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essentials managerial finance
Principles Of Managerial Finance 15th Global Edition Chad J. Zutter, Scott Smart - Solutions
=+c. If Sadiq invests at the beginning instead of at the end of each year, how much must he invest each year if his investments pay the same 8% per year?
=+LG 6 P5–47 Loan payment Determine the equal, end-of-year payment required each year over the life of the loans shown in the following table to repay them fully during the stated term of the loan.X MyLab Loan Principal Interest rate Term of loan (years)A $12,000 8% 3 B 60,000 12 10 C 75,000 10
=+LG 6 P5–48 Loan amortization schedule Han Xiao just closed a $50,000 business loan that she must repay her brother, who has agreed to lend it at 5% annual interest. Han must repay the loan over the next 5 years, in five equal, end-of-year payments.
=+a. How much does Han have to pay every year if she has to repay the loan by the fifth end-of-year installment?
=+b. Prepare an amortization schedule showing the interest and principal breakdown of each loan payments.
=+c. Explain why the interest expense of each subsequent payment declines over time.
=+LG 6 P5–49 Loan interest deductions Liz Rogers just closed a $10,000 business loan that she must repay in three equal, end-of-year payments. The interest rate on the loan is 13%. As part of her firm’s detailed financial planning, Liz wishes to determine the annual interest deduction
=+a. Determine the firm’s annual loan payment.
=+b. Prepare an amortization schedule for the loan.
=+c. How much interest expense will Liz’s firm have in each of the next 3 years as a result of this loan?Personal Finance Problem
=+LG 6 P5–50 Monthly loan payments Tim Smith is shopping for a used luxury car. He has found one priced at $30,000. The dealer has told Tim that if he can come up with a down payment of $5,000, the dealer will finance the balance of the price at a 6% annual rate over 3 years (36 months).
=+a. Assuming that Tim accepts the dealer’s offer, what will his monthly (end-ofmonth) payment amount be?
=+b. Use a financial calculator or spreadsheet to help you figure out what Tim’s monthly payment would be if the dealer were willing to finance the balance of the car price at a 4% annual rate.
=+LG 6 P5–51 Growth rates Jamie Turner bought shares of stock in three different companies on January 1, 2012. He eventually sold his shares on January 1, 2017. The following table shows his sale and purchase price for the three stocks. Calculate the average annual growth in each of the stock
=+P5–52 Rate of return Rishi Singh has $1,500 to invest. His investment counselor suggests that Rishi should buy an investment that pays no interest but will be worth$2,000 after 3 years.
=+a. What average annual rate of return will Rishi earn with this investment?
=+b. Rishi is considering another investment, of equal risk, that earns an annual return of 8%. Which investment should he make, and why?Personal Finance Problem
=+LG 6 P5–53 Rate of return and investment choice Madeline Jones has $6,000 and wants to invest it. Because she is only 20 years old, she is not worried about the length of the investment’s life. Her primary concern is the return she will earn on the investment.Her financial advisor has
=+a. Calculate the average annual rate of return on each of the four investments available to Madeline.
=+b. Which investment would you recommend to Madeline, given her goal of maximizing the annual return?
=+LG 6 P5–54 Rate of return: Annuity Amit Krishnamurthy invests in a bond that promises him$6,000 each year for the next 20 years. If he pays $75,000 for this investment, what is his annual rate of return?Personal Finance Problem
=+LG 6 P5–55 Choosing the best annuity Raina Herzig wishes to choose the best of four annuities available to her. In each case, in exchange for paying a lump sum today, she will receive equal, end-of-year cash payments for a specified number of years. She considers the annuities equally risky
=+a. Calculate, to the nearest 1%, the rate of return on each of the four annuities Raina is considering.
=+b. Given Raina’s stated decision criterion, which annuity would you recommend?Personal Finance Problem
=+LG 6 P5–56 Interest rate for an annuity April Bartrick has just received an inheritance of$1,000,000. She plans to invest the entire sum in an annuity, paying at the end of each year for the next 20 years. Two personal bankers suggest different long-term, fixed income instruments that she can
=+a. What is the rate of return offered by the two investments (rounded off to the nearest whole percent)?
=+b. April is willing to settle for an annuity that carries an interest rate assumption of 9% per annum. What minimum annual payment would be acceptable for her?Personal Finance Problem
=+LG 6 P5–57 Loan rates of interest You have a credit card debt amounting to $50,000. The card charges you a 32% interest rate with monthly compounding. You believe that the interest rate of the existing debt is too high, so you decide to switch cards and move the outstanding balance on the old
=+a. If you pay off the debt in 1 year with equal monthly amounts, how much interest payments have you saved by using (1) Card A, (2) Card B, and (3) Card C rather than keeping your existing card?
=+b. Which card should you choose?
=+LG 6 P5–58 Number of years needed to acccumulate a future amount For each of the following cases, determine the number of years it will take for the initial deposit to grow to equal the future amount at the given interest rate.
=+P5–59 Time to accumulate a given sum Manuel Rios wishes to determine how long it will take an initial deposit of $10,000 to double.
=+a. If Manuel earns 10% annual interest on the deposit, how long will it take for him to double his money?
=+b. How long will it take if he earns only 7% annual interest?
=+c. How long will it take if he can earn 12% annual interest?
=+d. Reviewing your findings in partsa, b, andc, indicate what relationship exists between the interest rate and the amount of time it will take Manuel to double his money.
=+ P5–60 Number of years to provide a given return In each of the following cases, determine the number of years that the given ordinary annuity cash flows must continue to provide the desired rate of return given the cost of the annuity.
=+P5–61 Time to repay installment loan Mia Salto wishes to determine how long it will take to repay a $14,000 loan given that the lender requires her to make annual end-ofyear installment payments of $2,450.
=+a. If the interest rate on the loan is 12%, how long will it take her to repay the loan fully?
=+b. How long will it take if the interest rate is 9%?
=+c. How long will it take if she has to pay 15% annual interest?
=+d. Reviewing your answers in partsa, b, andc, describe the general relationship between the interest rate and the amount of time it will take Mia to repay the loan fully.
=+LG 6 P5–62 ETHICS PROBLEM The Grameen Bank of Bangladesh is considered to be a pioneer institution in developing and promoting ‘micro finance.’ This emerging area in banking provides opportunities to the lowest income group of a society and offers loans as small as 1,000 Bangladeshi Taka
=+At the end of 2019, Uma Corporation is considering a major long-term project in an effort to remain competitive in its industry. The production and sales departments have determined the potential annual cash flow savings that could accrue to the firm if it acts soon. Specifically, they estimate
=+a. Determine the value (at the end of 2019) of the future cash flow savings expected to be generated by this project.
=+b. Based solely on the one criterion set by management, should the firm undertake this specific project? Explain.
=+c. What is the “interest rate risk,” and how might it influence the recommendation made in part b? Explain.
=+a. (1) On what financial goal does Stanley seem to be focusing? Is it the correct goal? Why or why not?(2) Could a potential agency problem exist in this firm? Explain.
=+b. Calculate the firm’s earnings per share (EPS) for each year, recognizing that the number of shares of common stock outstanding has remained unchanged since the firm’s inception. Comment on the EPS performance in view of your response in part a.
=+c. Use the financial data presented to determine Track’s operating cash flow (OCF)and free cash flow (FCF) in 2019. Evaluate your findings in light of Track’s current cash flow difficulties.
=+d. Analyze the firm’s financial condition in 2019 as it relates to (1) liquidity,(2) activity, (3) debt, (4) profitability, and (5) market, using the financial statements provided in Tables 2 and 3 and the ratio data included in Table 5. Be sure to evaluate the firm on both a cross-sectional
=+e. What recommendation would you make to Stanley regarding hiring a new software developer? Relate your recommendation here to your responses in part a.
=+g. Suppose you believed that the FCF generated by Track Software in 2019 could continue forever. You are willing to buy the company in order to receive this perpetual stream of free cash flow. What are you willing to pay if you require a 10%return on your investment?
=+1–1 What is the goal of the firm and, therefore, of managers and employees? Discuss how one measures achievement of this goal.
=+1–2 For what three main reasons is profit maximization potentially inconsistent with wealth maximization?
=+1–4 Is maximizing shareholder wealth inconsistent with having concern for the welfare of a firm’s other stakeholders?
=+1–5 What are the main types of decisions that financial managers make?
=+1–7 What is the primary economic principle used in managerial finance?
=+1–10 Which legal form of business organization is most common? Which form do the largest businesses typically take and why?
=+1–11 Describe the roles of, and the relationships among, the major parties in a corporation: stockholders, board of directors, and managers. How are corporate owners rewarded for the risks they take?
=+1–12 Explain why corporations face a double taxation problem? For corporations, how are the marginal and average tax rates related?
=+1–13 Define agency problems, and describe how they give rise to agency costs. Explain how a firm’s corporate governance structure can help avoid agency problems.
=+1–14 How can the firm structure management compensation to minimize agency problems?
=+1–15 How do market forces—both shareholder activism and the threat of takeover—prevent or minimize the agency problem? What role do institutional investors play in shareholder activism?
=+ST1–1 Emphasis on Cash Flows Worldwide Rugs is a rug importer located in the United States that resells its import products to local retailers. Last year, Worldwide Rugs imported $2.5 million worth of rugs from around the world, all of which were paid for prior to shipping. On receipt of the
=+a. What is the accounting profit that Worldwide Rugs generated for the year?
=+b. Did Worldwide Rugs have a successful year from an accounting perspective?
=+c. What is the financial cash flow that Worldwide Rugs generated for the year?
=+d. Did Worldwide Rugs have a successful year from a financial perspective?
=+e. If the current pattern persists, what is your expectation for the future success of Worldwide Rugs?
=+LG 4 E1–3 The Quickclick Media Ltd., announced that the profit for the previous year is twice the amount earned in the previous year, an improvement from the projected numbers. The chief human resources officer (CHRO) suggested that the employees need to be rewarded for their efforts. To keep
=+How can the company, which is a profitable one, have insufficient cash flows?Explain your answer.
=+LG 6 E1–5 Premier Baking Ltd. has recently appointed a new CEO to run its bakery business, which supplies to supermarkets and restaurants. The new CEO has instituted a new compensation policy and dropped the earlier incentive scheme, which was based on overall production achieved within the
=+Explain how the delays and delivery errors could represent a case of agency costs. How could Premier Bakery counter these agency costs??
=+P1–1 Liability comparisons John Bailey invested $50,000 in The Entertainment Company 7 years ago. He is concerned about the future of the firm, as the profits have plummeted over the last 4 years. The firm has $120,000 in outstanding debt and is considering declaring bankruptcy.
=+a. If John is the sole proprietor, describe the financial implication of the firm going bankrupt.
=+b. If John and his brother, Peter, are partners with an equal partnership distribution, describe the financial implication of the firm going bankrupt.
=+c. If the firm is a corporation, describe the financial implication of the firm going bankrupt.
=+LG 4 P1–2 Accrual income versus cash flow for a period The Motor Corporation sold vehicles for $500,000 to one specific dealer during the year. At the end of the financial year, the dealer still owed The Motor Corporation $350,000. The cost of the vehicles sold was $400,000, and this cost was
=+a. Determine the firm’s net profit for the past year using the accrual basis of accounting.
=+b. Determine the firm’s net cash flow for the past year using the cash basis of accounting.
=+c. The accountant and financial manager need to present the results to the CEO of The Motor Corporation. What will be their message regarding the performance of the corporation?Personal Finance Problem
=+LG 4 P1–3 Cash flows Sheldon Smith spends many hours monitoring his personal cash flows every month. Sheldon earns 5% on his short-term investments while paying prime plus 2% (prime is 9%) on the mortgage. The cash inflows and outflows for the month of March are as follows:PROBLEMS Select
=+a. Determine Sheldon’s total cash inflows and cash outflows for the month of March.
=+b. What is Sheldon’s net cash flow for the month of March? Explain the meaning of the term “net cash flow.”
=+c. What advice would you give Sheldon if there is a surplus of funds?
=+d. What advice would you give Sheldon if there is a shortage of funds?
=+LG 2 LG 4 P1–4 Marginal cost–benefit analysis and the goal of the firm Wendy Winter needs to determine whether the current warehouse system should be upgraded to a new system. The new system would require an initial cash outlay of $250,000. The current system could be sold for $55,000. The
=+a. Identify and describe the analysis Wendy should use to make the decision.
=+b. Calculate the marginal benefit of the proposed new warehouse system.
=+c. Calculate the marginal cost of the proposed new warehouse system.
=+d. What should Wendy’s recommendation be to the firm regarding the new warehouse system? Explain your answer.
=+e. If the new system is implemented, will the firm achieve the primary financial goal of managers?
=+LG 6 P1–5 Identifying agency problems, costs, and resolutions You are the CEO of Nelson Corporation, and the current stock price is $27.80. Pollack Enterprises announced today that it intends to buy Nelson Corporation. To obtain all the stock of Nelson Corporation, Pollack Enterprises is
=+Is the management of Nelson Corporation acting in the best interest of the Nelson Corporation stockholders? Explain your reasoning.
=+LG 5 P1–6 Corporate taxes Southern Textile Ltd., is a manufacturer of sportswear that supplies to a number of European retail stores. Its registered office is in Singapore. During 2017, the firm earned SGD 112,000 before taxes. Singapore’s corporate tax rate is 20%. Firms are eligible for a
=+a. Calculate the firm’s tax liability using Singapore’s corporate tax rates.
=+b. How much are Southern Textile’s 2017 after-tax earnings?
=+c. Calculate the firm’s average tax rate.
=+LG 6 P1–7 Average corporate tax rates Ordinary income in 2017 was taxed subject to the rates shown in the accompanying table. Using the data in the table, perform the following:
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