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essentials corporate finance
Essentials Of Corporate Finance 7th Edition Stephen Ross, Randolph Westerfield, Bradford Jordan - Solutions
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 the APR? The effective annual return?
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 effective annual return Friendly’s earns on this lending business? If you were brave enough to ask, what
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 balance. If the current balance is $14,720, how long will it take for the account to be paid off?
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 is the effective annual rate on this loan?
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 is the effective annual rate?
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 to report to potential borrowers? Explain why this rate is misleading to an uninformed borrower.
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 for a new loan?
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 an investment policy that will pay you and your heirs $35,000 per year forever.
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 will you pay for the policy?
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 interest, what amount must you deposit each year?
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 deposits for 40 years?
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 the money to buy the computer system at 8.25 percent annual interest, can you afford the new system?
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. How much will you have at the end of the 40 years? Does it matter if the investment plan pays you
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 investment be worth in 20 years at each bank?
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 still no Ferrari.)
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 be worth when you retire in 45 years? What if you wait 10 years before contributing? (Does this
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 years on the day you turn 30, how much must you invest today?
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 security’s price is $39,583. If an investor had purchased it for $24,099 at the offering and sold it
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 check over this period? If the winner’s prize increases at the same rate, what will it be in 2045?
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, assuming they appreciate at a 5.7 percent annual rate?
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 collect), 80 years from now. What is the present value of your windfall if the appropriate discount rate
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 to the present. If the relevant discount rate is 8 percent, what is the present value of this
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 you have enough to buy the car?
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 investment to cover the cost of your child’s college education?
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 14.64 161.05 Total interest $61.05 12345
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 much more money would you earn from your Second City Bank account at the end of 10 years?
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 2018, do you think the price would be higher or lower than today’s price? Why?
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 value?
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 equity?Figure 3.1 Income Statement Balance Sheet Assets $5,132.768 3,375.050 940.637 Liabilities & Equity
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 rates using ROE × b (and ROA × b) and the end of period equity (assets)? What are the growth rates if
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 growth rate possible? To answer, determine what the dividend payout ratio must be. How do you interpret
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 year, assuming a constant debt-equity ratio? What growth rate could be supported with no outside
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. What must total asset turnover be?
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 company. Ann Taylor Abercrombie Net income Shares outstanding Stock price $ 475.70 $ 97.24 87.05 57.10
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 constant at 1.20. What profit margin must the firm achieve?
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 are the dividends per share? What is the market-to-book ratio at the end of 2010? SMOLIRA
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 difference? Why? In dollars, sales were $695,266. What was the net loss in dollars?
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 return on equity to be 14.3 percent. Sales were $1,735,000, the total debt ratio was 0.35, and total
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 20,000 shares of common stock outstanding, and the previous year’s dividends per share were $1.25.
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. What was the company’s cash coverage ratio for the year?
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 is the company’s profit margin? Its total asset turnover? Its ROE?
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 on the trip as we do.” You’ve collected the following information from the grocery chain’s
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, profit margin is 9 percent, and ROE is 14 percent. What is the amount of the firm’s net fixed
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 turnover to 2.75 times, what would the new sales figure need to be, assuming no increase in total
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 are proportional to sales. Debt and equity are not. The company maintains a constant 40 percent
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 dividend payout ratio. No external financing is possible. What is the internal growth rate? Income
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 Sheets as of December 31, 2009 and 2010 2009 2010 2009 2010 Liabilities and Owners' Equity Assets
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 Assets Current assets Current liabilities $ 23,774 $ 31,437 Cash $194,922 $202,611 Accounts payable
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 = $95,000 Dividends = $40,000
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 suppliers during the year? What might a large value for this ratio imply?
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 a unit of inventory sit on the shelf before it was sold?
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 noticed that the cost of goods as a percentage of sales has been increasing steadily. At the same
You are examining the common-size income statements for a company for the past five years and have noticed that the cost of goods as a percentage of sales has been increasing steadily. At the same time, EBIT as a percentage of sales has been decreasing. What might account for the trends in these
Specialized ratios are sometimes used in specific industries. For example, the so-called book-to-bill ratio is closely watched for semiconductor manufacturers. A ratio of .93 indicates that for every $100 worth of chips shipped over some period, only $93 worth of new orders were received. In
In recent years, Dixie Co. has greatly increased its current ratio. At the same time, the quick ratio has fallen. What has happened? Has the liquidity of the company improved?
Consider the following abbreviated financial statements for Cabo Wabo, Inc.:a. What is owners' equity for 2009 and 2010?b. What is the change in net working capital for 2010?c. In 2010, Cabo Wabo purchased $5,616 in new fixed assets. How much in fixed assets did Cabo Wabo sell? What is the cash
Titan Football Manufacturing had the following operating results for 2010: sales = $19,780; cost of goods sold = $13,980; depreciation expense = $2,370; interest expense = $345; dividends paid = $550. At the beginning of the year, net fixed assets were $13,800, current assets were $2,940, and
In Problem 19, suppose Belyk Paving Co. paid out $400,000 in cash dividends. Is this possible? If no new investments were made in net fixed assets or net working capital, and if no new stock was issued during the year, what do you know about the firm’s long-term debt account?Data From Problem
During the year, Belyk Paving Co. had sales of $2,400,000. Cost of goods sold, administrative and selling expenses, and depreciation expense were $1,425,000, $435,000, and $490,000, respectively. In addition, the company had an interest expense of $215,000 and a tax rate of 35 percent. (Ignore any
Irrational, Inc., is obligated to pay its creditors $8,400 during the year.a. What is the value of the shareholders' equity if assets equal $9,300?b. What if assets equal $6,900?
Given the following information for Sookie’s Cookies Co., calculate the depreciation expense: sales = $51,000; costs = $39,800; addition to retained earnings = $2,300; dividends paid = $925; interest expense = $1,580; tax rate = 40 percent.
Sheffield Co. shows the following information on its 2010 income statement: sales = $153,000; costs = $81,900; other expenses = $5,200; depreciation expense = $10,900; interest expense = $8,400; taxes = $16,330; dividends = $7,200. In addition, you’re told that the firm issued $2,600 in new
Given the information for Schism, Inc., in Problems 11 and 12, suppose you also know that the firm’s net capital spending for 2010 was $910,000, and that the firm reduced its net working capital investment by $120,000. What was the firm’s 2010 operating cash flow, or OCF?Data From Problem 12The
The December 31, 2009, balance sheet of Schism, Inc., showed $135,000 in the common stock account and $2.6 million in the additional paid-in surplus account. The December 31, 2010, balance sheet showed $145,000 and $2.9 million in the same two accounts, respectively. If the company paid out
The December 31, 2009, balance sheet of Schism, Inc., showed long-term debt of $1.375 million, and the December 31, 2010, balance sheet showed long-term debt of $1.53 million. The 2010 income statement showed an interest expense of $91,500. What was the firm’s cash flow to creditors during
The December 31, 2009, balance sheet of Anna’s Tennis Shop, Inc., showed current assets of $1,015 and current liabilities of $870. The December 31, 2010, balance sheet showed current assets of $1,230 and current liabilities of $905. What was the company’s 2010 change in net working capital,
Rotweiler Obedience School’s December 31, 2009, balance sheet showed net fixed assets of $1.725 million, and the December 31, 2010, balance sheet showed net fixed assets of $2.04 million. The company’s 2010 income statement showed a depreciation expense of $321,000. What was Rotweiler’s net
The SGS Co. had $275,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company’s income taxes.Table 2.3 Taxable Income Tax Rate 0- 50,001– 75,001- 100,001- 335,000 335,001 – 10,000,000 10,000,001- 15,000,000 15,000,001- 18,333,333 18,333,334+ 50,000 15%
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $4 million. The machinery can be sold to the Romulans today for $6.2 million. Klingon’s current balance sheet shows net fixed assets of $2.8 million, current liabilities of $710,000, and net working capital of $ 130,000.
Lifeline, Inc., has sales of $585,000, costs of $273,000, depreciation expense of $71,000, interest expense of $38,000, and a tax rate of 35 percent. What is the net income for this firm?
Arredondo, Inc., has current assets of $2,170, net fixed assets of $9,300, current liabilities of $1,350, and long-term debt of $3,980. What is the value of the shareholders' equity account for this firm? How much is net working capital?
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