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Fundamentals Of Financial Management 13th Revised Edition James Van Horne, John Wachowicz - Solutions

What is meant by making the financial markets more efficient? More complete?
What is the purpose of stock market exchanges such as the New York Stock Exchange?
In general, what would be the likely effect of the following occurrences on the money and capital markets?a. The savings rate of individuals in the country declines.b. Individuals increase their savings at savings and loan associations and decrease their savings at banks.c. The government taxes
Pick a financial intermediary with which you are familiar and explain its economic role. Does it make the financial markets more efficient?
How does being a limited partner in a business enterprise differ from being a stockholder, assuming the same percentage of ownership?
What is the distinction between the money market and the capital market? Is the distinction real or artificial?
How do transaction costs affect the flow of funds and the efficiency of financial markets?
In addition to financial intermediaries, what other institutions and arrangements facilitate the flow of funds to and from business firms?
What are some of the disadvantages of (a) a sole proprietorship? (b) a partnership? (c) a limited liability company (LLC)?
In general, what are the principles on which the Modified Accelerated Cost Recovery System (MACRS) is based?
Interest on Treasury securities is not taxable at the state level, whereas interest on municipal securities is not taxable at the federal level. What is the reason for this feature?
If capital gains were to be taxed at a lower rate than ordinary income, as has been the case in the past, what types of investments would be favored?
Zaharias-Liras Wholesalers, a partnership, owes $418,000 to various shipping companies. Armand Zaharias has a personal net worth of $1,346,000, including a $140,000 equity interest in the partnership. Nick Liras has a personal net worth of $893,000, including the same equity interest in the
The Loann Le Milling Company is going to purchase a new piece of testing equipment for $28,000 and a new machine for $53,000. The equipment falls in the three-year property class, and the machine is in the five-year class. What annual depreciation will the company be able to take on the two assets?
Tripex Consolidated Industries owns $1.5 million in 12 percent bonds of Solow I Electronics Company. It also owns 100,000 shares of preferred stock of Solow, which constitutes 10 percent of all outstanding Solow preferred shares. In the past year, Solow paid the stipulated interest on its bonds and
The Castle Cork Company was founded in 20X1 and had the following taxable income through 20X5:Compute the corporate income tax or tax refund in each year, assuming the graduated tax rates discussed in the chapter.
Loquat Foods Company is able to borrow at an interest rate of 9 percent for one year. For the year, market participants expect 4 percent inflation. a. What approximate real rate of return does the lender expect? What is the inflation premium embodied in the nominal interest rate? b. If inflation
Sven Smorgasbord is 35 years old and is presently experiencing the "good" life. As a result, he anticipates that he will increase his weight at a rate of 3 percent a year. At present he weighs 200 pounds. What will he weigh at age 60?
What is compound interest? Why is it important?
What is an annuity? Is an annuity worth more or less than a lump sum payment received now that would be equal to the sum of all the future annuity payments?
Contrast the calculation of future (terminal) value with the calculation of present value. What is the difference?
What is the advantage of using present value tables rather than formulas?
The "Rule of 72" suggests that an amount will double in 12 years at a 6 percent compound annual rate or double in 6 years at a 12 percent annual rate. Is this a useful rule, and is it an accurate one?
The following are exercises in future (terminal) values:a. At the end of three years, how much is an initial deposit of $100 worth, assuming a compound annual interest rate of (i) 100 percent? (ii) 10 percent? (iii) 0 percent?b. At the end of five years, how much is an initial $500 deposit followed
Suppose you were to receive $1,000 at the end of 10 years. If your opportunity rate is 10 percent, what is the present value of this amount if interest is compounded (a) annu¬ally? (b) quarterly? (c) continuously?
In connection with the United States Bicentennial, the Treasury once contemplated offering a savings bond for $1,000 that would be worth $1 million in 100 years. Approximately what compound annual interest rate is implied by these terms?
Selyn Cohen is 63 years old and recently retired. He wishes to provide retirement income for himself and is considering an annuity contract with the Philo Life Insurance Company. Such a contract pays him an equal-dollar amount each year that he lives. For this cash-flow stream, he must put up a
The Happy Hang Glide Company is purchasing a building and has obtained a $190,000 mortgage loan for 20 years. The loan bears a compound annual interest rate of 17 percent and calls for equal annual installment payments at the end of each of the 20 years. What is the amount of the annual payment?
Establish loan amortization schedules for the following loans to the nearest cent (see Table 3.8 for an example):a. A 36-month loan of $8,000 with equal installment payments at the end of each month. The interest rate is 1 percent per month.b. A 25-year mortgage loan of $184,000 at a 10 percent
You have borrowed $14,300 at a compound annual interest rate of 15 percent. You feel that you will be able to make annual payments of $3,000 per year on your loan. (Payments include both principal and interest.) How long will it be before the loan is entirely paid off (to the nearest year)?
Lost Dutchman Mines, Inc., is considering investing in Peru. It makes a bid to the government to participate in the development of a mine, the profits of which will be realized at the end of five years. The mine is expected to produce $5 million in cash to Lost Dutchman Mines at that time. Other
Earl E. Bird has decided to start saving for his retirement. Beginning on his twenty-first birthday, Earl plans to invest $2,000 each birthday into a savings investment earning a 7 percent compound annual rate of interest. He will continue this savings program for a total of 10 years and then stop
When you were born, your dear old Aunt Minnie promised to deposit $1,000 in a savings account for you on each and every one of your birthdays, beginning with your first. The savings account bears a 5 percent compound annual rate of interest. You have just turned 25 and want all the cash. However,
Assume that you will be opening a savings account today by depositing $100,000. The savings account pays 5 percent compound annual interest, and this rate is assumed to remain in effect for all future periods. Four years from today you will withdraw R dollars. You will continue to make additional
The following are exercises in present values:a. $100 at the end of three years is worth how much today, assuming a discount rate of (i) 100 percent? (ii) 10 percent? (iii) 0 percent?b. What is the aggregate present value of $500 received at the end of each of the next three years, assuming a
Suppose that an investment promises to pay a nominal 9.6 percent annual rate of interest. What is the effective annual interest rate on this investment assuming that interest is compounded (a) Annually? (b) Semiannually? (c) Quarterly? (d) Monthly? (e) Daily (365 days)? (f) Continuously? (Report
"Want to win a million dollars? Here's how.... One winner, chosen at random from all entries, will win a $1,000,000 annuity." That was the statement announcing a contest on the World Wide Web. The contest rules described the "million-dollar prize" in greater detail: "40 annual payments of $25,000
It took roughly 14 years for the Dow Jones Average of 30 Industrial Stocks to go from 1,000 to 2,000. To double from 2,000 to 4,000 took only 8 years, and to go from 4,000 to 8,000 required roughly 2 years. To the nearest whole percent, what compound annual growth rates are implicit in these three
Joe Hernandez has inherited $25,000 and wishes to purchase an annuity that will provide him with a steady income over the next 12 years. He has heard that the local savings and loan association is currently paying 6 percent compound interest on an annual basis. If he were to deposit his funds,
You need to have $50,000 at the end of 10 years. To accumulate this sum, you have decided to save a certain amount at the end of each of the next 10 years and deposit it in the bank. The bank pays 8 percent interest compounded annually for long-term deposits. How much will you have to save each
Same as Problem 4 above, except that you deposit a certain amount at the beginning of each of the next 10 years. Now, how much will you have to save each year (to the nearest dollar)?
Vernal Equinox wishes to borrow $10,000 for three years. A group of individuals agrees to lend him this amount if he contracts to pay them $16,000 at the end of the three years. What is the implicit compound annual interest rate implied by this contract (to the nearest whole percent)?
You have been offered a note with four years to maturity, which will pay $3,000 at the end of each of the four years. The price of the note to you is $10,200. What is the implicit compound annual interest rate you will receive (to the nearest whole percent)?
Sales of the P.J. Cramer Company were $500,000 this year, and they are expected to grow at a compound rate of 20 percent for the next six years. What will be the sales figure at the end of each of the next six years?
The H & L Bark Company is considering the purchase of a debarking machine that is expected to provide cash flows as follows:If the appropriate annual discount rate is 14 percent, what is the present value of this cash flow stream?
What connection, if any, does a firm's market value have with its liquidation and/or going-concern value 7.
Could a security's intrinsic value to an investor ever differ from the security's market value 7. If so, under what circumstances?
In what sense is the treatment of bonds and preferred stock the same when it comes to valuation?
Why do bonds with long maturities fluctuate more in price than do bonds with short maturities, given the same change in yield to maturity?
Why is the growth rate in earnings and dividends of a company likely to taper off in the future? Could the growth rate increase as well? If it did, what would be the effect on stock price?
Using the constant perpetual growth dividend valuation model, could you have a situation in which a company grows at 30 percent per year (after subtracting out inflation) forever? Explain.
Gonzalez Electric Company has outstanding a 10 percent bond issue with a face value of $1,000 per bond and three years to maturity. Interest is payable annually. The bonds are privately held by Suresafe Fire Insurance Company. Suresafe wishes to sell the bonds, and is negotiating with another
Just today, Fawlty Foods, Inc.'s common stock paid a $1.40 annual dividend per share and had a closing price of $21. Assume that the market's required return, or capitaliza¬tion rate, for this investment is 12 percent and that dividends are expected to grow at a constant rate forever. a.
The Great Northern Specific Railway has noncallable, perpetual bonds outstanding. When originally issued, the perpetual bonds sold for $955 per bond; today (January 1) their current market price is $1,120 per bond. The company pays a semiannual interest payment of $45 per bond on June 30 and
Assume that everything stated in Problem 11 remains the same except that the bonds are not perpetual. Instead, they have a $1,000 par value and mature in 10 years.In problem The Great Northern Specific Railway has noncallable, perpetual bonds outstanding. When originally issued, the perpetual
Red Frog Brewery has $l,000-par-value bonds outstanding with the following characteristics: currently selling at par; 5 years until final maturity; and a 9 percent coupon rate (with interest paid semiannually). Interestingly, Old Chicago Brewery has a very similar bond issue outstanding. In fact,
Burp-Cola Company just finished making an annual dividend payment of $2 per share on its common stock. Its common stock dividend has been growing at an annual rate of 10 percent. Kelly Scott requires a 16 percent annual return on this stock. What intrinsic value should Kelly place on one share of
What would be the price per bond in Problem 1 if interest payments were made semiannually?
Superior Cement Company has an 8 percent preferred stock issue outstanding, with each share having a $100 face value. Currently, the yield is 10 percent. What is the market price per share? If interest rates in general should rise so that the required return becomes 12 percent, what will happen to
The stock of the Health Corporation is currently selling for $20 a share and is expected to pay a $1 dividend at the end of the year. If you bought the stock now and sold it for $23 after receiving the dividend, what rate of return would you earn?
Delphi Products Corporation currently pays a dividend of $2 per share, and this dividend is expected to grow at a 15 percent annual rate for three years, and then at a 10 percent rate for the next three years, after which it is expected to grow at a 5 percent rate forever. What value would you
North Great Timber Company will pay a dividend of $1.50 a share next year. After this, earnings and dividends are expected to grow at a 9 percent annual rate indefinitely. Investors currently require a rate of return of 13 percent. The company is considering several business strategies and wishes
A share of preferred stock for the Buford Pusser Baseball Bat Company just sold for $100 and carries an $8 annual dividend. a. What is the yield on this stock? b. Now assume that this stock has a call price of $110 in five years, when the company intends to call the issue.
The 9-percent-coupon-rate bonds of the Melbourne Mining Company have exactly 15 years remaining to maturity. The current market value of one of these $ 1,000-par-value bonds is $700. Interest is paid semiannually. Melanie Gibson places a nominal annual required rate of return of 14 percent on these
If investors were not risk averse on average, but rather were either risk indifferent (neutral) or even liked risk, would the risk-return concepts presented in this chapter be valid?
Define the characteristic line and its beta.
Why is beta a measure of systematic risk? What is its meaning?
What is the required rate of return of a stock? How can it be measured?
What would be the effect of the following changes on the market price of a company's stock, all other things the same? a. Investors demand a higher required rate of return for stocks in general. b. The covariance between the company's rate of return and that for the market decreases. c. The
Suppose that you are highly risk averse but that you still invest in common stocks. Will the betas of the stocks in which you invest be more or less than 1.0? Why?
If a security is undervalued in terms of the capital-asset pricing model, what will happen if investors come to recognize this undervaluation?
Jerome J. Jerome is considering investing in a security that has the following distribution of possible one-year returns:a. What is the expected return and standard deviation associated with the investment?b. Is there much "downside" risk? How can you tell?
Schmendiman, Inc., is the sole manufacturer of schmedimite (an inflexible, brittle building material made of radium and asbestos). Assume that the company's common stock can be valued using the constant dividend growth model (also sometimes known as the "Gordon Dividend Growth Model"). You expect
Summer Storme is analyzing an investment. The expected one-year return on the investment is 20 percent. The probability distribution of possible returns is approximately normal with a standard deviation of 15 percent. a. What are the chances that the investment will result in a negative return? b.
Suppose that you were given the following data for past excess quarterly returns for Markese Imports, Inc., and for the market portfolio:On the basis of this information, graph the relationship between the two sets of excess returns and draw a characteristic line. What is the approximate beta7What
Assuming that the CAPM approach is appropriate, compute the required rate of return for each of the following stocks, given a risk-free rate of 0.07 and an expected return for the market portfolio of 0.13:What implications can you draw?
Currently, the risk-free rate is 10 percent and the expected return on the market portfolio is 15 percent. Market analysts' return expectations for four stocks are listed here, together with each stock's expected beta.a. If the analysts' expectations are correct, which stocks (if any) are
Selena Maranjian invests the following sums of money in common stocks having expected returns as follows:a. What is the expected return (percentage) on her portfolio?b. What would be her expected return if she quadrupled her investment in Excelsior Hair Growth, Inc., while leaving everything else
Salt Lake City Services, Inc., provides maintenance services for commercial buildings. Currently, the beta on its common stock is 1.08. The risk-free rate is now 10 percent, and the expected return on the market portfolio is 15 percent. It is January 1, and the company is expected to pay a $2 per
The following common stocks are available for investment: COMMON STOCK (Ticker Symbol) BETANanyang Business Systems (NBS)……………….1.40Yunnan Garden Supply, Inc. (YUWHO)…………0.80Bird Nest Soups Company (SLURP) …………….0.60Wacho.com! (WACHO)
Does increasing a firm's inventory turnover ratio increase its profitability? Why should this ratio be computed using cost of goods sold (rather than sales, as is done by some compilers of financial statistics)?
Is it appropriate to insist that a financial ratio, such as the current ratio, exceed a certain absolute standard (e.g., 2:1)? Why?
Which firm is more profitable - Firm A with a total asset turnover of 10.0 and a net profit margin of 2 percent, or Firm B with a total asset turnover of 2.0 and a net profit margin of 10 percent? Provide examples of both types of firm.
Why do short-term creditors, such as banks, emphasize balance sheet analysis when considering loan requests? Should they also analyze projected income statements? Why?
How can index analysis be used to reinforce the insight gained from a trend analysis of financial ratios?
Why is the analysis of trends in financial ratios important?
Auxier Manufacturing Company has a current ratio of 4 to 1 but is unable to pay its bills. Why?
Can a firm generate a 25 percent return on assets and still be technically insolvent (unable to pay its bills)? Explain.
The traditional definitions of collection period and inventory turnover are criticized because in both cases balance sheet figures that are a result of approximately the last month of sales are related to annual sales (in the former case) or annual cost of goods sold (in the latter case). Why do
Which financial ratios would you be most likely to consult if you were the following? Why?a. A banker considering the financing of seasonal inventoryb. A wealthy equity investorc. The manager of a pension fund considering the purchase of a firm's bondsd. The president of a consumer products firm
In trying to judge whether a company has too much debt, what financial ratios would you use and for what purpose?
Why might it be possible for a company to make large operating profits, yet still be unable to meet debt payments when due? What financial ratios might be employed to detect such a condition?
The data for various companies in the same industry are as follows:Determine the total asset turnover, net profit margin, and earning power for each of the companies.
Cordillera Carson Company has the following balance sheet and income statement for 20X2 (in thousands):(i) Current period's depreciation is $480. (ii) Ending inventory for 20X1 was $1,800. On the basis of this information, compute (a) The current ratio. (b) The acid-test ratio. (c) The average
Selected financial ratios for RMN, Incorporated, are as follows:a. Why did return on investment decline? b. Was the increase in debt a result of greater current liabilities or of greater long-term debt? Explain.
The following information is available on the Vanier Corporation:BALANCE SHEET AS OF DECEMBER 31, 20X6 (IN THOUSANDS)INCOME STATEMENT FOR 20X6 (IN THOUSANDS)Credit sales€¦€¦€¦€¦€¦€¦€¦€¦€¦€¦..$8,000Cost of goods sold€¦€¦€¦€¦€¦€¦€¦€¦.
A company has total annual sales (all credit) of $400,000 and a gross profit margin of 20 percent. Its current assets are $80,000; current liabilities, $60,000; inventories, $30,000; and cash, $10,000.a. How much average inventory should be carried if management wants the inventory turnover to be
Stoney Mason, Inc., has sales of $6 million, a total asset turnover ratio of 6 for the year, and net profits of $120,000. a. What is the company's return on assets or earning power? b. The company is considering the installation of new point-of-sales cash registers throughout its stores. This
The long-term debt section of the balance sheet of the Queen Anne's Lace Corporation appears as follows: 9 1/4% mortgage bonds………………….. $2,500,000 12 3/8%% second mortgage bonds………. 1,500,000 10 1/4% debentures………………………. 1,000,000 14 1/2% subordinated
Tic-Tac Homes has had the following balance sheet statements the past four years (in thousands):Using index analysis, what are the major problems in the company's financial condition?

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