Questions and Answers of Essentials Corporate Finance

Butler International Limited is evaluating a project in Erewhon. The project will create the following cash flows:Year
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. For this policy, the purchaser, say, the
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 9 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 1-week loans at 7.1 percent interest per week.a. What APR must the store report to its
What is the value today of a 15-year annuity that pays $750 a year? The annuity’s first payment occurs 6 years from today. The discount rate is 8 percent for Years 1 through 5 and 11 percent
Amanda Rice has arranged to purchase a $725,000 vacation home in the Bahamas with a 20 percent down payment. The mortgage has a 5.4 APR compounded monthly and calls for equal monthly payments over
You receive a credit card application from Shady Banks Savings and Loan offering an introductory rate of 1.99 percent per year, compounded monthly for the first six months, increasing thereafter to
Young Pharmaceuticals is considering a drug project that costs $2.75 million today and is expected to generate end-of-year annual cash flows of $273,000 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 $153,000.
Your job pays you only once a year for all the work you did over the previous 12 months. Today, December 31, you received your salary of $74,500, and you plan to spend all of it. However, you want to
What is the relationship between the value of an annuity and discount rates? Suppose you bought a 20-year annuity of $4,700 per year at the current discount rate of 10 percent per year. What happens
You’re prepared to make monthly payments of $350, 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
You want to borrow $88,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $1,725, but no more. Assuming monthly compounding, what is the highest APR you can
You need a 30-year fixed-rate mortgage to buy a new home for $275,000. Your mortgage bank will lend you the money at an APR of 4.8 percent for this 360-month loan. However, you can only afford
The present value of the following cash flow stream is $6,700 when discounted at 7.1 percent annually. What is the value of the missing cash flow?Year
You won the TVM Lottery. You will receive $1 million today plus another 10 annual payments that increase by $335,000 per year. Thus, in one year you receive $1.335 million. In 2 years, you get $1.67
You have purchased a new warehouse. To finance the purchase, you’ve arranged for a 30-year mortgage for 80 percent of the $5,500,000 purchase price. The monthly payment on this loan will be
Consider a firm with a contract to sell an asset for $165,000 three years from now. The asset costs $103,000 to produce today. Given a relevant discount rate on this asset of 13 percent per year,
What is the present value of $8,500 per year at a discount rate of 6.7 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 $1,940 per month at the end of each month. If the discount rate is 11 percent compounded monthly for the first 7 years and 6 percent compounded monthly thereafter, what is the
You have your choice of two investment accounts. Investment A is a 15-year annuity that features end-of-month $1,175 payments and has a rate of 6.4 percent compounded monthly. Investment B is a
Given a discount rate of 6.3 percent per year, what is the value at Year 7 of a perpetual stream of $2,350 annual payments that begins at Year 15?
A local finance company quotes an interest rate of 16.3 percent on one-year loans. So, if you borrow $26,000, the interest for the year will be $4,238. Because you must repay a total of $30,238 in
A five-year annuity of 10 $5,230 semiannual payments will begin nine years from now, with the first payment coming nine and a half years from now. If the discount rate is 10 percent compounded
Suppose you are going to receive $13,250 per year for five years. The appropriate rate is 7.8 percent.a. What is the present value of the payments if they are in the form of an ordinary annuity? What
You want to buy a new sports car from Muscle Motors for $84,000. The contract is in the form of a 60-month annuity due at an APR of 6.08 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 10.7 percent compounded monthly. Because the clubs cost $3,350
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 $71,000. He will receive his first annual salary payment one year from the
You have recently won the super jackpot in the Washington State Lottery. After reading the fine print, you discover that you have the following two options: a. You will receive 31 annual
You have 30 years left until retirement and want to retire with $2.5 million. Your salary is paid annually, and you will receive $86,000 at the end of the current year. Your salary will increase at 3
On September 1, 2018, Susan Chao bought a motorcycle for $17,000. She paid $1,500 down and financed the balance with a five-year loan at an annual percentage rate of 6.8 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 $17,500 per month for 20 years, with the first
After deciding to acquire a new car, you can either lease the car or purchase it with a three-year loan. The car you want costs $37,000. 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 salarystructure:Time
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 16.4
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
Two banks in the area offer 30-year, $300,000 mortgages at 5.3 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:
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 $12,000 balance from your current credit
What is the present value of an annuity of $7,300 per year, with the first cash flow received 3 years from today and the last one received 30 years from today? Use a discount rate of 7 percent.
A prestigious investment bank designed a new security that pays a quarterly dividend of $2.25 in perpetuity. The first dividend occurs one quarter from today. What is the price of the security if the
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
You’re trying to choose between two different investments, both of which have up-front costs of $65,000. Investment G returns $125,000 in 6 years. Investment H returns $205,000 in 10 years. Which
You are planning to save for retirement over the next 30 years. To do this, you will invest $850 per month in a stock account and $350 per month in a bond account. The return of the stock account is
First Simple Bank pays 5.3 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
What is the future value in 11 years of $1,000 invested in an account with an APR of 8.9 percent:a. Compounded annually?b. Compounded semiannually?c. Compounded monthly?d. Compounded continuously?e.
One of your customers is delinquent on his accounts payable balance. You’ve mutually agreed to a repayment schedule of $400 per month. You will charge 1.1 percent per month interest on the overdue
First National Bank charges 11.4 percent compounded monthly on its business loans. First United Bank charges 11.6 percent compounded semiannually. As a potential borrower, to which bank would you go
Find the APR in each of the following cases: Number of Times Compounded APR EAR Semiannually Monthly Weekly 10.1% 17.4 8.6 Infinite 11.3
Find the EAR in each of the following cases: Number of Times Compounded APR EAR 7.1% Quarterly 13.2 8.9 8.1 Monthly Daily Infinite
The Perpetual Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $15,000 per year forever. If the required return on this investment is 3.8 percent, how
An investment offers $5,200 per year for 15 years, with the first payment occurring one year from now. If the required return is 7 percent, what is the value of the investment? What would the value
Investment X offers to pay you $4,350 per year for nine years, whereas Investment Y offers to pay you $6,900 per year for five years. Which of these cash flow streams has the higher present value if
Specter Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18
Compute the future value of $2,350 continuously compounded for:a. 9 years at an APR of 12 percent.b. 5 years at an APR of 8 percent.c. 17 years at an APR of 5 percent.d. 10 years at an APR of 9
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 $75 annually if the next payment occurs one
Although appealing to more refined tastes, art as a collectible has not always performed profitably. During 2010, Deutscher-Menzies sold Arkie under the Shower, a painting by renowned Australian
Imprudential, Inc., has an unfunded pension liability of $425 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
At 6.25 percent interest, how long does it take to double your money? To quadruple it?
Solve for the unknown number of years in each of the following: Present Value Years Interest Rate Future Value $ 625 7% 12 $ 1,104 5,275 810 16,500 17 245,830 215,000 21,500
Solve for the unknown interest rate in each of the following: Present Value Years Future Value Interest Rate $ 189 4 $ 287 410 887 14 27 51,700 152,184 21,400 538,600
For each of the following, compute the present value: Present Value Years Interest Rate $ 13,827 7% 11 19 29 15 43,852 11 725,380 18 590,710
Compute the future value of $1,250 compounded annually fora. 10 years at 5 percent.b. 10 years at 10 percent.c. 20 years at 5 percent.d. Why is the interest earned in part (c) not twice the amount
First City Bank pays 7.7 percent simple interest on its savings account balances, whereas Second City Bank pays 7.7 percent interest compounded annually. If you made a $7,800 deposit in each bank,
Use the sustainable growth rate equations from the previous problem to answer the following questions. Sourstone, Inc., had total assets of $430,000 and equity of $260,000 at the beginning of the
Suprenuk, Inc., wishes to maintain a growth rate of 11 percent per year and a debt-equity ratio of .37. Profit margin is 4.2 percent and the ratio of total assets to sales is constant at .80. Is this
Redo Problem 23 using sales growth rates of 30 and 35 percent in addition to 20 percent. Assume the company wishes to keep its debt-equity ratio constant. Illustrate graphically the relationship
In the previous problem, suppose the firm was operating at only 80 percent capacity in 2019. What is EFN now? Data from previous problem The most recent financial statements for Scott, Inc., appear
The most recent financial statements for Scott, Inc., appear below. Sales for 2020 are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the dividend payout
For the company in the previous problem, suppose fixed assets are $620,000 and sales are projected to grow to $605,000. How much in new fixed assets are required to support this growth in sales?
Blue Sky Mfg., Inc., is currently operating at 90 percent of fixed asset capacity. Current sales are $530,000. How much can sales increase before any new fixed assets are needed?
In addition to common?size financial statements, common?base year financial statements are often used. Common?base year financial statements are constructed by dividing the current year account
Terrell, Inc.’s, net income for the most recent year was $13,150. The tax rate was 24 percent. The firm paid $3,460 in total interest expense and deducted $4,380 in depreciation expense. What was
The Rossdale Company has a ratio of long-term debt to long-term debt plus equity of .34 and a current ratio of 1.29. Current liabilities are $1,450, sales are $7,380, profit margin is 8.1 percent,
A company has net income of $386,000, a profit margin of 8.6 percent, and an accounts receivable balance of $191,300. Assuming 80 percent of sales are on credit, what is the company’s days’
Which was the biggest culprit for the company’s demise: Too many orders, too little cash, or too little production capacity?
The Optical Scam Company has forecast a sales growth rate of 15 percent for next year. The current financial statements are shown here: a. Using the equation from the chapter, calculate the
Prince Albert Canning PLC had a net loss of £18,137 on sales of £279,386. What was the company’s profit margin? Does the fact that these figures are quoted in a foreign currency make any
Firm A and Firm B have debt-total asset ratios of 35 percent and 45 percent, respectively, and returns on total assets of 8 percent and 7 percent, respectively. Which firm has a greater return on
The Raindrop Company has an ROE of 12.1 percent and a payout ratio of 25 percent.a. What is the company’s sustainable growth rate?b. Can the company’s actual growth rate be different from its
Dahlia Colby, CFO of Charming Florist Ltd., has created the firm’s pro forma balance sheet for the next fiscal year. Sales are projected to grow by 12 percent to $320 million. Current assets,
The most recent financial statements for Williamson, Inc., are shown here (assuming no income taxes): Assets and costs are proportional to sales; debt and equity are not. No dividends are paid.
Assuming the following ratios are constant, what is the sustainable growth rate?Total asset turnover = 2.65Profit margin = 5.7%Equity multiplier = 1.60Payout ratio = 70%
If the Moran Corp. has an ROE of 11 percent and a payout ratio of 20 percent, what is its sustainable growth rate?
The most recent financial statements for Hailey Co. are shown here:Assets and costs are proportional to sales. The company maintains a constant 30 percent dividend payout ratio and a constant
The most recent financial statements for Bello, Inc., are shown here: Assets and costs are proportional to sales; debt and equity are not. A dividend of $2,700 was paid, and the company wishes to
Y3K, Inc., has sales of $3,300, total assets of $1,520, and a debt-equity ratio of 1.35. If its return on equity is 14 percent, what is its net income?
Synovec Company has a debt-equity ratio of .85. Return on assets is 7.3 percent, and total equity is $910,000. What is the equity multiplier? Return on equity? Net income?
If Muenster, Inc., has an equity multiplier of 1.35, total asset turnover of 1.87, and a profit margin of 6.1 percent, what is its ROE?
Dan Ervin was recently hired by East Coast Yachts to assist the company with its short-term financial planning and also to evaluate the company?s financial performance. Dan graduated from college
You are researching Time Manufacturing and have found the following accounting statement of cash flows for the most recent year. You also know that the company paid $81 million in current taxes and
For 2019, calculate the cash flow from assets, cash flow to creditors, and cash flow to stockholders. Use the following information for Ingersoll, Inc., for Problems 21 and 22. Assume the tax rate
Draw up an income statement and balance sheet for this company for 2018 and 2019. Use the following information for Ingersoll, Inc., for Problems 21 and 22. Assume the tax rate is 21 percent. 2019
Consider the following abbreviated financial statements for Weston Enterprises: a. What is owners? equity for 2018 and 2019? b. What is the change in net working capital for 2019? c. In 2019,
Cusic Industries had the following operating results for 2019: sales = $24,360; cost of goods sold = $17,600; depreciation expense = $3,400; interest expense = $860; dividends paid = $790. At the
In Problem 17, suppose Rainbow Umbrella Corp. paid out $34,000 in cash dividends. Is this possible? If spending on net fixed assets and net working capital was zero, and if no new stock was issued
During 2019, Rainbow Umbrella Corp. had sales of $630,000. Cost of goods sold, administrative and selling expenses, and depreciation expenses were $465,000, $85,000, and $135,000, respectively. In
Stark, Inc., is obligated to pay its creditors $10,700 very soon.a. What is the market value of the shareholders’ equity if assets have a market value of $11,900?b. What if assets equal $9,400?
Given the following information for O’Hara Marine Co., calculate the depreciation expense: sales = $54,000; costs = $29,500; addition to retained earnings = $5,300; dividends paid = $1,720;

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