent, 12-year annuity, what will the annual cash flow be?
Your company will generate $75,000 in annual revenue each year for the next eight years from a new information database. The computer system needed to set up the database costs $380,000. If you can
If you deposit $1,500 at the end of each of the next 20 years into an account paying 9.5 percent interest, how much money will you have in the account in 20 years? How much will you have if you make
You want to have $50,000 in your savings account five years from now, and you’re prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.2 percent
Biktimirov Bank offers you a $35,000, seven-year term loan at 10 percent annual interest. What will your annual loan payment be?
The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $5,000 per year forever. If the required return on this investment is 9 percent, how much
In the previous problem, suppose the Perpetual Life Insurance Co. told you the policy costs $58,000. At what interest rate would this be a fair deal?Data from problem 10The Perpetual Life Insurance
First National Bank charges 9.1 percent compounded monthly on its business loans. First United Bank charges 9.2 percent compounded semiannually. As a potential borrower, which bank would you go to
Cannone Credit Corp. wants to earn an effective annual return on its consumer loans of 14 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by
What is the future value of $600 in 20 years assuming an interest rate of 11 percent compounded semiannually?
Corn Credit Bank is offering 6.3 percent compounded daily on its savings accounts. If you deposit $5,000 today, how much will you have in the account in 5 years? In 10 years? In 20 years?
An investment will pay you $19,000 in six years. If the appropriate discount rate is 12 percent compounded daily, what is the present value?
Big Al’s Pawn Shop charges an interest rate of 25 percent per month on loans to its customers. Like all lenders, Big Al must report an APR to consumers. What rate should the shop report? What is
You want to buy a new sports coupe for $48,250, and the finance office at the dealership has quoted you a 9.8 percent APR loan for 60 months to buy the car. What will your monthly payments be? What
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $400 per month. You will charge 1.5 percent per month interest on the overdue
Maybepay Life Insurance Co. is selling a perpetuity contract that pays $1,050 monthly. The contract currently sells for $75,000. What is the monthly return on this investment vehicle? What is the
You are to make monthly deposits of $100 into a retirement account that pays 11 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your
If the appropriate discount rate for the following cash flows is 14 percent compounded quarterly, what is the present value of the cash flows? Year 1234 Cash Flow $ 800 700 0 1,200
In the previous problem, suppose you make $1,200 annual deposits into the same retirement account. How large will your account balance be in 20 years?Data from problem 24You are to make monthly
Beginning three months from now, you want to be able to withdraw $1,000 each quarter from your bank account to cover college expenses over the next four years. If the account pays 0.75 percent
If the appropriate discount rate for the following cash flows is 11.5 percent per year, what is the present value of the cash flows? Year 1234 Cash Flow $1,500 0 7,200 900
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 2.90 percent per year, compounded monthly for the first six months, increasing thereafter to
You are saving to buy a $150,000 house. There are two competing banks in your area, both offering certificates of deposit yielding 5 percent. How long will it take your initial $95,000 investment to
You have an investment that will pay you 1.72 percent per month. How much will you have per dollar invested in one year? In two years?
You have $1,100 today. You need $2,000. If you earn 1 percent per month, how many months will you wait?
You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe. They’ve offered you two different salary arrangements. You can have $75,000 per year for the next two years, or you can
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 $1,200,000 purchase price. The monthly payment on this loan will
Consider a firm with a contract to sell an asset for $95,000 three years from now. The asset costs $57,000 to produce today. Given a relevant discount rate on this asset of 14 percent per year, will
You’ve just won the U.S. Lottery. Lottery officials offer you the choice of two alternative payouts: either $2 million today, or $4 million 10 years from now. Which payout will you choose if the
Congratulations! You’ve just won the $15 million first prize in the Subscriptions R Us Sweepstakes. Unfortunately, the sweepstakes will actually give you the $15 million in $375,000 annual
What is the present value of $1,000 per year, at a discount rate of 12 percent, if the first payment is received 8 years from now and the last payment is received 20 years from now?
A 10-year annuity pays $1,500 per month, and payments are made at the end of each month. If the interest rate is 15 percent compounded monthly for the first four years, and 12 percent compounded
You have your choice of two investment accounts. Investment A is a 10-year annuity that features end-of-month $1,000 payments and has an interest rate of 11.5 percent compounded monthly. Investment B
Given an interest rate of 6.5 percent per year, what is the value at date t = 7 of a perpetual stream of $500 payments that begin at date t = 13?
If today is Year 0, what is the future value of the following cash flows five years from now? What is the future value 10 years from now? Assume a discount rate of 9 percent per year. Year 235 Cash
A local finance company quotes a 13 percent interest rate on one-year loans. So, if you borrow $20,000, the interest for the year will be $2,600. Because you must repay a total of $22,600 in one
A 5-year annuity of ten $8,000 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 14 percent compounded monthly, what is the
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 payments occur at the
You want to buy a new sports car from Muscle Motors for $48,000. The contract is in the form of a 48-month annuity due at a 9.25 percent APR. What will your monthly payment be?
Prepare an amortization schedule for a five-year loan of $20,000. The interest rate is 12 percent per year, and the loan calls for equal annual payments. How much interest is paid in the third year?
Rework Problem 58 assuming that the loan agreement calls for a principal reduction of $4,000 every year instead of equal annual payments.Data from Problem 58Prepare an amortization schedule for a
You are considering a one-year loan of $13,000. The interest rate is quoted on a discount basis (see the previous problem) as 16 percent. What is the effective annual rate?Data from Problem 60This
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. The interest rate is 11
You are looking at a one-year loan of $10,000. The interest rate is quoted as 12 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes
The interest rate on a one-year loan is quoted as 14 percent plus two points (see the previous problem). What is the EAR? Is your answer affected by the loan amount?Data from problem 62You are
There are two banks in the area that offer 30-year, $150,000 mortgages at 8.5 percent and charge a $1,000 loan application fee. However, the application fee charged by Insecurity Bank and Trust is
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 details of the policy are as
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 anticipated retirement at age 65. She
Your Christmas ski vacation was great, but it unfortunately ran a bit over budget. All is not lost, because you just received an offer in the mail to transfer your $10,000 balance from your current
You have just arranged for a $300,000 mortgage to finance the purchase of a large tract of land. The mortgage has a 9 percent APR, and it calls for monthly payments over the next 15 years. However,
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, your child’s 12th birthday.
Your financial planner offers you two different investment plans. Plan X is an $8,000 annual perpetuity. Plan Y is a 10-year, $20,000 annual annuity. Both plans will make their first payment one year
What is the value of an investment that pays $5,200 every other year forever, if the first payment occurs one year from today and the discount rate is 14 percent compounded daily? What is the value
A 10-year annual annuity due with the first payment occurring at date t = 7 has a current value of $50,000. If the discount rate is 13 percent per year, what is the annuity payment amount?
A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 11 percent interest per week.a. What APR must the store report to its
Look up Coca-Cola (KO), Gateway (GTW), Callaway Golf (ELY), and Navistar International (NAV). For each company, follow the “Financial Highlights” link and find the bond rating. Which companies
You can find current bond prices at www.bondsonline.com. You want to find the bond prices and yields for bonds issued by Georgia Pacific. To find these bonds at the site, click the “Bond Search”
You can find an online bond calculator at www.smartmoney.com. Follow the “Economy & Bonds” link and then click on the “Bond Calculator” link. What is the YTM for a bond that matures in August
WMS, Inc., has 7 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 price?
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.
Finley Co. has 10 percent coupon bonds on the market with nine years left to maturity. The bonds make annual payments. If the bond currently sells for $1,075.25, what is its YTM?
Mustaine Enterprises has bonds on the market making annual payments, with 13 years to maturity, and selling for $850. At this price, the bonds yield 7.4 percent. What must the coupon rate be on
Mullineaux Co. issued 11-year bonds one year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.5 percent, what is the current bond price?
Clapper Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM?
Barely Heroes Corporation has bonds on the market with 14.5 years to maturity, a YTM of 9 percent, and a current price of $850. The bonds make semiannual payments. What must the coupon rate be on
If Treasury bills are currently paying 8 percent and the inflation rate is 6 percent, what is the approximate real rate of interest? The exact real rate?
Suppose the real rate is 3.5 percent and the inflation rate is 3 percent. What rate would you expect to see on a Treasury bill?
Peter Piper wants to sell you an investment contract that pays equal $10,000 amounts at the end of each of the next 20 years. If you require an effective annual return of 9.5 percent on this
You’re trying to choose between two different investments, both of which have up-front costs of $30,000. Investment G returns $55,000 in six years. Investment H returns $90,000 in 11 years. Which
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 $2,000 per year at the current interest rate of 10 percent per
You’re prepared to make monthly payments of $95, beginning at the end of this month, into an account that pays 10 percent interest compounded monthly. How many payments will you have made when your
You want to borrow $40,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $825, but no more. Assuming monthly compounding, what is the highest rate you can
You need a 30-year, fixed-rate mortgage to buy a new home for $180,000. Your mortgage bank will lend you the money at a 7.5 percent APR for this 360-month loan. However, you can only afford monthly
In the 1994 NBA draft, no one was surprised when the Milwaukee Bucks took Glenn “Big Dog” Robinson with the first pick, but Robinson wanted big bucks from the Bucks: a 13-year deal worth a total
In our previous question, we looked at the numbers for Big Dog’s basketball contract. Now let’s take a look at the terms for Shaquille “Shaq” O’Neal, the number one pick in 1992 who was
An investment offers a 16 percent total return over the coming year. Alan Wingspan thinks the total real return on this investment will be only 10 percent. What does Alan believe the inflation rate
Say you own an asset that had a total return last year of 13 percent. If the inflation rate last year was 4 percent, what was your real return?
Locate the Treasury issue in Figure 7.4 maturing in November 2016. 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?FIGURE 7.4
Both Bond Bob and Bond Tom have 8 percent coupons, make semiannual payments, and are priced at par value. Bond Bob has 2 years to maturity, whereas Bond Tom has 15 years to maturity. If interest
Bond J is a 5 percent coupon bond. Bond K is an 11 percent coupon bond. Both bonds have 8 years to maturity, make semiannual payments, and have a YTM of 8 percent. If interest rates suddenly rise by
Lifehouse Software has 10 percent coupon bonds on the market with 7 years to maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is the current yield on
BDJ Co. wants to issue new 10-year bonds for some much needed expansion projects. The company currently has 8 percent coupon bonds on the market that sell for $1,095, make semiannual payments, and
Massey Co. has 12 percent coupon bonds making annual payments with a YTM of 9 percent. The current yield on these bonds is 9.80 percent. How many years do these bonds have left until they mature?
HSD Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 20-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent.a. What
Suppose your company needs to raise $10 million and you want to issue 30-year bonds for this purpose. Assume the required return on your bond issue will be 9 percent, and you’re evaluating two
Bond P is a premium bond with a 10 percent coupon. Bond D is a 6 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 8 percent, and have eight years to
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 known as the holding
Consider the prices on the following three Treasury issues as of February 24, 2002:Notice that the bond in the middle is callable. What is the implied value of the call feature? 6½ 8% 12 May 08n May
The Moulon Rouge 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
Heard, Inc., just paid a dividend of $1.75 per share on its stock. The dividends are expected to grow at a constant rate of 6 percent per year, indefinitely. If investors require a 12 percent return
A drawback of the dividend growth model is the need to estimate the growth rate of dividends. One way to estimate this growth rate is to use the sustainable growth rate. Look back at Chapter 4 and
According to the 2001 Value Line Investment Survey, the dividend growth for Phillips Petroleum (P) is 2.5 percent. Find the current price quote and dividend information at finance.yahoo.com. If the
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