Questions and Answers of Essentials Corporate Finance

Suppose your company needs to raise $45 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 7.5 percent, and you’re evaluating two
You purchase a bond with a coupon rate of 7.5 percent, semiannual coupons, and a clean price of $915. If the next coupon payment is due in two months, what is the invoice price?
You purchase a bond with an invoice price of $1,060. The bond has a coupon rate of 9.2 percent, semiannual coupons, and there are five months to the next coupon date. What is the clean price of the
BDJ Co. wants to issue new 20-year bonds for some much-needed expansion projects. The company currently has 8.5 percent coupon bonds on the market that sell for $1,125, make semiannual payments, and
Software has 7.5 percent coupon bonds on the market with 22 years to maturity. The bonds make semiannual payments and currently sell for 108 percent of par. What is the current yield on PK’s bonds?
Bond J is a 4 percent coupon bond. Bond S is a 14 percent coupon bond. Both bonds have eight years to maturity, make semiannual payments, and have a YTM of 9 percent. If interest rates suddenly rise
Locate the Treasury bond in Figure 6.3 maturing in February 2027. Is this a premium or a discount bond? What is its current yield? What is its yield to maturity? What is the bid-ask spread?Figure 6.3
Locate the Treasury issue in Figure 6.3 maturing in August 2023. What is its coupon rate? What is its bid price? What was the previous day's asked price?Figure 6.3 Asked Maturity Coupon Bid Asked Chg
Say you own an asset that had a total return last year of 17 percent. If the inflation rate last year was 3.2 percent, what was your real return?
Suppose the real rate is 3.2 percent and the inflation rate is 2.6 percent. What rate would you expect to see on a Treasury bill?
If Treasury bills are currently paying 5.7 percent and the inflation rate is 2.9 percent, what is the approximate real rate of interest? The exact real rate?
Osbourne Corporation has bonds on the market with 10.5 years to maturity, a YTM of 9.4 percent, and a current price of $945. The bonds make semiannual payments. What must the coupon rate be on the
Night Hawk Co. issued 15-year bonds two years ago at a coupon rate of 8.4 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM?
App Store Co. issued 15-year bonds one year ago at a coupon rate of 6.1 percent. The bonds make semiannual payments. If the YTM on these bonds is 5.3 percent, what is the current bond price?
Merton Enterprises has bonds on the market making annual payments, with 16 years to maturity, and selling for $963. At this price, the bonds yield 7.5 percent. What must the coupon rate be on
The Timberlake-Jackson Wardrobe 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 $1,145.70, what is its
Lycan, Inc., has 7 percent coupon bonds on the market that have 8 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 9 percent, what is the current bond price?
1. What are the monthly payments for a 30-year traditional mortgage? What are the payments for a 20-year traditional mortgage?2. Prepare an amortization table for the first six months of the
If the appropriate discount rate for the following cash flows is 8.4 percent, what is the present value of the cash flows? Cash Flow Year $1,200 1,100 2 3 800 4 600
Beginning three months from now, you want to be able to withdraw $2,500 each quarter from your bank account to cover college expenses over the next four years. If the account pays .65 percent
You are to make monthly deposits of $400 into a retirement account that pays 10.5 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your
Maybepay Life Insurance Co. is selling a perpetual annuity contract that pays $3,100 monthly. The contract currently sells for $325,000. What is the monthly return on this investment vehicle? What is
Friendly’s Quick Loans, Inc., offers you “Six for four, or I knock on your door.” This means you get $4 today and repay $6 when you get your paycheck in one week (or else). What’s the
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 0.9 percent per month interest on the overdue
You want to buy a new sports coupe for $73,800, and the finance office at the dealership has quoted you a 6.2 percent APR loan for 60 months to buy the car. What will your monthly payments be? What
Ricky Ripov’s Pawn Shop charges an interest rate of 15 percent per month on loans to its customers. Like all lenders, Ricky must report an APR to consumers. What rate should the shop report? What
An investment will pay you $80,000 in six years. If the appropriate discount rate is 6 percent compounded daily, what is the present value?
Bucher Credit Bank is offering 5.3 percent compounded daily on its savings accounts. If you deposit $5,000 today, how much will you have in the account in five years? In 10 years? In 20 years?
What is the future value of $1,560 in 13 years assuming an interest rate of 9 percent compounded semiannually?
Magnus Credit Corp. wants to earn an effective annual return on its consumer loans of 16 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law
First National Bank charges 10.1 percent compounded monthly on its business loans. First United Bank charges 10.3 percent compounded semiannually. As a potential borrower, which bank would you go to
Find the APR, or stated rate, in each of the following cases: Stated Rate (APR) Number of Times Compounded Semiannually Monthly Weekly Effective Rate (EAR) 12% 13 11 Daily
Find the EAR in each of the following cases: Effective Rate (EAR) Number of Times Compounded Stated Rate (APR) 8% 18 14 Quarterly Monthly Daily Semiannually 10
In the previous problem, suppose Curly’s told you the policy costs $600,000. At what interest rate would this be a fair deal?Data From Problem 10Curly’s Life Insurance Co. is trying to sell you
Curly’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $35,000 per year forever. If the required return on this investment is 6 percent, how much
Bath’s Bank offers you a $60,000, seven-year term loan at 9 percent annual interest. What will your annual loan payment be?
You want to have $25,000 in your savings account eight 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 4.75 percent
If you deposit $4,000 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
Your company will generate $45,000 in cash flow each year for the next nine years from a new information database. The computer system needed to set up the database costs $260,000. If you can borrow
You have $15,000 you want to invest for the next 40 years. You are offered an investment plan that will pay you 8 percent per year for the next 20 years and 12 percent per year for the last 20 years.
You have decided that you want to be a millionaire when you retire in 45 years. If you can earn an 11 percent annual return, how much do you have to invest today? What if you can earn 5.5 percent?
You need $75,000 in 10 years. If you can earn 0.42 percent per month, how much will you have to deposit today?
You can earn 0.35 percent per month at your bank. If you deposit $1,800, how long must you wait until your account has grown to $3,500?
An investment offers to quadruple your money in 24 months (don’t believe it). What rate per three months are you being offered?
You have $9,000 to deposit. Regency Bank offers 12 percent per year compounded monthly (1 percent per month), while King Bank offers 12 percent but will only compound annually. How much will your
You expect to receive $25,000 at graduation in two years. You plan on investing it at 9 percent until you have $160,000. How long will you wait from now? (Better than the situation in Question 9, but
You are scheduled to receive $13,000 in two years. When you receive it, you will invest it for six more years at 9 percent per year. How much will you have in eight years?
You have just made your first $5,000 contribution to your individual retirement account. Assuming you earn a 10.5 percent rate of return and make no additional contributions, what will your account
Suppose you are still committed to owning a $160,000 Ferrari (see Question 9). If you believe your mutual fund can achieve a 10.25 percent annual rate of return, and you want to buy the car in 10
Referring to the TMCC security we discussed at the very beginning of the chapter:a. Based on the $24,099 price, what rate was TMCC paying to borrow money?b. Suppose that, on March 28, 2016, this
In 2009, a $5 silver certificate from 1896 was sold for $10,500. For this to have been true, what was the annual increase in the value of the certificate?
In 1895, the first U.S. Open Golf Championship was held. The winner’s prize money was $150. In 2009, the winner’s check was $1,350,000. What was the annual percentage increase in the winner’s
Your coin collection contains 50 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2062,
You have just received notification that you have won the $2 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you’re around to
Imprudential, Inc., has an unfunded pension liability of $750 million that must be paid in 25 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back
You’re trying to save to buy a new $160,000 Ferrari. You have $25,000 today that can be invested at your bank. The bank pays 3.2 percent annual interest on its accounts. How long will it be before
In 2009, an 1893 Morgan silver dollar sold for $6,450. What was the rate of return on this investment?
Assume the total cost of a college education will be $320,000 when your child enters college in 18 years. You presently have $50,000 to invest. What annual rate of interest must you earn on your
Solve for the unknown number of years in each of the following: Interest Earned Ending Amount Beginning Amount Year $100.00 $10.00 $110.00 121.00 133.10 146.41 121.00 133.10 146.41 12.10 13.31 4
Solve for the unknown interest rate in each of the following: Present Value Future Value Years Interest Rate $ 715 $ 1,381 1,718 141,832 905 15,000 70,300 18 21 312,815
First City Bank pays 7 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made an $8,000 deposit in each bank, how
The TMCC security is bought and sold on the New York Stock Exchange. If you looked at the price today, do you think the price would exceed the $24,099 original price? Why? If you looked in the year
Suppose you deposit a large sum in an account that earns a low interest rate and simultaneously deposit a small sum in an account with a high interest rate. Which account will have the larger future
Hershey Co. reported the following income statement and balance sheet (in millions) for 2008. Construct the expanded Du Pont identity similar to Figure 3.1. What is the company’s return on
Best Buy reported the following numbers (in millions) for the years ending February 2007 and 2008. What are the internal and sustainable growth rates? What are the internal and sustainable growth
High Flyer, Inc., wishes to maintain a growth rate of 13 percent per year and a debt-equity ratio of 0.30. The profit margin is 5 percent, and total asset turnover is constant at 1.20. Is this
You’ve collected the following information about Fox, Inc.:What is the sustainable growth rate for the company? If it does grow at this rate, how much new borrowing will take place in the coming
Based on the following information, calculate the sustainable growth rate for Perks, Inc.: Profit margin = 4.3% Total asset turnover 2.10 Total debt ratio 0.30 Payout ratio = 15%
A firm wishes to maintain an internal growth rate of 6.5 percent and a dividend payout ratio of 30 percent. The current profit margin is 5.2 percent and the firm uses no external financing sources.
Abercrombie & Fitch and Ann Taylor reported the following numbers (in millions) for fiscal year 2008. Calculate the earnings per share, market to- book ratio, and price-earnings ratio for each
Fulkerson Manufacturing wishes to maintain a sustainable growth rate of 8 percent a year, a debt-equity ratio of 0.55, and a dividend payout ratio of 25 percent. The ratio of total assets to sales is
Smolira Golf has 10,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2010 was $73. What is the price-earnings ratio? What is the price-sales ratio? What
Prince Albert Canning PLC had a 2010 net loss of £24,382 on sales of £489,162. What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any
A fire has destroyed a large percentage of the financial records of the Inferno Company. You have the task of piecing together information in order to release a financial report. You have found the
For the most recent year, Grohl, Inc., had sales of $435,000, cost of goods sold of $219,600, depreciation expense of $59,300, and additions to retained earnings of $51,500. The firm currently has
Delectable Radish, Inc.'s, net income for the most recent year was $8,912. The tax rate was 34 percent. The firm paid $3,987 in total interest expense and deducted $4,873 in depreciation expense.
The Rose Company has net income of $149,850. There are currently 25.45 days' sales in receivables. Total assets are $838,000, total receivables are $146,300, and the debt-equity ratio is 0.75. What
In response to complaints about high prices, a grocery chain runs the following advertising campaign: “If you pay your child $1 to go buy $33 worth of groceries, then your child makes twice as much
The Hooya Company has a long-term debt ratio (i.e., the ratio of long-term debt to long-term debt plus equity) of 0.45 and a current ratio of 1.25. Current liabilities are $2,385, sales are $10,435,
Y3K, Inc., has sales of $7,385, total assets of $3,480, and a debt-equity ratio of 0.25. If its return on equity is 16 percent, what is its net income?
Dimeback Co. has total assets of $8,500,000 and a total asset turnover of 2.35 times. If the return on assets is 9 percent, what is its profit margin?
Xero, Inc., has a total debt ratio of 0.55, total debt of $315,000, and net income of $38,250. What is the company’s return on equity?
Kaleb’s Karate Supply had a profit margin of 10 percent, sales of $21 million, and total assets of $9.5 million. What was total asset turnover? If management set a goal of increasing total asset
For Shinoda Manufacturing in Problem 20, what is the sustainable growth rate?Data From Problem 20The most recent financial statements for Shinoda Manufacturing Co. are shown below:Assets and costs
The most recent financial statements for Shinoda Manufacturing Co. are shown below:Assets and costs are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent
Hahn’s Pianos has a profit margin of 6.35 percent on sales of $22,000,000. If the firm has debt of $8,400,000 and total assets of $15,000,000, what is the firm’s ROA?
The Delson Company has an ROA of 9 percent, an 8 percent profit margin, and an ROE of 14 percent. What is the company’s total asset turnover? What is the equity multiplier?
Suppose that the Bethesda Mining Company had sales of $2,156,873 and net income of $109,381 for the year ending December 31, 2010. Calculate the Du Pont identity. BETHESDA MINING COMPANY Balance
Prepare the 2009 and 2010 common size balance sheets for Bethesda Mining. BETHESDA MINING COMPANY Balance Sheets as of December 31, 2009 and 2010 2009 2010 2009 2010 Liabilities and Owners' Equity
Assuming the following ratios are constant, what is the sustainable growth rate? Total asset turnover 2.15 %3D Profit margin = 4.3% Equity multiplier = 1.62 Payout ratio = 40%
Based on the following information, calculate the sustainable growth rate for Southern Lights Co.: Profit margin = 8.4% Capital intensity ratio = 0.45 Debt-equity ratio = 0.60 %3D Net income =
If Mudvayne, Inc., has a 9 percent ROA and a 15 percent payout ratio, what is its internal growth rate?
Rainbow Company has a debt-equity ratio of 1.25. Return on assets is 7.5 percent, and total equity is $625,000. What is the equity multiplier? Return on equity? Net income?
For the past year, De Vries, Inc., had a cost of goods sold of $59,382. At the end of the year, the accounts payable balance was $13,689. How long on average did it take the company to pay off its
Jiminy Cricket Removal has a profit margin of 8 percent, total asset turnover of 1.16, and ROE of 14.30 percent. What is this firm’s debt-equity ratio?
If jPhone, Inc., has an equity multiplier of 1.35, total asset turnover of 1.64, and a profit margin of 7 percent, what is its ROE?
Boyd, Inc., has a total debt ratio of 0.45. What is its debt-equity ratio? What is its equity multiplier?
Ermy Corporation has ending inventory of $682,173 and cost of goods sold for the year just ended was $6,487,318. What is the inventory turnover? The days' sales in inventory? How long on average did
SDJ, Inc., has net working capital of $1,410, current liabilities of $5,810, and inventory of $1,315. What is the current ratio? What is the quick ratio?
In the previous question, what actions might managers take to improve these ratios?Previous questionYou are examining the common-size income statements for a company for the past five years and have

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