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Fundamentals of corporate finance 2nd Edition Robert Parrino, David S. Kidwell, Thomas W. Bates - Solutions

Compound growth rates are exponential over time. Explain.
What is the Rule of 72?
You are planning to take a spring break trip to Cancun your senior year. The trip is exactly two years away, but you want to be prepared and have enough money when the time comes. Explain how you would determine the amount of money you will have to save in order to pay for the trip.
Chuck Tomkovick is planning to invest $25,000 today in a mutual fund that will provide a return of 8 percent each year. What will be the value of the investment in 10 years?
Ted Rogers is investing $7,500 in a bank CD that pays a 6 percent annual interest. How much will the CD be worth at the end of five years?
Your aunt is planning to invest in a bank CD that will pay 7.5 percent interest semiannually. If she has $5,000 to invest, how much will she have at the end of four years?
Kate Eden received a graduation present of $2,000 that she is planning on investing in a mutual fund that earns 8.5 percent each year. How much money can she collect in three years?
Your bank pays 5 percent interest semiannually on your savings account. You don’t expect the current balance of $2,700 to change over the next four years. How much money can you expect to have at the end of this period?
Your birthday is coming up and instead of other presents, your parents promised to give you $1,000 in cash. Since you have a part-time job and, thus, don’t need the cash immediately, you decide to invest the money in a bank CD that pays 5.2 percent quarterly for the next two years. How much money
Find the future value of an investment of $100,000 made today for five years and paying 8.75 percent for the following compounding periods:a. Quarterly.b. Monthly.c. Daily.d. Continuous.
Joe Mauer, a catcher for the Minnesota Twins, is expected to hit 15 home runs in 2012. If his home-run-hitting ability is expected to grow by 12 percent every year for the following five years, how many home runs is he expected to hit in 2017?
Roy Gross is considering an investment that pays 7.6 percent. How much will he have to invest today so that the investment will be worth $25,000 in six years?
Maria Addaihas been offered a future payment of $750 two years from now. If she can earn 6.5 percent compounded annually on her investment, what should she pay for this investment today?
Your brother has asked you for a loan and has promised to pay back $7,750 at the end of three years. If you normally invest to earn 6 percent per year, how much will you be willing to lend to your brother?
Tracy Chapman is saving to buy a house in five years. She plans to put 20 percent down at that time, and she believes that she will need $35,000 for the down payment. If Tracy can invest in a fund that pays 9.25 percent annually, how much will she need to invest today?
You want to buy some bonds that will have a value of $1,000 at the end of seven years. The bonds pay 4.5 percent interest annually. How much should you pay for them today?
Elizabeth Sweeney wants to accumulate $12,000 by the end of 12 years. If the annual interest rate is 7 percent, how much will she have to invest today to achieve her goal?
You are in desperate need of cash and turn to your uncle, who has offered to lend you some money. You decide to borrow $1,300 and agree to pay back $1,500 in two years. Alternatively, you could borrow from your bank that is charging 6.5 percent interest annually. Should you go with your uncle or
You invest $150 in a mutual fund today that pays 9 percent interest annually. How long will it take to double your money?
Your finance textbook sold 53,250 copies in its first year. The publishing company expects the sales to grow at a rate of 20 percent each year for the next three years and by 10 percent in the fourth year. Calculate the total number of copies that the publisher expects to sell in years 3 and 4.
CelebNav, Inc., had sales last year of $700,000, and the analysts are predicting a good year for the start-up, with sales growing 20 percent a year for the next three years. Aft er that, the sales should grow 11 percent per year for two years, at which time the owners are planning to sell the
You decide to take advantage of the current online dating craze and start your own Web site. You know that you have 450 people who will sign up immediately and, through a careful marketing research and analysis, determine that membership can grow by 27 percent in the first two years, 22 percent in
Find the future value of an investment of $2,500 made today for the following rates and periods:a. 6.25 percent compounded semiannually for 12 years.b. 7.63 percent compounded quarterly for 6 years.c. 8.9 percent compounded monthly for 10 years.d. 10 percent compounded daily for 3 years.e. 8
Find the present value of $3,500 under each of the following rates and periods:a. 8.9 percent compounded monthly for five years.b. 6.6 percent compounded quarterly for eight years.c. 4.3 percent compounded daily for four years.d. 5.7 percent compounded continuously for three years.
Samantha plans to invest some money so that she has $5,500 at the end of three years. Which investment should she make given the following choices:a. 4.2 percent compounded daily.b. 4.9 percent compounded monthly.c. 5.2 percent compounded quarterly.d. 5.4 percent compounded annually
Zephyr Sales Company has sales of $1.125 million. If the company expects its sales to grow at 6.5 percent annually, how long will it be before the company can double its sales? Use a financial calculator to solve this problem.
You are able to deposit $850 in a bank CD today, and you will withdraw the money only once the balance is $1,000. If the bank pays 5 percent interest, how long will it take for the balance to reach $1,000?
Neon Lights Company is a private company with sales of $1.3 million a year. Management wants to go public but has to wait until the sales reach $2 million. If sales are expected to grow 12 percent annually, when is the earliest that Neon Lights can go public?
You have just inherited $550,000. You plan to save this money and continue to live off the money that you are earning in your current job. If the $550,000 is everything that you have other than an old car and some beat-up furniture, and you can invest the money in a bond that pays 4.6 percent
Xenix Corp had sales of $353,866 in 2011. If management expects its sales to be $476,450 in three years, what is the rate at which the company’s sales are expected to grow?
Infosys Technologies, Inc., an Indian technology company, reported net income of $419 million this year. Analysts expect the company’s earnings to be $1.468 billion in five years. What is the expected growth rate in the company’s earnings?
Caroline Weslin needs to decide whether to accept a bonus of $1,820 today or wait two years and receive $2,100 then. She can invest at 6 percent. What should she do?
Present value: Congress and the president have decided to increase the Federal tax rate in an effort to reduce the budget deficit. Suppose that Caroline Weslin will pay 35 percent of her bonus to the Federal government for taxes if she accepts the bonus today and 40 percent if she receives her
You have $2,500 you want to invest in your classmate’s start-up business. You believe the business idea to be great and hope to get $3,700 back at the end of three years. If all goes according to plan, what will be the return on your investment?
Patrick Seeley has $2,400 that he is looking to invest. His brother approached him with an investment opportunity that could double his money in four years. What interest rate would the investment have to yield in order for Patrick’s brother to deliver on his promise?
You have $12,000 in cash. You can deposit it today in a mutual fund earning 8.2 percent semiannually, or you can wait, enjoy some of it, and invest $11,000 in your brother’s business in two years. Your brother is promising you a return of at least 10 percent on your investment. Whichever
When you were born your parents set up a bank account in your name with an initial investment of $5,000. You are turning 21 in a few days and will have access to all your funds. The account was earning 7.3 percent for the first seven years, but then the rates went down to 5.5 percent for six years.
Sam Bradford, a number 1 draft pick of the St. Louis Rams, and his agent are evaluating three contract options. Each option offers a signing bonus and a series of payments over the life of the contract. Bradford uses a 10.25 percent rate of return to evaluate the contracts. Given the cash flows for
Surmec, Inc., reported earnings of $2.1 million last year. The company’s primary business is the manufacture of nuts and bolts. Since this is a mature industry, analysts are confident that sales will grow at a steady rate of 7 percent per year. The company’s net income equals 23 percent of
You will be graduating in two years and are thinking about your future. You know that you will want to buy a house five years after you graduate and that you will want to put down $60,000. As of right now, you have $8,000 in your savings account. You are also fairly certain that once you graduate,
Santiago Hernandez is planning to invest $25,000 in a money market account for two years. The account pays interest of 5.75 percent compounded on a monthly basis. How much money will Santiago Hernandez have at the end of two years?
Michael Carter is expecting an inheritance of $1.25 million in four years. If he had the money today, he could earn interest at an annual rate of 7.35 percent. What is the present value of this inheritance?
What is the future value of an investment of $3,000 aft er three years with compounding at the following rates and frequencies:a. 8.75 percent compounded monthly.b. 8.625 percent compounded daily.c. 8.5 percent compounded continuously.
Twenty-five years ago, Amanda Cortez invested $10,000 in an account paying an annual interest rate of 5.75 percent. What is the value of the investment today? What is the interest on interest earned on this investment?
You just bought a corporate bond for $863.75 today. In five years the bond will mature and you will receive $1,000. What is the rate of return on this bond?
Explain how to calculate the future value of a stream of cash flows.
Explain how to calculate the present value of a stream of cash flows.
Why is it important to adjust all cash flows to a common date?
How do an ordinary annuity, an annuity due, and a perpetuity differ?
Give two examples of perpetuities.
What is the annuity transformation method?
What is the difference between a growing annuity and a growing perpetuity?
What is the APR, and why are lending institutions required to disclose this rate?
What is the correct way to annualize an interest rate in financial decision making?
Distinguish between quoted interest rate, interest rate per period, and effective annual interest rate.
Identify the steps involved in computing the future value when you have multiple cash flows.
What is the key economic principle involved in calculating the present value and future value of multiple cash flows?
What is the difference between a perpetuity and an annuity?
Define annuity due. Would an investment be worth more if it were an ordinary annuity or an annuity due? Explain.
Raymond Bartz is trying to choose between two equally risky annuities, each paying $5,000 per year for five years. One is an ordinary annuity, the other is an annuity due. Which of the following statements is most correct?a. The present value of the ordinary annuity must exceed the present value of
Which of the following investments will have the highest future value at the end of three years? Assume that the effective annual rate for all investments is the same.a. You earn $3,000 at the end of three years (a total of one payment).b. You earn $1,000 at the end of every year for the next
Explain whether or not each of the following statements is correct.a. A 15-year mortgage will have larger monthly payments than a 30-year mortgage of the same amount and same interest rate.b. If an investment pays 10 percent interest compounded annually, its effective rate will also be 10 percent.
When will the annual percentage rate (APR) be the same as the effective annual rate (EAR)?
Why is the EAR superior to the APR in measuring the true economic cost or return?
Suppose three investments have equal lives and multiple cash flows. A high discount rate tends to favor:a. The investment with large cash flows early.b. The investment with large cash flows late.c. The investment with even cash flows.d. None of the investments since they have equal lives.
Konerko, Inc., expects to earn cash flows of $13,227, $15,611, $18,970, and $19,114 over the next four years. If the company uses an 8 percent discount rate, what is the future value of these cash flows at the end of year 4?
Ben Woolmer has an investment that will pay him the following cash flows over the next five years: $2,350, $2,725, $3,128, $3,366, and $3,695. If his investments typically earn 7.65 percent, what is the future value of the investment’s cash flows at the end of five years?
You are a freshman in college and are planning a trip to Europe when you graduate from college at the end of four years. You plan to save the following amounts annually, starting today: $625, $700, $700, and $750. If the account pays 5.75 percent annually, how much will you have at the end of four
Saul Cervantes has just purchased some equipment for his landscaping business. For this equipment he must pay the following amounts at the end of each of the next five years: $10,450, $8,500, $9,675, $12,500, and $11,635. If the appropriate discount rate is 10.875 percent, what is the cost in
Present value with multiple cash ﬂ ows: Jeremy Fenloch borrowed some money from his friend and promised to repay him the amounts of $1,225, $1,350, $1,500, $1,600, and $1,600 over the next five years. If the friend normally discounts investment cash flows at 8 percent annually, how much did
Biogenesis Inc. management expects the following cash flow stream over the next five years. They discount all cash flows using a 23 percent discount rate. What is the present value of this cash flow stream?
An investment opportunity requires a payment of $750 for 12 years, starting a year from today. If your required rate of return is 8 percent, what is the value of the investment to you today?
Dynamics Telecommunications Corp. has made an investment in another company that will guarantee it a cash flow of $22,500 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment?
Robert Hobbes plans to invest $25,000 a year at the end of each year for the next seven years in an investment that will pay him a rate of return of 11.4 percent. How much money will Robert have at the end of seven years?
Cecelia Thomas is a sales executive at a Baltimore firm. She is 25 years old and plans to invest $3,000 every year in an IRA account, beginning at the end of this year until she turns 65 years old. If the IRA investment will earn 9.75 percent annually, how much will she have in 40 years, when she
Future value of an annuity due: Refer to Problem 6.10. If Cecelia invests at the beginning of each year, how much will she have at age 65?
Kevin Winthrop is saving for an Australian vacation in three years. He estimates that he will need $5,000 to cover his airfare and all other expenses for a weeklong holiday in Australia. If he can invest his money in an S&P 500 equity index fund that is expected to earn an average return of
Computing annuity payment: The Elkridge Bar & Grill has a seven-year loan of $23,500 with Bank of America. It plans to repay the loan in seven equal installments starting today. If the rate of interest is 8.4 percent, how much will each payment be?
Your grandfather is retiring at the end of next year. He would like to ensure that his heirs receive payments of $10,000 a year forever starting when he retires. If he can earn 6.5 percent annually, how much does your grandfather need to invest to produce the desired cash flow?
Calculate the annual cash flows for each of the following investments:a. $250,000 invested at 6 percent.b. $50,000 invested at 12 percent.c. $100,000 invested at 10 percent.
Raj Krishnan bought a Honda Civic for $17,345. He put down $6,000 and financed the rest through the dealer at an APR of 4.9 percent for four years. What is the effective annual interest rate (EAR) if the loan payments are made monthly?
Cyclone Rentals borrowed $15,550 from a bank for three years. If the quoted rate (APR) is 6.75 percent, and the compounding is daily, what is the effective annual interest rate (EAR)?
You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequent payments which will grow at a rate of3.4 percent annually. If you use a 9 percent discount rate for investments like
Trigen Corp. management will invest cash flows of $331,000, $616,450, $212,775, $818,400, $1,239,644, and $1,617,848 in research and development over the next six years. If the appropriate interest rate is 6.75 percent, what is the future value of these investment cash flows six years from today?
Future value with multiple cash ﬂ ows: Stephanie Watson plans to make the following investments beginning next year. She will invest $3,125 in each of the next three years and will then make investments of $3,650, $3,725, $3,875, and $4,000 over the following four years. If the investments are
Carol Jenkins, a lottery winner, will receive the following payments over the next seven years. If she can invest her cash flows in a fund that will earn 10.5 percent annually, what is the present value of her winnings?
Gary Whitmore is a high school sophomore. He currently has $7,500 in a savings account that pays 5.65 percent annually. Gary plans to use his current savings plus what he can save over the next four years to buy a car. He estimates that the car will cost $12,000 in four years. How much money should
Modern Energy Company owns several gas stations. Management is looking to open a new station in the western suburbs of Baltimore. One possibility they are evaluating is to take over a station located at a site that has been leased from the county. The lease, originally for 99 years, currently has
Future value of annuity due: Jeremy Denham plans to save $5,000 every year for the next eight years, starting today. At the end of eight years, Jeremy will turn 30 years old and plans to use his savings toward the down payment on a house. If his investment in a mutual fund will earn him 10.3
Grant Productions has borrowed a large sum from the California Finance Company at a rate of 17.5 percent for a seven-year period. The loan calls for a payment of $1,540,862.19 each year beginning today. How much did Grant borrow?
Sharon Kabana has won a state lottery and will receive a payment of $89,729.45 every year, starting today, for the next 20 years. If she invests the proceeds at a rate of 7.25 percent, what is the present value of the cash flows that she will receive? Round to the nearest dollar.
You wrote a piece of soft ware that does a better job of allowing computers to network than any other program designed for this purpose. A large networking company wants to incorporate your soft ware into their systems and is offering to pay you $500,000 today, plus $500,000 at the end of each of
Suppose that the networking company in Problem 6.27 will not start paying you until the first of the new systems that uses your soft ware is sold in two years. What is the present value of that annuity? Assume that the appropriate interest rate is still 6 percent.
Calculate the present value of the following perpetuities:a. $1,250 discounted to the present at 7 percent.b. $7,250 discounted to the present at 6.33 percent.c. $850 discounted to the present at 20 percent.
Find the effective annual interest rate (EAR) for each of the following:a. 6 percent compounded quarterly.b. 4.99 percent compounded monthly.c. 7.25 percent compounded semiannually.d. 5.6 percent compounded daily.
Which of the following investments has the highest effective annual interest rate (EAR)?a. A bank CD that pays 8.25 percent compounded quarterly.b. A bank CD that pays 8.25 percent compounded monthly.c. A bank CD that pays 8.45 percent compounded annually.d. A bank CD that pays 8.25 percent
You are considering three alternative investments:(1) A three-year bank CD paying 7.5 percent compounded quarterly;(2) A three-year bank CD paying 7.3 percent compounded monthly; and(3) A three-year bank CD paying 7.75 percent compounded annually. Which investment has the highest effective annual
You have been offered the opportunity to invest in a project which is expected to provide you with the following cash flows: $4,000 in 1 year, $12,000 in 2 years, and $8,000 in 3 years. If the appropriate interest rates are 6 percent for the first year, 8 percent for the second year, and 12 percent
Tirade Owens, a professional athlete, currently has a contract that will pay him a large amount in the first year of his contract and smaller amounts thereafter. He and his agent have asked the team to restructure the contract. The team, though reluctant, obliged. Tirade and his agent came up with
Gary Kornig will be 30 years old next year and wants to retire when he is 65. So far he has saved(1) $6,950 in an IRA account in which his money is earning 8.3 percent annually(2) $5,000 in a money market account in which he is earning 5.25 percent annuallyGary wants to have $1 million when he

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