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Questions and Answers of
Corporate Finance
Solve for the unknown interest rate in each of the following:
You just won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $275,000 per year. Thus, in one year you receive $1.275 million. In two years, you get
You have just purchased a new warehouse. To finance the purchase, you've arranged for a 30-year mortgage for 80 percent of the $5,200,000 purchase price. The monthly payment on this loan will be
Consider a firm with a contract to sell an asset for $135,000 three years from now. The asset costs $89,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year,
A local finance company quotes an interest rate of 17 percent on one-year loans. So, if you borrow $23,000, the interest for the year will be $3,910.Because you must repay a total of $26,910 in one
A 5-year annuity of ten $6,175 semiannual payments will begin 9 years from now, with the first payment coming 9.5 years from now. If the discount rate is 11 percent compounded monthly, what is the
Suppose you are going to receive $16,250 per year for five years. The appropriate interest rate is 7.5 percent.a. What is the present value of the payments if they are in the form of an ordinary
Solve for the unknown number of years in each of the following:
You are saving for the college education of your two children. They are two years apart in age; one will begin college 15 years from today and the other will begin 17 years from today. You estimate
Tom Adams has received a job offer from a large investment bank as a clerk to an associate banker. His base salary will be $63,000. He will receive his first annual salary payment one year from the
You have recently won the super jackpot in the Washington State Lottery. On reading the fine print, you discover that you have the following two options:a. You will receive 31 annual payments of
You have 30 years left until retirement and want to retire with $2.2 million. Your salary is paid annually, and you will receive $83,000 at the end of the current year. Your salary will increase at 3
On September 1, 2013, Susan Chao bought a motorcycle for $34,000. She paid $2,000 down and financed the balance with a five-year loan at an annual percentage rate of 7.2 percent, compounded monthly.
Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $20,000 per month for 20 years, with the first
After deciding to buy a new car, you can either lease the car or purchase it with a three-year loan. The car you wish to buy costs $28,000. The dealer has a leasing arrangement where you pay $2,400
An All-Pro defensive lineman is in contract negotiations. The team has offered the following salary structure:Time .......................Salary0 ......................$8,500,0001
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 15.7
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 years before the plaintiff
You are looking at a one-year loan of $10,000. The interest rate is quoted as 8 percent plus three points. A point on a loan is simply 1 percent (one percentage point) of the loan amount. Quotes
Two banks in the area offer 30-year, $225,000 mortgages at 5.6 percent and charge a $2,900 loan application fee. However, the application fee charged by Insecurity Bank and Trust is refundable if the
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 that reads something like this: "$1,000
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 balance from your current credit
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 follows:
You have just won the lottery. You will receive $4,500,000 today, and then receive 40 payments of $1,600,000. These payments will start one year from now and will be paid every six months. A
A financial planning service offers a college savings program. The plan calls for you to make six annual payments of $11,000 each, with the first payment occurring today, your child's 12th birthday.
What is the value of an investment that pays $50,000 every other year forever, if the first payment occurs one year from today and the discount rate is 13 percent compounded daily? What is the value
A check-cashing store is in the business of making personal loans to walk-up customers. The store makes only one-week loans at 6.5 percent interest per week.a. What APR must the store report to its
Excel is a great tool for solving problems, but with many time value of money problems, you may still need to draw a time line. For example, consider a classic retirement problem. A friend is
One of your customers is delinquent on his accounts payable balance. You've mutually agreed to a repayment schedule of $500 per month. You will charge 1.1 percent per month interest on the overdue
First Simple Bank pays 4.1 percent simple interest on its investment accounts. If First Complex Bank pays interest on its accounts compounded annually, what rate should the bank set if it wants to
You're trying to choose between two different investments, both of which have up-front costs of $75,000. Investment G returns $125,000 in six years. Investment H returns $185,000 in 10 years. Which
Mark Weinstein has been working on an advanced technology in laser eye surgery. His technology will be available in the near term. He anticipates his first annual cash flow from the technology to be
A prestigious investment bank designed a new security that pays a quarterly dividend of $2.75 in perpetuity. The first dividend occurs one quarter from today. What is the price of the security if the
What is the present value of an annuity of $5,500 per year, with the first cash flow received three years from today and the last one received 25 years from today? Use a discount rate of 8 percent.
What is the value today of a 15-year annuity that pays $900 a year? The annuity's first payment occurs six years from today. The annual interest rate is 11 percent for Years 1 through 5, and 13
Young Pharmaceuticals is considering a drug project that costs $3.8 million today and is expected to generate end-of-year annual cash flows of $267,000, forever. At what discount rate would Young be
Southern California Publishing Company is trying to decide whether to revise its popular textbook, Financial Psychoanalysis Made Simple. The company has estimated that the revision will cost
You're prepared to make monthly payments of $240, 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 $96,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,950, but no more. Assuming monthly compounding, what is the highest APR you can
What is the present value of $7,500 per year, at a discount rate of 7.1 percent, if the first payment is received 6 years from now and the last payment is received 25 years from now?
A 15-year annuity pays $1,750 per month, and payments are made at the end of each month. If the interest rate is 12 percent compounded monthly for the first seven years, and 6 percent compounded
You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,300 payments and has an interest rate of 7.2 percent compounded monthly. Investment B
Given an interest rate of 5.6 percent per year, what is the value at Date t = 7 of a perpetual stream of $2,150 annual payments that begins at Date t = 15?
You want to buy a new sports car from Muscle Motors for $64,000. The contract is in the form of a 60-month annuity due at an APR of 6.15 percent. What will your monthly payment be?
You want to lease a set of golf clubs from Pings Ltd. The lease contract is in the form of 24 equal monthly payments at an APR of 11.2 percent, compounded monthly. Because the clubs cost $2,650
Your financial planner offers you two different investment plans. Plan X is a $20,000 annual perpetuity. Plan Y is a 10-year, $34,000 annual annuity. Both plans will make their first payment one year
Imprudential, Inc., has an unfunded pension liability of $550 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to discount this liability back
An investor purchasing a British consol is entitled to receive annual payments from the British government forever. What is the price of a consol that pays $125 annually if the next payment occurs
Maxwell Software, Inc., has the following mutually exclusive projects.Year .....................Project A ................Project B0 ...........................2$20,000 .................2$24,0001
Suppose you are offered $9,400 today but must make the following payments:Year ..................Cash Flows ($)0 .................................$ 9,4001 .................................−4,5002
Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent.Year
The Cori's Sausage Corporation is trying to choose between the following two mutually exclusive design projects:Year ..................Cash Flow (I) .............Cash Flow (II)0
Cutler Petroleum, Inc., is trying to evaluate a generation project with the following cash flows:Year .....................Cash Flow0 .....................−$ 78,000,0001
Wii Brothers, a game manufacturer, has a new idea for an adventure game. It can market the game either as a traditional board game or as an interactive DVD, but not both. Consider the following cash
Hanmi Group, a consumer electronics conglomerate, is reviewing its annual budget in wireless technology. It is considering investments in three different technologies to develop wireless
Consider the following cash flows of two mutually exclusive projects for AZ-Motorcars. Assume the discount rate for both projects is 10 percent.Year ............AZM MiniSUV...........AZF FullSUV0
The treasurer of Amaro Canned Fruits, Inc., has projected the cash flows of Projects A, B, and C as follows:Suppose the relevant discount rate is 12 percent per year.a. Compute the profitability
Consider the following cash flows of two mutually exclusive projects for Tokyo Rubber Company. Assume the discount rate for both projects is 8 percent.Year ..............Dry Prepreg
Consider two mutually exclusive new product launch projects that Nagano Golf is considering. Assume the discount rate for both products is 15 percent.Project A: Nagano NP-30.Professional clubs that
An investment project provides cash inflows of $790 per year for eight years. What is the project payback period if the initial cost is $3,200? What if the initial cost is $4,800? What if it is
This problem is useful for testing the ability of financial calculators and computer software. Consider the following cash flows. How many different IRRs are there? When should we take this
The Yurdone Corporation wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up." As a result, the cemetery project will provide a net cash inflow of
The Utah Mining Corporation is set to open a gold mine near Provo, Utah. According to the treasurer, Monty Goldstein, "This is a golden opportunity." The mine will cost $2,700,000 to open and will
Butler International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year .....................Cash
Consider two streams of cash flows, A and B. Stream A's first cash flow is $11,600 and is received three years from today. Future cash flows in Stream A grow by 4 percent in perpetuity. Stream B's
An investment project has annual cash inflows of $5,000, $5,500, $6,000, and $7,000, and a discount rate of 12 percent. What is the discounted payback period for these cash flows if the initial
An investment project costs $17,500 and has annual cash flows of $4,300 for six years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 10
Vital Silence, Inc., has a project with the following cash flows:Year ............Cash Flows ($)0 ........................−$24,0001 ............................9,7002
Compute the internal rate of return for the cash flows of the following two projects:Cash Flows ($)Year ..........Project ..........A Project B0 ..............−$5,700 .............−$3,4501
Suppose the following two independent investment opportunities are available to Relax, Inc. The appropriate discount rate is 8.5 percent.Year ....................Project Alpha ..............Project
As you have already seen, Excel does not have a function to calculate the payback period. We have shown three ways to calculate the payback period, but there are numerous other methods as well. The
Seth Bullock, the owner of Bullock Gold Mining, is evaluating a new gold mine in South Dakota. Dan Dority, the company's geologist, has just finished his analysis of the mine site. He has estimated
In March 2014, BMW announced plans to spend $1 billion to expand production at its South Carolina plant. The plant produced the secondgeneration BMW X3 as well as the company's X5 and X6 models. The
Bill plans to open a self-serve grooming center in a storefront. The grooming equipment will cost $265,000, to be paid immediately. Bill expects aftertax cash inflows of $59,000 annually for seven
Flatte Restaurant is considering the purchase of a $7,500 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straight-line method. The machine
You are evaluating two different silicon wafer milling machines. The Techron I costs $245,000, has a three-year life, and has pretax operating costs of $39,000 per year. The Techron II costs
Massey Machine Shop is considering a four-year project to improve its production efficiency. Buying a new machine press for $730,000 is estimated to result in $270,000 in annual pretax cost savings.
Hagar Industrial Systems Company (HISC) is trying to decide between two different conveyor belt systems. System A costs $290,000, has a four-year life, and requires $89,000 in pretax annual operating
Vandalay Industries is considering the purchase of a new machine for the production of latex. Machine A costs $3,100,000 and will last for six years. Variable costs are 35 percent of sales, and fixed
Consider the following cash flows on two mutually exclusive projects:Year............... Project A............ Project B0..................... 2$30,000............ 2$45,0001..................... ...
Sparkling Water, Inc., expects to sell 2.7 million bottles of drinking water each year in perpetuity. This year each bottle will sell for $1.35 in real terms and will cost $.85 in real terms. Sales
Etonic, Inc., is considering an investment of $395,000 in an asset with an economic life of five years. The firm estimates that the nominal annual cash revenues and expenses at the end of the first
Bridgton Golf Academy is evaluating new golf practice equipment. The "Dimple-Max" equipment costs $64,000, has a three-year life, and costs $7,500 per year to operate. The relevant discount rate is
The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received
RightPrice Investors, Inc., is considering the purchase of a $415,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line
A firm is considering an investment in a new machine with a price of $15.6 million to replace its existing machine. The current machine has a book value of $5.4 million and a market value of $4.1
Sanders Enterprises, Inc., has been considering the purchase of a new manufacturing facility for $750,000. The facility is to be fully depreciated on a straight-line basis over seven years. It is
With the growing popularity of casual surf print clothing, two recent MBA graduates decided to broaden this casual surf concept to encompass a "surf lifestyle for the home." With limited capital,
You have been hired as a consultant for Pristine Urban-Tech Zither, Inc. (PUTZ), manufacturers of fine zithers. The market for zithers is growing quickly. The company bought some land three years ago
Pilot Plus Pens is deciding when to replace its old machine. The machine's current salvage value is $2.8 million. Its current book value is $1.6 million. If not sold, the old machine will require
Office Automation, Inc., must choose between two copiers, the XX40 or the RH45. The XX40 costs $1,499 and will last for three years. The copier will require a real aftertax cost of $120 per year
Dickinson Brothers, Inc., is considering investing in a machine to produce computer keyboards. The price of the machine will be $975,000, and its economic life is five years. The machine will be
Aday Acoustics, Inc., projects unit sales for a new seven-octave voice emulation implant as follows:Year .....................Unit Sales1..............................
A proposed cost-saving device has an installed cost of $710,000. The device will be used in a five-year project but is classified as three-year MACRS property for tax purposes. The required initial
Another utilization of cash flow analysis is setting the bid price on a project. To calculate the bid price, we set the project NPV equal to zero and find the required price. Thus the bid price
The technique for calculating a bid price can be extended to many other types of problems. Answer the following questions using the same technique as setting a bid price; that is, set the project NPV
Hardwick Enterprises is evaluating alternative uses for a three-story manufacturing and warehousing building that it has purchased for $1,250,000. The company can continue to rent the building to the
The Biological Insect Control Corporation (BICC) has hired you as a consultant to evaluate the NPV of its proposed toad ranch. The company plans to breed toads and sell them as ecologically desirable
O'Bannon Electronics has an investment opportunity to produce a new HDTV. The required investment on January 1 of this year is $145 million. The firm will depreciate the investment to zero using the
After extensive medical and marketing research, Pill, Inc., believes it can penetrate the pain reliever market. It is considering two alternative products. The first is a medication for headache
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