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Entrepreneurial Finance 6th edition Philip J. Adelman; Alan M. Marks - Solutions
You are managing a company that stocks and distributes hardware. The company employs two purchasing agents who receive combined salaries of $90,000. They process six thousand purchase requests per year. Average inventory in storage is $600,000, and the total cost of running the warehouse is
Calculate the Economic Order Quantity, or EOQ, for exercise 8 if annual demand is 10,000 thousand units, inventory storage costs average 20 percent, unit price is $50, and ordering costs are $30.
Interview several business owners or managers in the community in different industries. How important is proper inventory management to them with respect to its roll in the business enterprise?
How important was Ian’s knowledge of the billing procedures used within the steel industry in his being able to establish his business? Given his cash position when he opened his business, do you believe he would have been successful without this knowledge? How much risk did he take?
What is the relationship between the time value of money and inflation?
What are the advantages and disadvantages of a fixed principal, fixed interest loan?
What is the purpose of a bridge loan?
Distinguish between bank discount and simple interest.
Jill Kramer borrowed $25,000 to pay for a startup business. Jill must repay the loan at the end of five months in one payment with a 6 percent simple interest rate. a. What is the total amount that Jill must repay in five months? b. How much interest does Jill repay?
A financial institution quotes a rate of 6.45 percent compounded monthly. What is the effective rate for the year?
If you want an effective rate of 5 percent, what is an acceptable quoted rate if money is compounded monthly?
If inflation averages 4 percent per year, how much purchasing power will $1.00 lose in ten years?
How much will you pay for a $10,000 automobile in 20 years if the inflation rate averages 3 percent per year for 20 years?
At the beginning of each year, you deposit the following into a growth mutual fund that earns 6 percent per year: How much should the fund be worth at the end of 5 years?
Icahn Tackel just signed an $11.5 million, four year contract with an NFL team. He received a signing bonus of $2 million; $1.5 million at the end of year one; $3 million at the end of year two; $3.5 million at the end of year three; and 1.5 million at the end of year four. What is the present
Bylo Selhi wants to know how many years it well take for his mutual fund investment of $50,000 to reach $500,000 if his mutual fund pays an average of 12 percent per year.
Ira Schwab wins the lottery and decides to take the one lump sum of $500,000 minus taxes. Ira receives a check for $300,000 after taxes. Using the rule of 72, determine a. How long will it take him to get $600,000 if he can earn 3 percent? b. How long will it take him to get $600,000 if he can earn
Felice Navidad purchases 2,000 shares of NOW Technology stock at $4 in Christmas 2008. Four years later, in Christmas of 2012 she sells the stock at $28 per share. What is Felice’s internal rate of return?
Carrie Haute buys a fast food restaurant for $500,000. She is very successful and sells the business six years later for $1,375,000. What is Carrie’s internal rate of return?
Joe Jones went to his bank to find out how long it will take for $1,000 to amount to $1,350 at 9 percent simple interest. Solve Joe's problem.
Rochelle Kotter wants to attend a university five years from now. She will need $88,000. Assume Rochelle’s bank pays 3 percent interest compounded monthly. What must Rochelle deposit today to accumulate $88,000 in five years?
Compute the effective annual rates for the following: a. 2 percent compounded yearly. b. 2 percent compounded semi-annually. c. 2 percent compounded quarterly. d. 2 percent compounded monthly. e. 2 percent compounded daily (use 365 days a year).
Mr. N invests $5,000 in a certificate of deposit in his local bank. He receives 2 percent compounded annually for 5 years. How much interest does his investment earn during this time period?
The Fed cuts the Federal Funds rate and the Discount rate and the Prime goes down to 3.5 percent. Al Truistyk owns an exercise center and needs to upgrade his equipment in order to meet his customers’ needs. The equipment costs $275,000 and the lender requires a 10 percent down payment. Al must
The Smiths purchase a $600,000 house and must sell their old home in order to make a 20 percent down payment plus closing costs of $7,000 on the new house. Currently, they have a mortgage balance of $100,000 on their old home, which has been appraised at $300,000 They have been pre-approved by the
Hy Potenuse bought a $10,000 Treasury bill at 0.115 percent discount for 13 weeks (91 days). a. How much does Hy pay for the bill? b. What is the effective rate of interest?
Alana Olsen borrowed $5,000 for 90 days from First Bank. The bank discounted the note at 7 percent.a. What proceeds did Olsen receive?b. What is the effective rate to the nearest basis point?
The face values of a simple interest note and bank discount note are $8,000 each. Assume both notes have 8.75 percent interest rates for 60 days. Calculate the following:a. The amount of interest charged for each.b. The maturity value of the simple interest note.c. The maturity value of the bank
You deposit $760 in an account one time that compounds monthly at 2 percent. How much will you have in your account at the end of ten years?
A balloon payment of $21,000 on your house is due in 10 years. If you can earn an average of 5 percent per year for the 10-year period, how much will you have to place into an account today to have the $21,000 in 10 years?
The Blue Bonnet paid only $350 rent for 17 years between 1973 and 1990. Based on a 4 percent inflation rate, how much should their rent have been in by 1990? What advantage did this lease provide to the Mobel family?
Using the information in the case study and the current menu price of a burrito plate lunch special at $6.99 and a large soda at $2.00. How much revenue is derived on their worse day and on their best day?
What is the difference between the present value of an annuity and the future value of an annuity?
Describe situations in which you have an integration of future lump sums and streams of equal and unequal payments.
Ira Schwab opens up a Schwab IRA and places $2,000 in his retirement account at the beginning of each year for 10 years. He believes the account will earn 5 percent interest per year, compounded quarterly. How much will he have in his retirement account in 10 years?
You like to buy lottery tickets every week. The lottery pays an insurance company that pays the winner an annuity. If you win a $60,000,000 lottery and elect to take an annuity, you get $3,000,000 per year at the beginning of each year for the next 20 years.a. How much will the state have to pay
Mr. Bates is creating a college fund for his daughter. He will put in $850 at the end of each year for the next 15 years. He expects to earn 6.35% annually. How much money will his daughter have in her college fund?
Blushing Rose invests $1,000 into her Roth IRA. She can increase this investment annually by $1,000 until she reaches the $5,000 annual contribution limit. She will then invest $5,000 per year at the end of each year for 30 years. How much will Blushing have in her IRA at the end of 34 years if her
Joe Doe is currently 65 years of age. He is currently drawing $20,000 a year out of his IRA. He expects to live to 100 and wants to know what he needs now to insure himself that he will be able to draw the $20,000 at the beginning of each year for the next 35 years. He believes the account will
The city of Glendale borrows $48 million by issuing municipal bonds to help build the Arizona Cardinals football stadium. It plans to set up a sinking fund that will repay the loan at the end of 10 years. Assume a 4 percent interest rate per year. What should the city place into the fund at the end
Congratulations! You have just won a $40 million lottery and have elected to receive $2 million per year for 20 years. Assume that a 4 percent interest rate is used to evaluate the annuity and that you receive each payment at the beginning of the year. a. What is the present value of the
Calculate the monthly mortgage payment made at the beginning of each month on a $100,000 mortgage. The mortgage is for fifteen years and the interest rate is 5.5 percent.
EZ Leifer plans to retire at the age of 65 and believes he will live to be 90. EZ wants to receive an annual retirement payment of $50,000 at the beginning of each year. He sets up a retirement account that is estimated to earn 6 percent annually.a.How much money must Easy have in the account when
Tom and Mary James just had a baby. They heard that the cost of providing a college education for this baby will be $100,000 in 18 years. Tom normally receives a Christmas bonus of $4,000 every year in the paycheck prior to Christmas. He read that a good stock mutual fund should pay him an average
Sam is currently 30 years of age. He owns his own business, and wants to retire at the age of 60. He has little confidence in the current Social Security system. He wants to retire with an annual income of $72,000 a year.a. If Sam believes he will live to age 90, how much does he have to accumulate
Regarding question 7b, if Sam believes he will earn 10 percent on his investment for retirement, how much does he have to contribute to his retirement account at the beginning of each year to accumulate his retirement nest egg?
You have been shopping for a new home. You have a choice of financing. You can choose either a $200,000 mortgage at 4.75 percent for 30 years, or a $200,000 mortgage at 3.5 percent for 15 years.a. Calculate the monthly payment for both the 30-year and 15-year mortgages.b. Calculate the amount of
Evaluate the equity that the Smiths have in their properties. What advice would you give the Smiths with regard to their tolerance for risk?
What distinguishes a capital investment from other investments?
List two advantages of using NPV.
What is the relationship between NPV and profitability index (PI)?
What are the advantages of the PI method of capital budgeting?
How does the accounting rate of return (ARR) differ from the internal rate of return (IRR)?
What are the differences between mutually exclusive, non-mutually exclusive, and capital rationing decisions?
What is the three-step process of controlling?
List and briefly explain the five-step capital budgeting process.
What are some of the tax-factor benefits of capital budgeting?
List the advantages and disadvantages of the payback method.
How does a company determine the interest rate it will use in making a net present value (NPV) decision?
Describe the process of calculating NPV.
What is the payback if investment cost is $45,000 and the after tax benefit is $2,000?
Manny Kurr is considering the purchase of a beauty salon. The initial cost of this purchase is $16,000. The after-tax cash flows from this investment should be $4,000 per year for the next 5 years. His opportunity cost of capital is 10 percent. Please calculate the following:a) Payback—Should
I. M. Aruban has a sandwich shop in a downtown business district. Several of his customers have said that they would purchase from his shop more often if he offered a delivery service. I. M. is considering establishing a delivery service to meet the needs of his market. He believes that he will
You decide to help I. M. with his analysis. A good fax machine will cost $500 and functions properly for five years. The phone company charges $300 for installing a new line and $60 a month for the line. A new delivery van costs $20,000 and can be financed for 60 months with a $4,000 down payment.
Herb E. Vore is considering investing in a Salad Stop franchise that will require an initial outlay of $100,000. He conducted market research and found that after tax cash flows on this investment should be about $20,000 a year for the next 7 years. The franchiser stated that Herb will generate a
Carni Vore represents a meat sandwich restaurant chain that is expanding into a new, large metropolitan area. He currently has $2 million to invest and wants to open several restaurants. He found that each site will require a cash outlay of $230,000 for leasing, equipment, and initial inventory.
Carni’s boss stated that after reviewing first-quarter earnings, the company decided to invest in only one store in the city. After evaluating the performance of the store, the company will determine if it wants to increase its presence in the area. a) If you were Carni, what method of evaluation
Joe Morton buys a piece of equipment for $200,000. He puts down $40,000 and finances $160,000. Joe's opportunity cost is 4 percent and the lender's interest rate is 8 percent. Find the weighted average cost of capital (WACC).
Lisa Camry bought a $15,000 car with a $3,000 down payment. The balance is financed by a manufacturer’s sale offering 0-percent annual interest. If Lisa’s opportunity cost is 5 percent, what is her WACC?
If the 10 percent present value ordinary annuity factor (PVAF) is 8.5136 and the 11 percent PVAF is 7.9633, a PVAF of 8.1234 correlates to an internal rate of return of _______.
The Ohm Depot Co. is currently considering the purchase of a new machine that would increase the speed of manufacturing electronic equipment and save money. The net cost of the new machine is $66,000. The annual cash flows have the following projections:If the cost of capital is 10 percent find
Kay Sadilla is considering investing in a franchise that will require an initial outlay of $75,000. She conducted market research and found that after-tax cash flows on the investment should be about $15,000 per year for the next 7 years. The franchiser stated that Kay would generate a 20 percent
Meg O’Byte wants to buy a new computer for her business for Internet access on a cable modem. The computer system cost is $5,100. The cable company charges $200 (including the cable modem) for installation and has a $50 a month usage fee for business, paid at the end of the month. Meg expects to
The LJB Company must replace a freezer and is trying to decide between two alternatives:The LJB Company's cost of capital is 8 percent.Which investment provides LJB with the lowest total cost?
What steps should a business take in making a capital budgeting decision? What steps did Kay take in making a capital budgeting decision? Compare your answers.
Do a SWOT analysis on SWAN Rehabilitation.
Compare the risk of buying a U.S. Government bond to that of buying a corporate bond.
Compare cumulative, convertible, and callable preferred stock.
What is the difference between a mutual fund and a mutual fund family?
List and briefly describe three different types of mutual funds.
Compare no-load and load mutual funds.
Compare short-term and long-term investment strategies.
What is the difference between a contribution and a benefit-oriented retirement plan?
What are the basic factors that should be considered when establishing an individual retirement plan?
How may a small-business owner plan for the use, conservation, and transfer of wealth as efficiently as possible?
What is the role of trusts in estate planning?
Compare speculative risk and pure risk.
How can a business owner identify risk exposure?
What are some programs that an entrepreneur can use to reduce risk?
Compare whole-life and term insurance.
What is the difference between the coupon rate and the current market interest rate of a bond?
If the coupon rate on a bond is 8 percent and current market interest rates are 6 percent, should this bond be selling at a premium or a discount?
How do we determine the book value of a stock?
You have a friend, Icahn Betitall, who just started a small business. He is paying a hefty premium for insurance. Icahn’s insurance agent told him that he is insuring against the risk of loss on fire, theft, liability, and business interruption. Icahn also has policies for life, health, and
A ten-year bond with a $1,000 face value has a coupon rate of 8 percent that it pays semiannually. If current interest rates are 7 percent for bonds of a similar nature, calculate the price of the bond.
A corporation has total assets of $85 million and total liabilities of $5 million. If the corporation has 4 million shares of common stock outstanding, what is the book value per share of common stock?
The book value of a company is $15 per share and the total common stockholders’ equity is $45 million. How many shares of common stock has this corporation issued?
ABC Corp. issues 10 million shares of common stock and 20,000 shares of 8 percent preferred stock at $50 par. The corporation makes an annual profit of $10 million, and the board of directors declares a $5-million-dollar stock dividend.a. What is the preferred stock dividend per share?b. What is
Best-Cost Corp. issues 5 million shares of common stock and 100,000 shares of 6 percent cumulative preferred stock at $100 par. The corporation has not paid any dividend during the past three years. The board of directors decides to pay $5 million in dividends for the current year.a. How much in
David Nash has $100,000 to invest in a mutual fund.a. How many shares will he purchase in a no-load mutual fund whose NAV is $50 per share?b. How many shares will he purchase in a loaded mutual fund whose NAV is $50 per share and which has a front-loaded sales charge of 5 percent?
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